By Brandes Elitch
What a great time to be in the payments business. We are on the verge of another golden age for ISOs, much like when the card brands decreed that electronic ticket capture was ready for prime time. Here are a few interesting developments I've noticed recently.
At the end of May, Google Inc. announced Google Wallet, a strategic initiative with Citibank N.A., First Data Corp., Sprint Nextel Corp. and MasterCard Worldwide. Using near field communication (NFC) technology, you tap your phone at any MasterCard PayPass-enabled checkout terminal. It requires an app-specific PIN.
Initially, all payment card credentials will be encrypted and stored on a chip that is separate from the Android device's memory. Google said it is an opportunity for businesses to strengthen customer relationships by offering faster, easier shopping, with relevant promotions and loyalty rewards. Google called it an open commerce ecosystem letting consumers simultaneously make NFC wallet payments and redeem promotions.
The product is in test mode and should be available this summer. The partners are recruiting issuing banks, payment networks, mobile carriers and merchants. Eight million businesses accept credit cards in the United States, but only 124,000 merchants are PayPass-enabled. Google Wallet will encounter hurdles on its way to mass utilization.
The wallet has two variants: a PayPass-eligible Citi MasterCard and a virtual Google prepaid card that can be loaded from any payment card. Google is also working with POS manufacturers to create single-tap transactions in which consumers can pay with a credit or gift card, redeem promotions, and get loyalty points. It should someday be able to generate receipts, tickets and boarding passes.
Google stressed that it is creating an open platform. But as Evan Schuman pointed out in his retail technology blog on StorefrontBacktalk (www.storefrontbacktalk.com/securityfraud/google-wallet-struggles-with-being-open-but-on-only-one-platform-its-own/), Mobile Wallet is only available on Google's platform.
Because Apple Inc. and Research In Motion Ltd. (maker of the BlackBerry) are not participating, Google must fly solo. Schuman said Apple, PayPal Inc. and other players will likely develop competitive offerings, leading to even more fragmentation.
Multiplatform support is needed, including mobile platforms. Is Google serious about this, or does it just want a first-mover advantage? Also, we should recognize that NFC-capable mobile phones and merchant terminals are not widely deployed or even available now. And this may be true for months or years. Google Wallet would require the merchant to buy all new NFC-equipped terminals.
As observer SparkBase put it, Google is focused on building a fiefdom, and the company's goal is to take customers away from ISOs. SparkBase pointed out that over the last five years, Google has failed in its attempts to reach consumers directly. These efforts included Google Nexus One mobile phone, Google Buzz, Google Wave, Google Coupons, Google Video and Google Checkout.
Like those products, Google Wallet faces big market, technology and adoption challenges. Interestingly, at the 2011 Electronic Transactions Associations' Annual Meeting & Expo held in May, SparkBase won the Technology Innovation Award for its smart phone-enabled multiterminal, integrated mobile wallet, which securely integrates with merchants' existing credit card terminals.
Some 50 million iPhones and Android phones can use this technology right now. In fact, it can be used on 250 million activated mobile devices with the addition of a $50 tabletop sensor. And SparkBase's technology works with multiple payment gateways.
In a survey of 20 top-tier payments industry leaders at ETA, consultant Aite Group LLC got the message: Forget PayPal and Google. Acquirers are most worried about Visa Inc. and MasterCard.
Most agreed that card networks would increasingly compete in merchant acquiring in the years to come. Card networks are already direct acquirers in foreign countries. In 2010, Visa acquired processor CyberSource Corp. On the issuing side, networks offer services to card issuers that compete with those from third-party processors.
I commented on Square Inc. in a previous article ("Square gaining momentum despite security concerns," The Green Sheet, March 28, 2011, issue 11:03:02), but at the time Square had not introduced its mobile POS offering.
The Square Card Case, launched in May, delivers absolute escape from Payment Card Industry (PCI) Data Security Standard (DSS) rules.
In scope, the PCI DSS rules determine that if a customer hands a payment card to any of a retailer's representatives, swipes or waves the card at a device controlled by a retailer, or types card data into a website branded and controlled by a retailer, that retailer is subject to PCI requirements. Square's product takes the retailer out of this process. Of course, Visa has invested in Square, too.
PayPal purchased something called Fig Card, a cheap USB plug-in to POS devices to support mobile payments. Payment information is conveyed by sending a photo of a bill or text message to PayPal and is authorized by password. The PayPal model also rides on the rails of MasterCard and Visa. Yet another new product, Zoosh from Naratte Inc., uses Shopkick-like high frequency audio instead of radio signals to mimic NFC-style communication on phones that play MP3 files. Naratte also developed an inexpensive plug-in for VeriFone Inc. and Hypercom Corp. POS devices, so a mobile phone sending signals will look just like a gift card or payment card to the POS software.
Zoosh does away with back-end and POS software changes, while simplifying both testing on a few trial POS devices and getting out of the trial (by just unplugging it). The add-on cost is around $30. But as many observers have noted, U.S. consumers seem wedded to the mag stripe card.
Yet to make Zoosh work, consumers will have to download the app to their phones, where their card numbers will have to be stored, Schuman wrote. Then there is the matter of working with coupon and gift card vendors - without adding interchange fees - and convincing all parties that its encryption meets PCI DSS requirements.
While I'm on the subject of mobile payments, I should mention mobile remote deposit capture (RDC). A survey released in May 2011 by Javelin Strategy & Research found that one in four consumers and one in two mobile banking users want to make deposits from their phones.
However, only three of the top 10 U.S. banks - JP Morgan Chase & Co., PNC Bank and U.S. Bank - offer this service. Javelin data shows that over half of the financial institutions will roll out mobile RDC in the next year and view technologies like it as important building blocks for mobile (wallet) payments. Javelin said that rather than waiting for its sudden adoption, consumers and banks will steadily migrate to mobile money via component technologies.
ISOs should think through how they will be impacted by each of these unfolding developments. Some alternatives will create revenue opportunities for ISOs; some of them will deliberately keep the ISO out of the revenue stream.
Finally, it is always useful to keep things in perspective. About 85 percent of all transactions in the world take place in cash. Person-to-person payments in the United States total about $2.9 trillion annually, and almost all involve cash or check. A 2009 Federal Deposit Insurance Corp. study estimated that some 17 million adults in U.S. households don't have access to a single bank account, and another 43 million are underbanked.
For example, an underbanked individual may have a bank account but also use nonbanks such as payday lenders, pawn shops and check cashing companies. Out of 300 million people, only about 60 million Americans actively use credit cards every month. The old saw relentlessly pushed by the card brands that every American regularly uses a credit card was never true. It is even less true today, now that debit has surpassed credit in transaction volume.
We call mobile an alternative payment only because our thinking and orientation have been shaped by interchange for the last 50 years. But the lobbying that led to the Durbin Amendment is about what the Federal Reserve called a market failure with regard to interchange levels.
Whether you agree with this or not, many merchants - your customers - do, and interchange represents one of the biggest line items in their expense statements. This fact makes them receptive to new forms of payment, but they will not welcome the expense of replacing all their POS hardware. The coming year should be interesting.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at firstname.lastname@example.org.
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