By Scott Henry
In the United States, consumers use credit and debit cards more than they use cash and checks. But telephone dial-up authorizations at the POS are slowing merchants' abilities to process the increasing flow of card transactions. And when compared to Internet Protocol (IP) authorizations (Ethernet and wireless), dial-up service is more expensive.
Merchants and other business enterprises must handle more transactions during peak times to increase sales and provide better customer service. Phone costs are a growing irritant as businesses strive for efficiency to win customers and continue to keep them happy.
Research indicates that while POS authorization costs via dial-up have declined in recent years, the costs of IP-based POS systems have decreased more dramatically. The Strawhecker Group's 2007 Merchant Processing Pricing Benchmark Study revealed that traditional POS dial-up authorization costs declined 7 percent overall last year, the biggest single year decrease in five years; IP authorizations dropped 23 percent.
One prominent acquirer recently advertised a program with a choice of POS IP authorization at 2 cents per transaction or dial authorization at 2.5 cents per transaction, demonstrating a 20 percent differential in favor of IP.
IP use is growing rapidly and probably accounts for roughly 40 percent of all new payment terminal sales. Indeed, Strawhecker stated that IP is rapidly overtaking dial-up as the preferred medium as a result of the pricing differential.
So if IP authorization for credit and debit cards is faster and less expensive, why isn't everyone using it?
"Clearly the large acquirers have seized on this price advantage and are the early adopters of this technology," Strawhecker noted. "The smaller acquirers need to take note of this trend if they hope to be able to offer competitive prices to their merchant base."
But a big chunk of the payments industry still hasn't budged. Much of that is due to market inertia or the philosophy that if it isn't broken, don't fix it.
The mom-and-pop convenience store that handles just a few transactions with a dial-up connection is not likely to be first in line to make the switch to IP. But others are in a position to enjoy the benefits of moving to IP. And many mom-and-pop stores today have an Internet connection for one purpose or another.
Last year, Mercator Advisory Group noted that 80 percent of merchants in the United States are IP-enabled. Where there is Internet contact, there's absolutely no reason - physical or financial - why the POS shouldn't be converted.
When it comes to handling customer service, IP-based transactions are lightning fast and enjoy a constant connection. Merchants using broadband Internet connections complete transactions in two to four seconds, compared to about 14 seconds for those using dial-up modems. In terms of flexibility, IP can't be beat. There are multiple types of IP communications to fit any environment - Ethernet for local area networks, cable and DSL modems; Wi-Fi for localized wireless networks; and code division multiple access and general packet radio service to tie into digital cellular networks.
Moving a dial-up terminal to another location takes time, and installing a new land line is expensive. With IP, moving a terminal can be done almost instantly by installing a wireless router to extend the reach of a local-area network (LAN) or broadband modem, or using a cellular-based wireless IP terminal.
While most people think the cellular option is just for mobile applications, the rapid decline in mobile data service prices makes this a competitive alternative to traditional dial-up terminals. In fact, one large processor said that half of its cellular deployments last year were for fixed countertop use.
With the flexibility of wireless IP, terminals can extend card-based payments beyond the store countertop and into new revenue-generating venues such as sidewalk sales, outdoor garden departments, or even airport, mall or stadium kiosks. Savvy merchants can take their existing broadband connections, whether they are digital subscriber lines or installed Ethernet LANs, and set up their own wireless LANs without having to lay a single cable.
When it was introduced, IP was popular only among technically adept computer users because it was new and complex. It has since become streamlined and simplified, and millions of people use it to surf the Internet, send and receive e-mail, download music or shop online. And it works with a variety of consumer devices including personal computers, cell phones, cable boxes and POS terminals.
IP-based POS transactions use the industry-standard secure sockets layer (SSL) encryption standard, which enables secure transactions across public and private networks. SSL creates a shared key (like a secret code) between two pieces of equipment, so only those devices can understand the information passed between them. This creates an end-to-end secure environment, so if someone were to intercept the transmission signal, the information wouldn't be readable.
Whenever an item is purchased online, SSL encryption is used. It secures billions of dollars in e-commerce. Dial-up terminals, on the other hand, offer no transaction security for data in transit, based on the assumption that somebody would have to tap a phone line to intercept the data.
So, I'll ask again: If IP is faster, less expensive and more secure, what's stopping us, as ISOs and merchant level salespeople (MLSs), from converting merchants to IP-based systems?
With the migration now under way to Payment Card Industry Data Security Standard-approved PIN entry devices, now is the time to get merchants on board with a new way of completing transactions. You can provide the guidance to show them how to save money and do more with IP. That's the kind of advice that builds loyalty and sets MLSs apart in a competitive market.
Scott Henry is Director, North America Product Marketing, for VeriFone. He can be contacted at firstname.lastname@example.org.
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