What's next for payments?

Markiyan Malko |

April 13, 2011

Recently I attended the Alternative Payment Systems Innovations Summit in hopes of finding what the next big thing in payments was and came away with more questions than answers. Heading into the summit, all I heard for the past couple months was about NFC and how it will absolutely revolutionize the payments landscape and, not surprisingly, it was talked about a good amount.

Although there was some positive talk about NFC (mainly by solution providers who have NFC solutions), the rest of the exhibitors and attendees were lukewarm on the concept. Mainly, the big box retailers like Wal-Mart, 7-Eleven and Macy’s were all very reserved on NFC if it’s main value and function is payments. Contrary to popular belief, swiping a credit card on a terminal is really not that hard and is actually usually quicker than most NFC solutions that have been proposed to far. The only real reason any of these retailers would have interest in NFC is the marketing and social aspect of the solution. If NFC could help them track customers, their interests and drive business to the store then NFC has a place in their stores. Otherwise, I’ll share a quote that came up numerous times during the conference… “NFC is a solution looking for a problem.”

Although it was surprising to hear that NFC is not exciting to everyone, it was obvious that it was not a silver bullet for the mobile payments industry. The biggest reason at this time is the fragmentation of standards and solutions. Every major player is putting their stake in NFC right now and trying to come out with their own, proprietary solutions that will only work with them. From a practicality standpoint this will hinder the adoption of NFC and might even kill it for the main stream. There needs to be a common standard that terminal manufacturers, banks and processors can follow to support NFC because you cannot expect the merchant to support 10 different types of NFC solutions… because they won’t.

Another interesting vertical was the availability of mobile billing options. Have you ever wondered why more merchants do not just bill your mobile carrier for services? We know they can because we can donate money to the Red Cross to help disaster survivors and many mobile applications such as games can charge us for buying items. Why not Amazon or Apple then? It’s actually very simple, cost. Traditionally, the mobile carrier takes 40%-50% of the sale and keeps it as a transaction fee which, of course, would not make it a viable solution for sellers of physical goods. This is not as big of a deal for sellers of digital goods that have no tangible cost and ease of sale is more important than sales margins. Recently, the mobile carriers have begun realizing that this might be a revenue stream for them and they have come out with programs that have made the fee structure closer to the 15%-17% range which makes it more competitive though still not a viable option for retailers paying 2%-3% for credit card transactions currently.

Lastly, PCI and PA-DSS undoubtedly were hot topics and one interesting presentation was from Subway/Value Pay Services regarding limiting their PCI scope. After in depth research into PCI solutions Subway decided to implement end-to-end encryption and tokenization in all of their 26 thousand US locations. They did so by implementing the Magtek IPAD pin pad that employs an encrypted read head that secures the data before it’s sent to the POS system. Because the POS system never sees the card data in the clear (not encrypted) and does not have a way to decrypt it, it’s out of scope for PCI, essentially limiting Subway’s stores to just having to worry about card handling procedures for their employees. Merchant Warehouse has been a strong proponent of this approach to securing card data and our MerchantWARE gateway has supported the Magtek solutions for almost three years so if you need more details on any of these topics feel free to contact us.

The next 12-18 months should be very interesting to watch and I’m excited to see what shakes out, especially in the NFC realm. Stay tuned, we’ll keep you in the loop.