Once again we hear that the U.S. lags Europe in an important new technology. The U.S. is just now moving away from plain magnetic stripe credit cards, which are vulnerable to counterfeiting, while Europe and Asia switched to more secure chip-based “smart cards” years ago.
There’s no disputing that Europe and Asia are the smart card leaders, but the U.S. is poised to leap ahead with smartphone-based mobile payments. And it’s worth understanding why. Europe is sometimes first-to-market with new technologies, because Europe chooses relatively safe new technologies and carefully manages their implementation. The U.S. produces more innovation, however, because there is more spontaneous, bottom-up development in the U.S.
For starters, the U.S. is positioned to take the lead in mobile payments for logistical reasons. Europe and Asia have already invested heavily in upgrading their point of sale (POS) terminals to accept smart cards. The U.S. is just starting to replace magnetic stripe cards with smart cards, and manufacturers have decided to offer future-proof card readers that support both smart card and smartphone payments. While the incentives for U.S. merchants to upgrade to the new dual-purpose card readers are compelling, it will be much harder to persuade merchants in Europe and Asia to swap out generally newer terminals that already accept smart cards.
The original incentive for merchants to upgrade to payment terminals that support the EMV (Europay, MasterCard, and Visa) smart card standard was liability. Liability for certain types of “card present” transactions are shifting from the card issuers to merchants who have not upgraded to accept smart cards. (You can learn more about the migration to smart cards in the U.S. by visiting the Smart Card Alliance website.)
However, U.S. merchants now have even greater incentive to upgrade to new dual-purpose card readers: the readers’ ability to accept smartphone-based mobile payments. Security-wise, smartphones can do everything smart cards can do and more. Smartphone users increasingly demand self-service options for accessing product information, receiving notifications and special offers and paying. And brick-and-mortar merchants have discovered that they can deliver superior shopping experiences to smartphone users through personalization and contextual engagement. Here are some options for mobile payments.
Only a choice of solutions can ensure the success of mobile payments. One of the most compelling is built around near field communication (NFC), the technology that enables smartphones to make “tap and go” payments on dual-purpose card readers, and that is rapidly becoming a standard smartphone feature. (A list of NFC-capable smartphones and tablets can be found here.) An NFC smartphone emulates a “contactless” EMV card. (Most EMV smart cards are the “contact” variety and must be inserted in the new readers; however, there are also “contactless” cards that the user merely taps against the reader.)
NFC adds a unique layer of physical security: Communication between the reader and the phone is limited to within just a few centimeters. That’s because in mobile payment applications only one of the NFC devices generates a signal -- the other device merely adds information to the signal that can only be recovered at very close range. There are other cool applications for NFC, such as reading inexpensive tags that can be attached to retail shelves, displays, and even individual items. The NFC Forum has done yeoman’s work developing NFC specifications and promoting the technology’s use, and provides resources for developers.
P97 Networks has developed a cloud-based mobile payment solution called PetroZone for convenience and fuel retail stores. There are roughly 150,000 gas stations with 1.3 million gas dispensers in the U.S., generating 41 million transactions daily, accounting for about 16% of all credit card activity. Replacing the readers at gas pumps will be expensive and time-consuming, so another solution is urgently needed. PetroZone requires no new hardware at the pump and tackles the security issue using multi-factor authentication: something the user has (the phone), something the user knows (a passcode), and something the user is (the user’s current location as determined by GPS). According to P97 Networks, PetroZone mobile payments are more secure than traditional credit card payments, and enable alternative payment modes such as automatic clearing house (ACH).
More exciting and forward-looking are PetroZone’s behavioral marketing capabilities. For instance, users with automobiles featuring “connected car” technology can be automatically notified when their fuel tank is low and directed to a nearby gas station with the best price or a special offer for something the user has purchased in the past. The user saves money while the merchant drives revenue -- perhaps while steering the user to the most cost-effective payment mode.
Innovation sometimes means breathing new life into old technology. LoopPay, acquired by Samsung in early 2015, enables mobile payments using legacy card readers. The firm’s magnetic secure transmission (MST) technology allows smartphones to emulate swiping a magnetic stripe card through a magnetic stripe card reader. The user pays by holding the device (either an iPhone with a special LoopPay case or the device that slides out of the case) next to the reader and either tapping the pay button in the LoopPay app or pushing the button on the LoopPay device. LoopPay users can start making mobile payments nearly everywhere, right now.
LoopPay’s solution may be disconcerting when first encountered, however. The check-out clerk may be worried when they see the user paying by holding an electronic gadget near the card reader rather than swiping a card. Plus, the LoopPay CardCase includes a storage area for the user’s ID and a backup credit card. A place is needed to store the user’s ID because mobile payment users could make leaving their wallets at home a habit. The backup credit card is no doubt in case a merchant refuses to accept payment using an unfamiliar device.
There are now mobile payment solutions in the U.S. for new card readers, for bypassing card readers, and for old card readers. Each can do things that smart cards can’t.
Europe’s plan to reduce credit card fraud in stores by using smart cards achieved its goal. The U.S.’s more flexible and spontaneous approach will achieve much more. Mobile payments will be an important tool for digital businesses, enabling them to deliver more choices, personalization, and engagement.
Out of the simple act of paying, entrepreneurs will invent new and often unexpected forms of value. Not everything can be planned years in advance.
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