This is Part I of Retail TouchPoints' payment update, a three-part report uncovering the latest developments in EMV, mobile payment and mobile POS. Part II, which will focus on developments in mobile wallets and payment apps, will appear in the April 24 newsletter.
Payment processing is a vital step in the sales lifecycle. Whether online or in the store, consumers are completing purchases with credit and debit cards, PayPal, Google Wallet and other digital options. Recent developments and trends in payment and technology have retailers rethinking their payment processes to keep pace with tech-savvy shoppers, as well as upcoming industry mandates.
These developments include the move to smart cards in the U.S. and retailers' need to comply with Europay, Visa and MasterCard (EMV) — the global standard for smart card processing. They also include growth in Near Field Communication (NFC) technology, and mobile payment applications and hardware, such as those from Google, Square, PayPal and VeriFone.
The continued proliferation of smartphones has caused merchants to consider the enterprise-wide benefits of implementing mobile payment in-store. As of February 2012, 49.7% of U.S. mobile phone subscribers had a smartphone, according to Nielsen research. Based on a survey of more than 20,000 mobile users, the research also revealed that more than two-thirds of consumers who bought a new handset in the last three months chose a smartphone over a feature phone.
As consumers grow more comfortable using their smartphones to browse and buy items, mobile payment will offer a greater opportunity for retailers to improve customer engagement in store locations, according to John Devlin, Senior Practice/Group Director of AutoID and Smart Cards for ABI Research.
"It's not about just serving the customers and allowing payment — it's about integrating this information with customer data to determine what they're doing, where they're doing it, and what their experience is," Devlin said. "At some point, shoppers may be tapping into coupons, loyalty programs and other information while in the store, allowing them to receive offers and gain additional points. It provides a great way to interact with consumers."
Although merchants such as American Eagle, Bloomingdale's, Macy's and Walgreens are implementing "tap and pay" tactics with Google Wallet in select locations, other retailers are struggling to follow suit. This lackluster implementation rate may be caused by several factors, including investment and employee training processes, as well as overall consumer interest.
"I think any perceived security concerns surrounding [the mobile wallet] are going to be resolved soon, but one of the biggest challenges retailers face is with consumer adoption," said David Hogan, Executive Director of Heartland Payment Systems and former CIO of the National Retail Federation (NRF). "Retailers have to determine what incentives they can provide to entice their customers to use their mobile wallet. It's my belief that this mass adoption to mobile is still several years away."
New developments regarding EMV's migration to the U.S., however, are coming to the forefront, driving U.S. merchants to transition to contact and contactless payment options that utilize chip-enabled smart cards. According to ABI Research, an estimated one billion payment cards with contactless capabilities will be shipped globally in 2016, up from just 170 million in 2010. ABI Research also predicted that smart card shipments will overtake mag stripe card shipments by 2015.
Cards embedded with EMV chips enhance payment security and decrease the likelihood that identity and credit theft will occur. The technology already is implemented throughout Europe and other countries worldwide. According to The Smart Card Alliance, in countries such as the U.K. where EMV cards are a standard, card-related fraud is at its lowest levels. Specifically, losses at U.K. retailers have fallen by 67% since 2004.
Walmart, Best Buy and Home Depot already have announced plans to become EMV compliant, according to recent coverage from Retail TouchPoints. To minimize the risks and maximize investments, U.S. merchants should understand the overall impact of early decision-making and migration to EMV.
"If you look at the credit card, at least in North America, it's ideal for consumers to make a payment quickly and efficiently," Hogan said. "But the traditional credit card is an antiquated form with the mag stripe. The recent announcements from MasterCard and Visa are showing that there's a roadmap to adoption of EMV chip cards in the U.S. soon."
U.S. Merchants Progress To EMV
In the U.S., Visa, MasterCard and Discover all have released regulations and incentives for merchants to support acceptance of EMV chip technology by April 2013. This development encourages U.S. merchants to start revamping their POS hardware to enable contact and contactless payments for "chip and PIN," in which customer identities are embedded in the chip, as well as "chip and signature."
After October 1, 2015, the payment industry will see a liability shift for U.S. and cross-border counterfeit card-present POS transactions, moving the responsibility to retailers for any fraud related to smart card usage.
In August 2011, Visa announced that it would take numerous steps to speed adoption of EMV among U.S. merchants. According to a company announcement, Visa will alter its Technology Innovation Program (TIP) to eliminate the requirement for eligible merchants to validate their compliance with the PCI Data Security Standard for any year in which at least 75% of a merchant's Visa transactions originate from chip-enabled terminals. The credit card company was the first to mandate U.S. acquirers, or payment processors, and sub-processor service providers to support merchant acceptance of chip transactions no later than April 1, 2013.
This move will create a smoother transition to NFC and mobile payment, according to Jim McCarthy, Global Head of Product, Visa Inc. "By encouraging investments in EMV contact and contactless chip technology, we will speed the adoption of mobile payments as well as improve international interoperability and security," McCarthy said in a press statement. "As NFC mobile payments and other chip-based emerging technologies are poised to take off in the coming years, we are taking steps today to create a commercial framework that will support growth opportunities and create value for all participants in the payment chain."
MasterCard also has released a standards roadmap for merchants to implement EMV and revamp their POS hardware to allow contactless payment. In January 2012, MasterCard announced its EMV guidelines, and discussed how the framework will serve as the foundation for the next generation of products and services developed to enhance the way consumers pay.
"We're moving toward a world beyond plastic, where consumers will shop and pay in a way that best fits their needs and lifestyles ― with a simple tap, click or touch in-store, online or on a mobile device," said Chris McWilton, President of U.S. Markets for MasterCard, in a press statement. "Our roadmap represents a transformational shift in the approach to payments and is not simply about EMV and chip and PIN."
To further the adoption of EMV, MasterCard will work with acquirers to ensure infrastructure readiness by April 2013, and will provide merchants that implement EMV-compatible terminals with financial benefits. The company also will ensure all customer-facing touch points are EMV-ready, including ATMs, physical POS, online payment and mobile commerce.
Discover was last of the major credit card brands to reveal its plans to further EMV adoption in the U.S. The company released a statement on March 15, 2012, saying it will mandate D-PAS, its EMV-compliant payment specification, in 2013 for acquirers and direct-connect merchants in the U.S., Canada and Mexico. This initiative will help keep certification and deployment streamlined, leading to an efficient transition for issuers, merchants and acquirers.
Discover's statement also said its EMV deployment efforts already are underway domestically: In January 2012, Discover processed its first U.S. EMV card transactions at enabled Walmart locations. Walmart is certified to process D-PAS in both the U.S. and Canada.
D-PAS has been deployed over the last three years around the world. Discover has more than 1 million smart cards circulating among international issuers, and will further expansion throughout 2012, according to the statement. Discover plans to support all card authentication channels both online and offline, as well as all cardholder verification methods, including chip and PIN, in all commerce channels, both contact and contactless, including mobile payment.
The alignment and collaboration that is taking place between credit card companies, merchants and advocacy organizations, such as the Merchant Advisory Group, reaffirms the growing importance of EMV in decreasing credit card fraud and improving the efficiency of payment processes, according to Andrew Morris, Director of Market Platform Dynamics.
"Everyone except American Express has expressed a similar timeline for the rollout of EMV across the U.S. They're all giving the same basic dates for acquirers and merchants to comply, although there are some variations of how they're treating incentives and fraud liability shifts," Morris said. "Even the Merchant Advisory group is supporting EMV by coming out and saying that these are issues important to retailers, and discussing how this [migration] should be done. We have alignment, but the discussion now is how retailers should deploy the smart card and whether they should verify the cardholder with a signature or a PIN."
Chip and PIN More Secure Than Chip and Signature
Chip and PIN allows consumers to verify their credit card account and payment with a PIN number, while "chip and signature" provides the option for cardholders to sign for payments. Although the latter option adds flexibility to the purchasing process, it also increases likelihood of fraud.
"The retail industry is burdened with card fraud and resulting chargebacks," Hogan noted. "Merchants prefer chip and PIN over chip and signature because it's a more secure form of payment. If you have a card, and there's a PIN associated with it, then it will be much more difficult for someone else to use your card if it's lost or stolen. The other major benefit of these smart cards is that they're extremely difficult to copy compared to the traditional mag stripe.
"However as merchants make the transition to EMV, they will be presented with the prime opportunity to examine their entire payment infrastructure,"
explained. "The challenge will be how do you design a solution with so many competing solutions to choose from? Do you go with Google, PayPal, Isis, Visa Wallet, etc., or create your own closed-loop solution like Starbucks?"
Part II of the "Payment Update" will publish in the April 24 newsletter.