The merchant payment processing arena has been in a state of flux for the past few years, driven by the advent of smart-phones and a multitude of other disruptive new payment technologies. These trends threaten to reshape the playing field of retail payments, both at the point of sale and online. Our industry, however, is both large and complex. There are many players in the value chain, but competition is fierce, and profit margins are extremely thin, leaving very little for innovation, security enhancements, and adapting for whatever the future throws at you.
Adapting to change may be an inevitably recurring theme in our profession, but trying to find the most cost-effective way to accommodate wide-sweeping changes while still pleasing your fickle customer base can be a difficult task. The good news is that the complexity of our business can slow down even the most aggressive project plans, thereby providing much needed time for planning and preparation. The bad news is that change costs money, but the employees at Merchantseek.com are here to keep you informed and to ensure that you find a processor that is up-to-date on these new payment technologies and sufficiently prepared to support your individual needs going forward.
From a priority perspective, nothing much has changed over the past two years.
• Mobile technology is sweeping the planet, and, with it, millions upon millions of smart-phones that enable one-on-one marketing directly to the individual customer. Delays have resulted, as competitors fight it out for supremacy.
• Chip cards are also an inevitable reality in the United States. After years of resisting this global trend, domestic card issuers must convert and merchants must accept by fast-approaching deadlines, which might be extended.
• In the meantime, the criminal element in our society continues to wreak havoc in the form of data breaches. Security issues must be addressed.
• Lastly, is the collective “Other” category. Innovation is rampant within a host of new payment start-ups, each vying for the next great idea that will sweep the industry and make a fortune for its supporters. Some are worthy. Some are not.
Here is a brief recap of the status of each of these pervasive themes for 2015:
#1 – The “Brave New World” of mobile payments is taking longer than expected.
Press releases continue to tout the oncoming revolution of how consumers will change their purchasing habits due to smart-phone technology. The credit and debit card processing eco-system of today, however, contains many players, each performing a necessary role in a very integrated process. These players include acquirers/processors, issuers, card networks, gateway providers, and independent sales organizations, each competing to maintain and expand its share of the action. Mobile payment technology threatens to disrupt this entire payment model, while shifting control to new players.
Resistance and a wait-and-see attitude has been the result. The complexity of so many moving parts in the industry has frustrated many attempts at grand cooperation. The need for a central data depository, the key component for direct marketing campaigns, has evolved into an e-wallet battle of major proportions between the likes of Google, Amazon, Apple, PayPal, and a host of others. No victor has emerged.
There have been isolated successes. Starbucks brims with pride over their private label card. ApplePay has garnered enormous attention, but Samsung and Android are hot on its heels. Near-Field Communication (NFC) technology is making a come back, but the jury is still out. Consumers are still skeptical. Swiping cards remains more convenient and secure than using your phone. Optimists point to ever-growing e-commerce traffic that is presently 7% of retail sales. The general consensus is that progress will happen in small steps, but it will take much more time before any system achieves critical mass.
#2 – Chip Cards are coming to the U.S. whether you want them or not.
The U.S. market has always benefited from a low-cost telecommunications grid that enabled fraud control through authorization messaging between the issuer and the merchant in seconds. The rest of the world does not have this same low-cost grid. Their low-cost alternative is an EMV-Chip card, where fraud control can occur directly at the point of sale. Global issuers and merchants have been converting to chip cards over the past decade, while the U.S. has resisted the effort until the past few years.
The October 1st deadline for transitioning cards and merchant terminals is near and the status of conversion is best described as a “fractured environment”. If large merchants turn on their systems, the best estimate is a 50% coverage rate by yearend. Roughly 20% of cardholders have received new cards. We can expect card associations to extend the deadline, but will there be penalties? Chip cards are not a complete answer to fraud control. One analyst notes that, “Many countries that have migrated to EMV have experienced an increase in e-commerce fraud rates.”
Do merchants upgrade for EMV, and then for NFC, and then for tokenization or whatever else comes down the line? The need for a single common standard is obvious. Budgets and resources are already stretched to the limits, another reason why the transition has been incomplete, at best. But fraud, currently an $8 billion problem, will not go away. It will continue to grow, and new tactics are necessary. Look for 2016 to be a year where true momentum builds for chip cards and when small to medium-sized merchants have more cost-effective transition solutions.
#3 – Despite best efforts, security data breaches will continue to occur.
Sensitive data breaches are a fact of life. Crooks have the resources to buy and use the most sophisticated technology on the market today to further their various cyber-crime activities. Each breach brings a new lesson and points out a new vulnerability. As one pundit put it, “In the aftermath of the 2013 Target data breach, many companies began discussing the use of tokenization to replace sensitive card data with a secure value called a token. Some want to wipe out passwords entirely, and others are looking for ways to build a digital identity that can operate across devices.”
Tokenization permits a merchant to store an encrypted “token”, a surrogate value for a customer’s debit or credit card number. This process eliminates the need for merchants to store sensitive data, thus eliminating a potential target for a future breach. Token systems are already available for mobile phones. The current consensus, however, is unclear. No one has proposed a roadmap for conversion, but security issues persist. Expect more news to come on how security layering will eventually produce results.
#4 – New payment start-ups appear monthly, each searching for the gold ring.
Amidst the uncertainty of future conversion alternatives, the one thing that is certain is that innovation is alive and well in the payments industry. Newly funded ventures pop up each month like mushrooms on the payments landscape, each promoting a new idea it hopes will sweep the industry. BitCoin continues to grab headlines, as does its block-chain technology. There are a multitude of “bring your own tablet”-based systems courting merchants, such as Square Register, POWA, NCR Silver, Shopify, Vend, ShopKeep, ProPay, and Revel. Other efforts address cloud-based/Internet-connected terminals, integrated POS systems, point-to-point encryption, in-aisle checkout, and the notion of “merchant app stores”, as well as real-time payments, biometrics, and in-house installment-pay systems. None of these new ideas require immediate attention, but it will be interesting to follow which ones succeed going forward.
The merchant payment processing industry is definitely changing, but the nature of our world is that the largest players at the top of the food chain must change first and then pass down to the rest of the participants the necessary protocols for final implementation efforts. Transitions can take an average of seven years in the best cases, and a decade for the worst. The advantage of delays is that smaller enterprises have more time to find the best low-cost options and the best partners to align with for the future.
The staff members at Merchantseek.com are aware of the problems that you face and are here to help you during this difficult transition. Change is inevitable, but there are cost-effective ways to deal with its impacts and capable partners available to counsel your future movements. Let us be your guide!