Applauding Visa’s Plans to Accelerate EMV Adoption in the US

Applauding Visa’s Plans to Accelerate EMV Adoption in the US
Yesterday Visa announced its plans to accelerate EMV adoption in the US. A confluence of factors, such as some of the US merchants and issuers making independent moves towards EMV, as well as accelerating developments around mobile payments, helped Visa decide that the time to act is now. It is the first time that a major cards network has thrown its weight behind the EMV debate in the US, and I think it is a very important development. For those of us in Europe already used to EMV, the announcement had a number of familiar tactics and incentives to ignite the industry-wide migration, such as:
  • Expanding the Technology Innovation Program (TIP) to Merchants in the U.S. effective October 1, 2012. TIP eliminates the requirement for eligible merchants to annually validate their compliance with the PCI Data Security Standard for any year in which at least 75 percent of the merchant’s Visa transactions originate from chip-enabled terminals;
  • Establishing a Counterfeit Fraud Liability Shift for domestic and cross-border counterfeit card-present point-of-sale (POS) transactions, effective October 1, 2015 with fuel-selling merchants given an additional two years to comply.
However, there were some very important differences:
  • Visa is not forcing the US to migrate to Chip and PIN, a standard currently used in Europe. Instead, the migration to chip is intended to lay the foundation for dynamic customer authentication. While PIN is undoubtedly more secure than signature, both tools suffer from being static authentication methods, which, if compromised, will lead to security breaches. Dynamic authentication means that new data is generated for every transaction, making it less valuable to steal card data and thus boosting security. Visa re-iterated its intent to support signature and PIN authentication methods globally, but also stated its expectations that their use will diminish over time and be replaced by dynamic authentication technologies.
  • Visa insists on the rollout of terminals able to support both contact and contactless chip acceptance, including NFC-based mobile payments. In fact, unlike in Europe, only such terminals will qualify for the TIP incentive. By doing so, Visa creates the conditions to solve the “chicken part” of the “chicken and egg” connundrum of NFC mobile payments.
In my opinion, Visa should be applauded for:
  • asserting industry leadership;
  • thinking strategically and proposing a pragmatic and forward-looking solution;
  • proposing specific and realistic dates (SEPA rule-makers, take note!)
  • creating incentives for the migration to happen.
Nevertheless, I suspect this will generate a lot of debate in the industry. No doubt, some will argue that given the economic uncertainty and Durbin implementation, the industry already has enough on its hands at the moment. What do you think? Will Visa’s decision be enough to move the needle? How will the issuers, merchants and the other schemes react?

Rewards on Prepaid

Rewards on Prepaid
We are all familiar with loyalty points and other types of rewards we get on credit cards. The economics (i.e. relatively higher interchange, opportunity to earn interest fees, etc.) and the stand-alone product nature (i.e. not linked to a current account) meant that many credit card issuers used to look for additional ways to stand out from the crowd to acquire customers. With economics deteriorating in recent years, the credit card rewards programmes are getting less generous, changing shape, or disappearing altogether – a subject I am looking at in more detail in my research at the moment. Those in the US are also very used to getting rewards on debit cards, something which doesn’t really exist yet in the UK. Again, it is yet to be seen where debit rewards will end-up given the Durbin regulation, but the early signs are that the shape of those is changing as well – some issuers are taking away debit rewards and others are looking for other ways to deliver them and are turning to providers such as Cardlytics for merchant-funded rewards. Then Orange in the UK announced in February this year that they are launching ‘Orange Cash’, “the UK’s first major contactless prepaid card”. In addition to regular payment features, the card allows “Orange Cash customers to earn points as they spend, which are redeemable against a range of rewards including Pay As You Go Orange texts, airtime, credit or Orange shop vouchers”. I believe it must one of the first examples of rewards on a prepaid card. Which actually makes sense – a prepaid card is also a standalone product that the customer needs to buy, so rewards can help differentiate it. And with various fees and interchange exempt from regulation (at least for now), the economics might look more attractive than many debit cards. As an “issuer”, Orange is also taking a relationship perspective and the rewards are designed to engender loyalty not just to the prepaid card, but also to the mobile network, still a primary relationship between Orange and most of its customers. This card is interesting from two other perspectives: a) It’s a prepaid contactless card. I’ve always maintained that contactless technology is most suited for prepaid wallets (from use case, not technology point of view) – given it’s “tap and go” nature, I would much rather expose my prepaid account which has limited funds than, say, my current account. b) It’s a stepping stone for Orange towards mobile payments. It gets their customers used to contactless and prepaid wallet concepts, both of which will be necessary when launching NFC-based mobile payments where Orange have strong ambitions. Now, if only someone could solve the contactless acceptance challenge…

Reporting from the field

Reporting from the field
Last week I attended “The Future of Cards and Payments” conference in London. Over two days, various speakers shared their perspectives on how they see the cards and payments market developing, particularly in the UK. Here is a selection of facts, which I picked up during the presentations and found especially interesting:
  • The crisis hasn’t changed the UK consumers’ behaviour that much. According to a study by Visa Europe, 56% of respondents in 2010 agreed with the statement “I save money so I have some protection in the future”, compared to 57% in 2008 and 24% are “open to borrowing to buy what I want today” (vs 23% in 2008). Having said that, more people are aware of their finances with 63% vs 45% two years ago “watching every penny they spend to avoid getting into debt”.
  • Cash is not going away. In the same Visa survey, 35% of people surveyed in 2010 stated that they “prefer to pay in cash for everything I buy”, which is down from 54% in 2002, but up from 18% in 2008.
  • Only ~50% of business accounts in the UK have a card
  • Identity fraud is up by 32% in 2009
  • Cheques are due to be phased out in the UK by 2018. However, it will only be done if by 2016 there are real alternatives in place, they are available to the users, well known and are being used. Heavy cheque users include charities (get 70% of their income via cheques) and elderly (may need another paper-based alternative, e.g. giro credit) among others.
  • UK market has ~4m prepaid cards.
  • Also, UK is on track to have 12m contactless cards in use by December 2011. Focus needs to shift now to acceptance.
  • Adoption of SEPA Direct Debit is partly an issue of interchange. 70% of euro-based DD transactions in the EU don’t have interchange, but the others do. The European Commission is firmly against having interchange for DD, but accept that a transition period may be required and there might be a case for it when dealing with rejected transactions.
  • To limit fraud, some online merchants and their PSPs are beginning to tailor availability of payment methods based on the consumer’s postcode, e.g. credit cards would be OK if you live in a premium address in Chelsea or Kensington, but only a prepaid electronic voucher (e.g. ukash) would be offered if you happen to shop from a council estate in Peckham.
  • And if you live with 20 other strangers in a room with no doors or windows in Asia or Africa and have no bank account, storing money is as important to you as being able to make payments.
I will be on vacation for my next blog post. See you in August!

Looking Through Suica-Colored Glasses

Looking Through Suica-Colored Glasses
Taking a short break from my research into mobile contactless payments, I recently made a private trip to Japan (I tend to go 4 – 5 times a year). However, with mobile contactless heavy on my mind, I couldn’t resist buying myself a prepaid Suica contactless card for use on the JR (Japan Railway) and subway lines around Tokyo. I simply inserted JPY 2,000 into the ticketing machine, entered some info, and a Suica card with my name printed on it came out (contactless card instant issuance, very nice). I thus joined the ranks of the 26,000,000+ active Suica cardholders. Armed with my Suica card, I began to casually observe the behavior of my fellow travellers. Despite Japan’s reputation as being the world’s most advanced country in terms of mobile payments, I can honestly say that I did not see a single commuter using a mobile phone to make a contactless payment. Japanese consumers seem perfectly content keeping their contactless cards tucked inside their wallets or card holders, which they wave at the turnstile — surprise #1. My new toy still in hand, I began to really pay attention to the non-transit merchants that accepted Suica as a form of payment — newstands, convenience stores, taxis and vending machines. However, it wasn’t until I returned to the States that I understood the magnitude of Suica’s non-transit payments. As of this year, there are > 44,000 acceptance locations in the Eastern Honshu region of Japan alone. More importantly, the number of non-transit transactions is rapidly approaching 1,000,000 per day (see figure below) — surprise #2. suica-figure What shouldn’t be surprising is that JR (the Suica Issuer) understands quite well that Suica’s non-transit business represents a viable, non-core business line and has designated Suica as a “pillar” of its corporate business strategy (some interesting similarities to eBay/PayPal…). JR’s near-term goal for Suica is 8,000,000 non-transit transactions per day. These transactions will be MasterCard’s and Visa’s to lose, meaning the JR/Suica has become a true disruptor (the same is true for Octopus Card in HK). As the U.S. has multiple population centers, I don’t envision such disruption occurring here. However, those countries with a dominant population center (e.g., France/Paris, UK/London, Canada/Toronto) are most likely to be chinks in the payment brands’ armor.