Getting m-POS ready for EMV in the US

Getting m-POS ready for EMV in the US
As we highlighted in our recent report The Update on EMV Migration in the US: Leaving the Station and Building up Steam, the US market is finally making a strong progress towards EMV. While many of the barriers we discussed in the past have been dismantled, there are still challenges that remain. One such challenge is the upgrade to m-POS platforms. Square has created an entirely new market a few years ago with a simple ‘dongle’ that a merchant could connect to his smartphone’s or tablet’s headphone socket and start accepting cards. The customer would swipe the card, sign on the phone and that would be it. Now Square and its many competitors have to bring out new devices that support EMV cards. That also means a change for merchants, and they will have options. Square announced its new device in November last year. Unlike most of m-POS solutions in Europe, it will not support chip and PIN, but will be a standalone chip card reader and will support signature as the cardholder verification method. It will start shipping in spring, but will not be free – merchants will have to pay $29 for the mobile chip card reader and $39 for the accessory to Square Stand. Earlier this month PayPal Here also announced that it will be bringing its EMV reader already available in the UK and other markets to the US. And in addition to iOS and Android, it will support Microsoft Surface Pro 3, and other devices running Windows 8.1. First Data’s Clover has launched Clover Mobile, a mobile and EMV compatible version of its Clover m-POS platform. Unlike Square’s readers, Clover Mobile also supports NFC transactions, including Apple Pay. And then there is Poynt, launched at last year’s Money2020. Poynt is described as “a future-proof device that accepts magnetic stripe, EMV, NFC, Bluetooth and QR code payment technologies. You are ready to accept your customers’ favorite payment methods: Apple Pay, chip-and-pin, mobile apps, and whatever else the future brings.” Of course, there are other options, above solutions are just a few examples. The challenge for merchants is deciding if and when to upgrade the readers and whether to stick with their existing provider. As always, risk-based assessment will be key. For example, whenever I am in Vegas, I try to visit a small shop that sells vinyl records, which accepts card payments via Square. If I were the owner, I would look to upgrade to an EMV reader as soon as possible – while it’s not a coffee shop in terms of frequency of transactions, most payments are tens and hundreds of dollars. On the other hand, a local dry cleaner who already knows most of its customers will be less compelled to upgrade. Clearly, not everyone will be ready by the liability shift deadline in October, but merchants with the risky profile should make sure they are.

US Merchants Remain Unconvinced by EMV

US Merchants Remain Unconvinced by EMV
I presented at the CARTES America conference in Las Vegas last week. It was a great event with many interesting conference sessions and good opportunities to network. One of the highlights for me was the opening keynote with panelists representing various merchant organisations, such as Merchant Advisory Group (MRA), National Restaurant Asociation (NRA) and The Association for Convenience and Fuel Retailing (NACS). The message was pretty clear – merchants are not convinced about EMV, certainly not in its present form. At the very least, they have genuine concerns about costs, some of the decisions to-date and the issues that remain unresolved:
  • According to the panelists, “even if the fraud rates were to double to 8bps, that is still not enough to cover capital expenditure paid over 30 years,” the “ROI is just impossible.” While it is easy to dismiss merchant cost concerns as bargaining, merchants are not looking just at the cost of terminal replacement. For example, apparently many US fuel stations today do not have sufficient bandwidth for EMV transactions, which means ripping off and upgrading station forecourts. And while that in itself is expensive, many such changes would require certifications and approvals from Environmental Protection Agency (EPA) further escalating the costs.
  • Merchant training is also likely to be a significant undertaking – “smaller members don’t know what the letters (EMV) even stand for”, they are “behind on education.”
  • Merchants are concerned about the decision not to go uniformly for Chip and PIN. In their view, the continued presence of signature as a cardholder verification mechanism only confuses the market.
  • Rightly or wrongly, they are also concerned about the chip being a “property of a few stakeholders” and what it means to them in terms of transaction visibility. “We will not buy information back from the issuers about our customers.”
  • Also, ambiguity on Durbin stifles progress by merchants. While the panelists described Durbin amendment as “the most significant positive change for merchants”, the requirements to have two unafilliated network applications on the same card complicate EMV implementation for debit cards.
At worst, some seem to view EMV as yet another conspiracy of banks and card schemes against merchants. As one panelist described the situation: “Liability for signature transactions in brick-and-mortar environment today are with the issuers, while we (merchants) pay premium for the e-commerce transactions. With EMV, you are now transferring the liability to us for brick-and-mortar transactions (assuming merchants don’t migrate to chip), while doing nothing to solve e-commerce issues. And as we know, with EMV, fraud migrates to e-commerce, so we are getting hit twice.” So what does it all mean? It is very likely that 2015 deadlines will not be met. Or in other words, the merchants will not be ready and if the issuers are, the merchants will be hit by the liability shift. As I understood, if merchants had their way, they would:
  • Get rid of signature and move to a “common customer experience around the world”, i.e. Chip & PIN;
  • Get rid of PCI, or at least reduce the scope;
  • Get interchange relief or help with terminalisation;
  • Solve e-commerce.
Banks and schemes can agree or disagree with these positions. What is important is that there is a dialogue and all parties are involved. Merchants are a crucial constituent in the payments equation and their voice has to be heard. I know merchants are already active participants in key forums (e.g. EMV Migration Forum), and they should continue to collaborate with the industry to find the best solutions for the market.

“Should We Repel Durbin?”

“Should We Repel Durbin?”
That was the question someone asked me last week at an ATM, Debit and Prepaid Forum. I know – it was in Vegas, the person was joking and the question is really a rethorical one. And yet, it kind of rings true, because no one seems to be happy with the new regulation. Except, of course, the lobbyists, lawyers and other industry advisors. And perhaps some acquirers and ISOs. As expected, “Life after Durbin” discussions dominated the event. Of course, the large debit issuers are unhappy – the general consensus is that this will wipe out about $8bn in annual interchange revenue for the industry. The issuers are looking for ways to cut costs or to raise revenue. It was interesting to watch how nearly everyone had to update their slides, as Bank of America withdrew their planned $5 debit card fee about 24 hours before the official conference started. The bank itself explained that they “listened to the customer feedback and acted accordingly.” The smaller exempt issuers are not entirely unhappy. Credit unions announced a large new customer intake (“760k new accounts in the last 10 days, more than in the entire year previously”). However, they are worried that they will also feel competitive pressure on interchange or might be discriminated by the merchants and their acquirers. Also, it remains to be seen how profitable the new customers will be for them. Prepaid issuers seem to be unsure what to make of it. On one hand, some prepaid cards are exempt from regulation, however, the exemption conditions and small print gets very complex very quickly. Cue in the lawyers and corporate counsels to help navigate the regulatory maze. The network routing rules banning the exclusivity arrangements are seen as an opportunity by at least some of the networks, especially the smaller ones. However, the implementation – renegotiation of contracts, setting up of routing rules, etc – is not an insignificant undertaking for all involved. Cue in consultants and more lawyers. Perhaps most surprisingly, the merchants are not happy at all. The merchant panel, represented by senior executives from Walmart, 7-Eleven and McDonald’s was one of the most interesting sessions at the Forum. They all expressed disappointment in the final regulation. Walmart said that the regulation was a “disappointment, but a good start for future regulatory reforms, including credit.” It is true that for small ticket purchases, the costs of debit acceptance have gone up, as it’s now a flat fee, i.e. the cap was implemented also as a floor. When asked if and when consumers can expect to see lower prices, the merchants responded by saying that the “merchant market is very competitive, therefore any cost changes will be passed to consumers, both increases and decreases”. In other words, “expect prices not to change much or perhaps even go up.” Redbox, a US-based DVD rental firm, already followed through on this and raised its prices for DVD rentals from $1 to $1.20 quoting increases in their costs of debit processing. Smaller merchants are also unhappy because it might take time for any savings to trickle through to them. Unless their acquirers and processors charge them “interchange plus”, they may find it difficult to demand immediate reductions in their bundled fees. Those with lower volumes may also lack the necessary know-how or may simply prefer avoiding the hassle of putting pressure on their acquirers to lower their fees. It will take a better part of next year for the full effects of Durbin regulations to become clearer, but the early signs are that it won’t reach all of its intended outcomes. So, what’s next? P.S. As an aside, this year’s ATM, Debit and Prepaid Forum saw the best-ever attendance – over 1,100 participants – and had a very interesting agenda with great speakers. Congratulations and thank you to SourceMedia, the event organisers, and Tony Hayes, a conference chairman (and a partner at Oliver Wyman, Celent’s parent company) for all their efforts!