The diversity of payments in the US

As a payments geek, I am always curious about payment experiences in various parts of the world. In the last month I had a couple of trips to the US – to New York and to New Orleans – and they just reminded me how diverse the US payments environment is. And I am only talking about the physical POS; I haven't really ordered anything online or in-app while I was there.

First, a few observations around EMV. As I live in the UK, all my cards are Chip and PIN, and the US market has been migrating to EMV for a while now. Of course, the migration can't happen overnight – some merchants have already upgraded their terminals, but many haven't yet. Also, there is no mandate in the US to use offline PIN, so "chip and signature" EMV cards are common amongst the US issuers. As an end-user, I experienced a full gamut of payment scenarios:

  • Majority of merchants would simply take my card, swipe it and give it back to me straight away. Not one of them checked if my card is even signed, let alone if the signatures matched…
  • On a few occassions, I was asked to insert the card into an EMV terminal and enter my PIN. And then we waited. And waited more. And a bit more. I knew EMV transactions take longer in the US, but I didn't realise just how much longer… Not surprisingly, the networks had to do something about it and have announced software updates (e.g. Visa's Quick Chip for EMV and MasterCard's M/Chip Fast) to speed up transaction processing.
  • Not a single eating establishment I visited had a handheld EMV terminal. All of them just took my card and disappeared for a while in the "back of the room" – a practice that sends shivers down the spine for most Europeans 🙂
  • On at least one occassion, I entered the PIN, yet the salesperson was still looking for a signature box on the receipt and wanted me to sign it. I had to explain that PIN replaces the need for signature; of course, these things will disappear once merchants learn more about the EMV cards.

A number of merchants in New Orleans had a Clover POS station. It looked really sleek on retailer desks and transactions seemed fast and easy. I asked a couple of them what they thought of it, and they all said they were very happy with the device, its looks and ease of use.

As a side note, American Express cards seem to be far more widely accepted in the US. In Europe, I got into a habit to double check at new places if they take Amex; in the US, that seems unnecessary.

Of course, it's no longer just cards. US was the first market in the world to see the launch of Apple Pay, Android Pay and a number of other digital wallets. The challenge for many of these wallets is the lack of places where they can be used, as contactless terminals remain relatively rare, albeit growing. However, when they can be used, they work very well. The biggest advantage that I can see as the UK user of Apple Pay is that in the US I can use Apple Pay for any transaction, whatever the amount (as long as my issuer is happy to authorise it). I had no problem paying for a taxi ride from New York's JFK airport to downtown by Apple Pay ($70+ fare with the tip). In the UK, Apple Pay and Android Pay (which has just launched this week) are subject to the same contactless card transaction limits and can only be used for transactions of £30 or less. Again, we expect this to change, as contactless terminals get upgraded.

I was also intrigued to see a PayPal acceptance badge at one of the POS terminals. I asked the cashier if it was a popular payment method amongst their customers. The cashier said that it seemed new to him, and that he personally had yet to see anyone trying to use it. I must admit, I am a fan of the PayPal wallet and use it whenever I can, but nearly all of my transactions are online/ via a mobile app. This time, I only noticed the PayPal sign after I already started paying by card, so can't quite report on the actual experience…

And yet, cash remains hard to beat, with many places only accepting cash. I refrained from visiting any of the dodgier establishments on New Orleans' Bourbon Street, but I didn't even had to in order to experience the power of cash. Most sellers in the French Market clearly prefer cash; getting into (jazz) Preservation Hall is "cash only" at the door, and while not every place has the sign as artistic as the one in the picture below, "cash only, one drink minimum" was a common mantra of many bars with live music.

cash only

Clearly, there is a lot of payments innovation in the US. Various wallets and innovations in POS contribute to the diversity of end user experiences. Such diversity is a good thing and if anything, it will only increase, as customers will have increasingly more ways to pay. And as the migration to EMV continues, the undesireable kind of diversity should reduce as well.

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.

Busy Few Weeks in the Payments World

It has been busy few weeks in the payments world. Not surprisingly, reaction to Apple Pay’s announcement is the hottest topic in payments. It even manages to dominate European conferences with no specific agenda items dedicated to Apple. We at Celent added our own voice to the debate by publishing a new report on Apple’s entry into payments, in which we describe Apple Pay and assess its prospects. Celent clients can download the report here, and all are welcome to join me at the webinar next Monday, October 20th. By then, Apple Pay should be up and running – the iOS upgrade which would launch Apple Pay is expected over the weekend. In the meantime, PayPal announced that it would separate from eBay and its core auction business, and would get a new CEO, Dan Schulman, a seasoned payments executive from American Express. Arguably, both companies will be able to better focus and compete as stand-alone businesses. However, it’s difficult not to think that the separation also makes them both more “in play” in the industry consolidation. Immediately, rumours started swirling around who might buy/ merge with PayPal; some of the loudest noises concentrate around Square, although so far those rumours have been denied by Jack Dorsey via Twitter. Autumn is traditionally a conference season, and this year again, many of us are attending the leading events from Sibos and EFMA to Money2020, AFP, and BAI. My colleague Stephen and I were last week at Mobey Day in Barcelona, as usual an excellent event; many thanks to Mobey Forum for their cordial invitations! As a sign of its growing presence and influence, Mobey Day became two days this year. It focused on two major themes – Host Card Emulation (HCE) and biometrics. While the latter was brought to the forefront by Apple Pay, the former can certainly be an alternative strategy for banks looking to deploy NFC solutions for Android devices. Dan Latimore and I will soon be attending Money 2020, and are very much looking forward to spend a few days immersed in payments innovation and meeting our clients. Our diaries are filling up fast, but if you are going to be there and would like to meet, let us know or reach out to your Celent account manager. However, as much as we all get excited about innovation in payments, we can’t afford to forget what makes it all work in the back office. We have been conducting extensive research this year into card management and transaction processing (CMTP) market and the vendors that serve that market. Our report offering “a dozen observations” on the market trends has been out for a couple of weeks now and I will be hosting a webinar on this topic next week on October 22nd – join us if you can.

The Challenge of Making Mobile Payments Work at the POS

This weekend I paid with PayPal in the physical store. There are a handful of stores in the UK that now accept PayPal payments, and while I’ve seen the demos, this was my first time to actually go through the process myself. And I have to say, it’s not something I will be looking to experience in a hurry again… The good news: the payment worked, first time. Which is more than what I can say about my NFC experiment with QuickTap wallet from Orange (EE) and Barclaycard. There, my experience has been very inconsistent – sometimes it works like a dream, other times it doesn’t work at all. The worst is when it’s not even clear if it worked, and at least one of us, either me or the merchant, is left scratching our heads if we ended up short-changed, either by paying cash or card or by assuming the payment did go through. None such problems with PayPal – the payment went through and I got instant acknowledgement of the transaction. The bad news: it took forever, and required perseverance and patience on all parties. Luckily, there was not a queue behind, I was determined to do it and the cashier was curious and willing to go along with me. I was prompted to pay by a sign “Pay here with PayPal” (or something to that effect), which is how it should be – clear signage at the till that a particular payment method is welcome here. Frankly, I am getting tired having to ask if the merchant would take my Amex card, as often there is no sign of what types of cards are accepted anywhere near the till, which is where it is most useful. My cashier had no idea what either of us should do for me to pay with PayPal. Luckily, her manager was around and he was able to direct both of us. That is something I highlighted in my report on NFC lessons learned equally applicable here – merchants should train their front-end staff, not just managers. The first step was to fire up the app and log in. Now, this is my fault – I haven’t set up a PIN on my PayPal account, so had to type in my full email and password, which seemed a very cumbersome thing to do on the phone. PayPal supports an easier option, and even “Remember me” feature, which would bypass the requirement to log in altogether, although I am not convinced I would want to do that for security reasons. Then I had to find the shop to “check-in” for payment. The shop was called Blacks, an outdoors retailer, but did not seem to be on the list of local retailers. I saw in the app corner “an ad” that “PayPal is now accepted at Blacks” and clicked on that. However, according to the list the nearest shop was miles away. At this point, the manager said, “Oh, we used to be called Millets, so we are probably still under that name.” He gave me the specific address, and sure enough, I found that particular Millets store on the list in the app. Strangely though, according to the app, the store was apparently 1.6 miles away, even though I was standing right in it… Another lesson: if you are providing a list of retailers accepting your solution – certainly a good thing to do – make sure it is up-to-date and the geolocation works properly. Having found the store, I was ready to “check-in” and having waited for the app to process the request, I received a bar code and a long number. The cashier said I had to type in the number into their terminal. I thought they would just scan the bar code, but apparently they couldn’t, so I ended up typing in a long (if I recall correctly, 10-digit) number into the POS terminal. After another long delay (the cashier: “wait, wait, it’s doing something!”), the payment went through and I was done. Much of the delay was down to general slowness – every step seemed to take ages to move to the next level. I can only assume it was because I was on a 3G connection; presumably, a Wi-Fi or a 4G would have solved much of that problem. Throughout all this, my wife was patiently standing by my side with a puzzled expression on her face. Finally, she asked a very sensible question: “Why?” Indeed, why go through everything I just went through – a painful log-in to the app, finding the store you are already in, waiting for the app to respond, typing a long code into the POS terminal, and more waiting when I could have just inserted my chip and PIN card into the same terminal slot and be done in seconds? After all, my payment ultimately will come out of the same card I would have used anyway. To be honest, I didn’t have a good answer to my wife’s question. The most obvious and immediate benefit is that I didn’t have to use my card at the merchant, which after Target and other data breaches would be a legitimate, although probably still not strong enough argument in the US. Because of EMV, here in the UK, that argument is even weaker. I know the vision is that I will be getting local and unique offers, etc., but again, there are and will be other ways for me to receive those offers, including linking them directly to a card. Digital receipts? Definitely not worth the extra hassle, at least for me personally. Now, I have to make one thing clear – I have a lot of respect and admiration for PayPal. As I discuss in my recently published report on Top Trends in Retail Payments, in my view, they have made probably the most progress of all the open digital wallets. They get what it takes, and they have most of the ingredients to be successful. The fact that even they struggle to deliver a superior customer experience is not a slight on PayPal, but simply demonstrates the scale of the challenge for the industry. Despite all the challenges in delivering it consistently, when and where it works, contactless “tap and go” experience is at least as good as a regular card transaction. Contextual payments, which are seamlessly integrated directly into retailers’ or service providers’ mobile apps, with which I can meaningfully engage to receive a service (e.g. hail a taxi), definitely make life easier. And “push” payments directly from a bank account (e.g. Zapp) at least give me something different (e.g. increased control over the transaction – view the balance before paying, etc.) Mobile payments certainly have a future, but they have to do much more than add a complex front-end to a card transaction. Otherwise, my wife won’t be alone in asking “why?”

Crowdfunding and Payments

I came across an interesting story last week about a conflict between PayPal and an augmented reality glasses startup that’s raising money on crowdfunding site Indiegogo. The story highlighted the risks and challenges that payments companies face when dealing with areas where regulation is struggling to keep up with the pace of innovation; a topic we discussed in our report earlier this year, Managing Digital Payments Risks: A Regulatory Perspective. Crowdfunding, basically an investment activity, is growing and increasingly popular, yet remains largely unregulated. To complicate matters further, it’s inherently cross-border, which means either coordination of regulatory efforts across countries or the need to operate across many different frameworks. Of course, there are many different risks in crowdfunding. In addition to risks related to individual projects (“what if the company dissappeared with the funds?”), you also have platform risks, such as, (“what if the crowdfunding platform funds «strange» projects?”) Crowdfunding also demands some unique functionality from payment processors – for example, many platforms require projects to achieve their funding requirements completely; if the project doesn’t raise all the funds it asked for, all the pledges made have to be refunded. All these things make it difficult for payment processors to support crowdfunding platforms. While no one likes their funds frozen, it is understandable that payment providers can be cautious as they thread these uncharted waters. PayPal says it’s in the “midst of overhauling our policies in this space.” Some processors prefer to stay away from crowdfunding altogether; at least PayPal is prepared to “roll up the sleeves” and take on the challenges.

Google Wallet Relaunches and Takes on PayPal at Its Own Game

They say, “imitation is the sincerest form of flattery.” In my report last year I contrasted Google Wallet and PayPal as representatives of two fundamentally distinct approaches seeking to win in the battle to bring mobile payments to the high street. Not anymore – having failed to ignite the market in the first 12 months and its first incarnation, Google Wallet re-launched yesterday with a revised approach, essentially taking a leaf out of PayPal’s book. Unlike PayPal, the “Google Wallet 2.0” will continue to focus on NFC technology. However, instead of storing all the payment credentials on the secure element inside the phone, it is moving most of them into the cloud, leaving inside the phone only a prepaid account, which is based on MasterCard’s PayPass and can be used anywhere where PayPass is accepted. The prepaid account is linked direcly to any of the debit or credit payment cards (MasterCard, Visa, Amex, Discover), which the customers can register themselves, just like they would register a card as a funding source for a PayPal account. More details on the new Google Wallet here. So, what does this mean and who are going to be the winners and losers? It’s early days, of course, but here are some of my preliminary thoughts:
  • Consumers, Google and payment networks, especially MasterCard, are likely to emerge as the winners here. Consumers are now in control and can register and manage their cards directly with Google, independent of their banks. They will have to learn to trust Google, which has some work to do to re-establish its image after the initial security concerns. However, as and when consumers come on board, this will be good news for Google and its card partners.
  • While Google continues to stick with NFC for the “last mile” technology, MNOs will continue to have a say in this game. However, this set up now lays the ground for Google to potentially decide to bypass the secure element, and the MNOs, in the future altogether.
  • The impact on banks is likely to be mixed. Most banks didn’t want to play with Google when it was offering the opportunity to digitalise their payments credentials directly and remain in control of the payments portion of the transaction. Now, while the bank cards will continue to be part of the transcation, they are clearly taking the back seat and will have to deal with Google as a “merchant of record” for their transactions. True, they won’t have to incur the extra costs of provisioning their card credentials on to secure element, but that would also rule them out from participating in other NFC ventures, such as Isis.
  • The biggest unknown is the impact on merchants. And that’s because the transaction economics are no longer obvious for Google Wallet and is a question I am most keen to find out more about. In the initial set-up Google was clear that they would not take a cut on the payment transaction and the merchant would have paid a standard fee depending on the card used. Now, from the merchant point of view, they are accepting a prepaid MasterCard, while it might an Amex card that actually funds the transaction. PayPal deals with it by having direct acquiring relationships with its merchants and offering them a discount rate which represents an expected blend of funding transactions. Does it also mean that Google Wallet will have to establish relationships with the acquirers to re-coup from merchants any potential differences in transaction costs? Or will it have to charge the end user for “loading” their wallet, something that other prepaid card providers do for card-based re-load transactions?
It’s Day 1 after re-launch and, naturally, there are more questions than answers. Only time will tell how successful Google Wallet 2.0 will be, but for now it feels like a step in the right direction, at least from Google’s perspective.

PayPal’s March Into the High Street

The readers of this blog and Celent clients with access to our reports will know that when we talk about “mobile payments” we are careful to specify what we mean by it. While many talk about NFC payments, we prefer to discuss “mobile at the retail point-of-sale”, recognising the diversity of ways how a mobile could be used to make a payment. Last year we predicted that the biggest rival to the emerging NFC solutions (and a threat to the banks and card issuers) would be PayPal with its “wallet-in-the-cloud” approach to in-store mobile payments. This week PayPal announced two massive steps in that direction – a deal with two large POS manufacturers, Verifone and Equinox, and new relationships with 15 retailers, including household names, such as Abercrombie & Fitch, American Eagle Outfitters, Barnes & Noble, Foot Locker, JC Penney, Office Depot, and Toys “R” Us among others. This is in addition to the last year’s pilot with Home Depot, which has now seen the solution rolled out to 2,000 stores. Some of the press has already called PayPal the “world’s fifth payments network.” In case you are not familiar with PayPal’s in-store vision, essentially, you are checking out with your PayPal account rather than your Visa/ MasterCard/ Amex card or cash. You may have a PayPal card, but it’s simply a way to identify and communicate your PayPal account credentials. The same could be achieved by entering your mobile phone and a PIN into the terminal. The solution does not rely on NFC, so the consumers don’t have to purchase NFC-equipped handsets and merchants don’t have to do hardware upgrades to their terminals. Usually, software upgrade is sufficient, which is why the deals with POS manufacturers as well as POS software developers are crucial to make it easy to the merchants. Of course, the merchants still need to have a commercial agreement with PayPal to accept it as a payment method, which is why securing relationships with the US leading merchants is so important. However, PayPal understands very well that scaling up the merchant relationships on a global basis is going to be the hardest task in creating a truly universal payments scheme. That could be one of the reasons why PayPal continues to position itself as a “bank’s friend” – it understands how difficult it would be to achieve the necessary global scale on its own. However, that would require to “open up the scheme” and go from a three-party to a four-party model. Would PayPal be prepared to do that? Would banks be willing to join in?

First Look at PayPal’s Mobile Strategy

With preparations for SIBOS (see Gareth’s earlier blog), it would have been easy to miss PayPal’s announcement this week amongst all the other pre-SIBOS press releases. And it would have been a mistake, because it is important. PayPal talked about “re-imagining money” and “new normal in retail”. Often such platitudes don’t mean much, but if PayPal can implement what their slick video demonstrates, it might indeed be something special. Details are still scarce, but PayPal showed how it would change the retailing experiencing through mobile, but without changing the retailers’ terminals. No NFC, but code scanning; cards with PayPal logo (but no Visa/ MasterCard and not even a number). Checkouts possible without queuing at the tills. Deciding how to settle for purchases after a busy shopping day by putting some on PayPal credit and paying for others immediately through a card or bank account. More details will be needed to understand if and how this vision is going to be turned into reality, but for now, enjoy the film and I will see you in Toronto.

PayPal opens up the market for the unbanked

EBay / PayPal has acquired Zong, one of the leading companies in mobile payments. What did they buy? First they bought relationships with hundreds of mobile network operators (MNOs) who trust Zong enough to allow them to bill the MNO’s customer accounts. PayPal knows how to bill a bank account or a credit card, but doesn’t have these relationships. This is huge. It suddenly makes the PayPal addressable market not just those people with bank accounts, but those people with mobile phones. Secondly, they bought relationships with lots of merchants, merchants who are willing to pay far more for payments than PayPal merchants. Merchants take up to 30% haircuts on Zong payments. These tend to be digital goods with very high margins. If PayPal can move any of these accounts to bank funding it is a big win. Finally they are buying lots of customers, but I don’t believe that these customers were the reason PayPal bought the firm. PayPal has 100 million active accounts. What should happen with this new combined entity? PayPal will offer existing Zong customers a new funding mechanism right off the bat. I also expect PayPal will use their muscle to reduce the discount Zong/PayPal must accept from MNOs. Finally they will also work on creating a new mobile payment platform for the unbanked. It will have a higher interchange rate than the existing PayPal platform, but will open up a entirely new category of customers to mobile commerce. What do you think will happen?

U.S. Bank Deposit Point II: Will Pay-for-Deposit Last?

In March, U.S. Bank launched two consumer/small business products after extensive pilot testing: • Deposit Point, a desktop RDC product bundled with its online banking solution. • Deposit Point Mobile, Initially available to U.S. Bank Mobile Wallet users who have an iPhone. Following up on my previous post, Celent finds two aspects of the product launch noteworthy. 1. U.S. Bank is making both desktop and mobile RDC available to its consumer and small business retail banking clients 2. It is charging $.50 per deposit for the service. The last post addresses the former. This post address U.S. Bank’s move to charge for the service in an environment where most banks charge monthly fees for commercial RDC products while offering consumer RDC free of charge. Some have proclaimed U.S. Bank’s price point for Deposit Point a non-starter. Celent offers two responses: • We don’t think so, and • We hope not We don’t think so: To call the idea of charging consumers and small businesses $.50 per deposit a non-starter denies RDC’s concept strength. RDC saves time and money – and it’s “green”. All three benefits are compelling to many consumers and small businesses. It’s not clear how much testing U.S. Bank did prior to establishing a price point for its Deposit Point. Obviously, some customers will pass on the idea once the price point is known. Fine! Alternatives are available for those customers preferring to drive to a branch or ATM and stand in line. More importantly, launching Deposit Point with an associated fee establishes that the convenience of RDC indeed has value. The bank is free to bundle Deposit Point with other services or to discount the product in the future. We expect it to do so. In the meantime, the bank should be able to enjoy some early-mover benefits. To do otherwise would be leaving money on the table. The fee structures accompanying PayPal, Popmoney and ZashPay suggest there may be some sustainability to a pay-for-deposit RDC model. We hope not: Will the pay-for-deposit model survive? One thing is certain, a raft of large banks are gearing up to launch mobile and consumer desktop RDC products of their own in short order. But for the next year or two, these financial institutions will be in the minority. And most that do launch consumer RDC products will not make them available to the mass market because of the perceived risk in doing so. Most consumers won’t have access to RDC. This opens up a sizeable market for third party, bank-neutral solutions – as long as there is revenue to be had in return for the risk taking. The next six months will be telling.