Blog: January 2015
Whether you think credit cards are a boon to your business or a necessary evil that chips away at your bottom line, you probably accept them for payment, along with checks and (in rare cases) cold, hard cash. Visa alone saw over 2 trillion dollars in charges last year, generating billions of dollars in fees for everyone involved in the credit card processing chain. It may not be the most cost-effective way to collect payment, but few would argue that it’s not incredibly convenient for both merchant and customer.
That quick “swipe” of a card has been the de facto method of paying for goods and services (especially at “point of sale”, e.g. a cash register or similar service experience) for decades. Dozens of companies have tried to challenge this; a few have succeeded, albeit partially – PayPal, for instance, has successfully built a payments system that both embraces credit cards and circumvents them whenever possible (using bank accounts). Most innovation, though, hasn’t really changed the basic “swipe and wait” interaction we all know so well. Recent innovators such as Square (and its imitators) simply make the swiping more accessible by enabling it on a tablet or smartphone.
There are many reasons that this landscape changes so slowly; primarily, it is because entrenched players want to keep it the way it is. Every party in the credit card processing chain takes a small cut, and those half pennies here and tiny percentages there add up to billions of dollars in fees every year. But it’s also because of the rapid rise of fraudulent transactions; credit card companies claim (in some cases correctly) that they are best equipped to make sure that a given transaction is legitimate. They’re understandably hesitant to hand the keys to mansion to anyone else.
2015 could be the year that we see a big shake up in the payments industry. To understand why, you just need to remember two names: Apple and Walmart. Both companies are big enough players to push a lot of people into new ways of doing things. And, interestingly, each company is attempting to change the way we pay for things in completely different ways.
Note: When I talk about this shake-up, keep in mind that I’m mainly referring to “mobile” payments. The term “mobile” payment is an odd one, since most payments are still “mobile” payments in the sense that you make them with a credit card at a merchant’s place of business. What “mobile” really means in this context is paying with your smartphone.
Apple’s new payment system has only just launched, but CEO Tim Cook says it is already bigger than any of the other mobile payment systems on the market. Apple’s approach is, as you might expect, very consumer-centric – they are endeavoring to make the payment process easier for the consumer, without much regard for the merchants themselves. This means that the process of paying is as simple and seamless as possible – when it works right, it’s actually easier than pulling out a credit card, swiping it, and signing a receipt. You just bring your iPhone near a compatible credit card terminal, authenticate with Touch ID (the fingerprint sensor), and you’re pretty much done.
Interestingly, Apple worked directly with the big credit card companies to make this happen. Much like when they launched the original iPhone, Apple is not afraid to walk in and push around established players (they famously extracted a variety of concessions from AT&T for an exclusive launch on that carrier, including not allowing them to put their logo on the iPhone). In the case of Apple Pay, the established credit card companies still provide the credit cards and process the transactions, earning their standard fees. Apple adds in a very small cut, and assumes some of the fraud risk in the process.
The difference is in the mechanics of the transaction. First, Apple uses NFC, or Near Field Communication, a technology that has been around for many years in the form of “wave your card” terminals such as PayPass. NFC is only available on Apple’s newest phones, but it’s been available in other forms for a few years, including Google’s largely unsuccessful Wallet payment system. The benefit of NFC is that so many payment terminals already accept it.
In addition, Apple Pay doubles down on security. First, when you activate your credit card for Apple Pay, Apple actually generates a new credit card number that is only used for Apple Pay. The payments are still processed the same way, but the number is exclusive to Apple Pay. Second, Apple Pay uses the fingerprint sensor by default, so it is much more difficult for someone to steal your phone and use Apple Pay fraudulently.
Will Apple Pay succeed? Probably, by virtue of sheer volume. Apple’s iPhones have sold incredibly well, and Apple’s alliance with the credit card companies means that consumers get to keep the things they like about credit cards – float, miles, other benefits – while getting a little bit more convenience and tracking of their purchases.
If Apple Pay falters or fails, it may be as a result of another behemoth – Walmart. The retail giant has made no secret of its disdain for credit card companies, going so far as to sue them over the fees they charge. Walmart is leading a consortium of retailers – the Merchant Customer Exchange, or MCX – that aims to reinvent mobile payments completely.
Next year, MCX plans to launch a service called “CurrentC” that will attempt to bypass credit cards completely. Instead, CurrentC will withdraw funds directly from a customer’s bank account. In exchange for direct access to your checking account, CurrentC promises coupons and other benefits exclusively for customers that use its payment system.
CurrentC is built by merchants for merchants; its two primary goals are bypassing the interchange fees that credit card companies collect (these fees range in the 2–3% range; for a company like Walmart, with margins around 3–4%, you can see how this could make such a huge difference) and collecting lots of useful data about customers and their purchasing patterns.
This type of system has seen success in the past. Starbucks, for instance, operates a very popular payment and customer-tracking system, based around stored value cards and smartphone apps. Even more similar to CurrentC’s model is Target’s Red Card program, which offers you five percent off everything, all the time, in exchange for direct access to your bank account and information about your purchases.
But Target is a great example of how retailers have been less successful at fighting fraud than credit card companies; Target’s massive security breach last year was one of the biggest ever in retail history. It remains to be seen whether consumers will entrust merchants with so much personal information in exchange for special offers and coupons.
More troubling (at least to a nerd like me) is CurrentC’s clunky purchase process. It requires scanning QR codes, in many cases by both the merchant and the customer, and lacks the polish and single-tap convenience of Apple Pay. I’ve written (somewhat derisively) about QR codes before, but they live on in all their decades-old technological glory. If CurrentC’s only method of conducting transactions is going to be scanning QR codes, I can’t imagine that it will be a mass market success.
For the record, my money is on Apple Pay (literally – I put my reward Visa in there this weekend), but I don’t think Apple Pay will be the only player in this. I think the payment landscape will continue to be a messy one for years to come. There are just too many players with opposing goals, and far too much money at stake, for any of this to work out quickly and cleanly.
A version of this article also appeared in Identity Marketing magazine.