A look at the evolving payments landscape

We live in interesting times when it comes to all the ways we can pay and complete purchases, times when you can now order food for delivery without ever leaving your search engine. More convenient and secure ways of making payments are advancing on a number of interesting fronts, including computer chip enabled EMV credit and debit cards that are soon to replace magnetic stripe cards in the United States, and mobile phone-based digital wallets like Apple Pay and CurrentC (not to mention the digital currency bitcoin, which admittedly we’re pulling for).

Just like in any competitive landscape, the payments methods that offer the best performance for the user will ultimately triumph, and I believe it’s these measures – convenience and security – which will be most closely tied to success. You might wonder what will happen to those non-digital elder statesmen of the payments world, cash and checks. These methods will remain in the mix, to the degree people find them useful and reliable.

However, if you benchmark convenience by how long it takes to pay when you’re standing in the checkout lane, it can be hard to believe people would still choose to take the time to write out a check (fact: many people still do this).

From a security perspective, the problem with checks is that they’re from an era before the systems existed to make authentication and authorization convenient and commonplace, and are not very secure. The problem with credit cards, at least as we know them today, is similar – they come from an era that didn’t anticipate ecommerce or issues like the major store data breaches we see in the news today.

With traditional credit or debit cards, the magnetic stripe contains information that doesn’t change, so once a hacker or card counterfeiter gets that information there’s nothing stopping them from making purchases as if they have your card.

Cards are about to get smarter (thanks to EMV)

The process of modernizing credit card security is underway with the move to EMV cards. EMV is a global standard for credit and debit cards that uses a computer chip within the cards to authenticate transactions.

These cards add greater protection against fraud, because an EMV card creates a unique transaction code every time it’s used for payment. This means that if a hacker gets ahold of the card information that a store keeps after making a sale, they still won’t be able to make other purchases using that information, because the transaction number they’ve stolen is no longer usable.

A deadline for a liability shift has been set for October 1st of this year by the major credit card companies to incentivize EMV adoption. Here’s how it works: if you have a store, you’re looking at a cost of around $500 for each EMV-compliant point-of-sale terminal you might add. Retail giant Target, driven by the card data breach it suffered in 2014, is moving early into EMV, estimating the cost of the conversion at $100 million.

Currently, a customer’s losses due to in-store transactions made with their stolen card information is covered by either the payment processor or the bank that issued the card; the store has no liability. After October 1st that liability shifts to the party that is least EMV-compliant, namely the merchant who hasn’t updated their point-of-sale equipment. Not every location will be ready by the deadline, but this change should certainly spur adoption.

When we explain the advantages of using bitcoin, one we always mention is the value of avoiding credit card and debit card fees (which can be as much as 2% in some cases). This gives merchants a sizeable savings in bitcoin transactions, which they can choose to invest in price competitiveness by passing those savings on to the bitcoin consumer. A concern with EMV is that – because the average cost of issuing an EMV card is $3.50 and the costs of the necessary equipment is also high – those costs will likely be recouped through charges to the customer.

However, if the EMV system does perform well in securing payments and reducing fraud (which is promising but might be the start of a longer road ahead), then those savings from eliminated fraud may reduce fees and costs to the customer for the same reason that bitcoin’s secure protocol lowers payment processing fees.

How does Apple Pay fit in? It’s all in how you use it

The other interesting thing about EMV cards is how customers physically use them to make a payment. Because they make use of a chip and not a magnetic stripe, in EMV card transactions you won’t swipe your card, you dip it into the reader and wait a moment for it to process. This procedure ends up being a bit slower than swiping; as EMV has rolled out in Canada, the problem of users leaving their cards behind in the readers has emerged. Any new technology takes some getting used to, but near field communication (NFC) technology like Apple Pay elegantly evades the issue of users forgetting cards by offering “contactless payment” where you pay by phone, and your phone never leaves your hand.

In fact, it needs your hand to work; to use Apple Pay, you enter your card information into a digital wallet on your phone, and select the card or other payment method you’ll use at checkout. In lieu of a pin or signature, you press your fingertip to a biometric fingerprint reader on your screen, and hold your phone near the POS system, and wait for a quick vibration to tell you the transaction is complete. This process, as designed by Apple, is quite user-friendly.

In most cases it requires only a touch of your phone to complete a purchase. Interestingly, contactless payment is available for EMV cards as well, but will not be common in EMV’s initial rollout in the United States due to the expense of the cards and the equipment needed to scan them (Apple Pay faces similar hurdles to wide acceptance, but has lined up a strong list of supporting retailers). What this means is this: EMV cards themselves stand a good chance to offer the convenience of contactless payments in a few years, but Apple Pay is helping consumers realize that future early.

Chase Bank, which supports Apple Pay, has found that contactless technology can reduce payment time at the point of sale by up to 40%, so merchants who embrace this technology will be enjoying faster checkout lanes, whether customers are using their phones or their cards.

MCX’s CurrentC system features fewer fees, but also less convenience

CurrentC is an alternative to Apple Pay from the Merchant Customer Exchange (MCX), a merchant group including Wal-Mart, Rite Aid and CVS, among other members. The CurrentC system is arguably less elegant than Apple Pay; to make a payment the customer must use an app on their phone to scan a QR code, which is slower and more laborious than simply holding a finger to a phone.

The driving factor for the stores in the MCX is the opportunity of using their own secure payment system to eliminate those up to 2% card fees, saving the money for themselves or investing it in cost competitiveness (which traditionally is the major brand play for Wal-Mart).

But one way or another, we’ll all be paying with our phones

The driving technological force behind each of these changes is that we all now carry mobile phones with access to the Internet, making payments by phone possible. What gets me excited about bitcoin and other new fintech is how they will change the world in the coming years, transforming commerce and opening new markets.

Already in emerging markets like Kenya, Tanzania, and Uganda the total values of mobile payment transa