Intelligent solutions to connect with your members.
Payment Services · WHITE PAPER
CONNECT
WHITE PAPER:
How advancing technology is
changing the retail landscape
Consumers traditionally have been required to possess either a physical debit or credit card in order to make purchases, but recent advancements in technology have created new payment trends. These technologies, especially mobile payments, are rapidly moving forward due to marketing campaigns initiated by mobile providers and large financial institutions that have implemented these services. While there is a lot of buzz surrounding these payment methods, it is unclear what the overall consumer adoption rate will be, leaving mid to small-sized financial institutions uncertain if they should enter this marketspace.
There are benefits and roadblocks associated with these services and this white paper seeks to help financial institutions better understand how these products fit into their current payments strategy and future business model.
●
THE HISTORY OF MOBILEAs mobile devices have permeated the marketplace, developers have focused on implementing enhancements that will allow devices to be multi-functional and more dynamic for end users. Prior to the introduction of
smartphones, mobile payments were limited to purchases for the phone itself, such as the purchase of customized ring tones or bill payments. Beyond these internal functions, the first example of mobile payments was introduced in 1997 when Coca-Cola added functionality to a limited number of vending machines where consumers could make a mobile purchase. The consumer would send a text message to the vending machine to setup payment and the machine would then vend the product.
In 2002, Sony and NXP Semiconductors introduced a new form of technology called Near Field Communication (NFC) that enables secure data to be transferred between devices in a short range. This innovation established several new options for mobile providers to accept and process payments via smartphone. These options have created a marketspace that now allows merchants to potentially become part of the banking experience and places financial institutions in a position where they need to enable consumers to perform these types of transactions.
With the advent of NFC, mobile providers were able to implement mobile wallets within their operating systems that allow consumers the ability to store payment information securely within the device to replace traditional plastic debit and/or credit cards when purchasing goods or services. These types of transactions are processed securely with many providers utilizing a technology known as tokenization, the process of replacing actual cardholder data with a random unique number that cannot be reused. The actual card information is saved in a “vault,” which manages a reference database in order to match the tokenized data to the actual data in the event this information is needed again. An example of this would be if merchandise is returned or exchanged.
●
THE TOKENIZATION PROCESSSource: First Data Services THE KEY PLAYERS
While there are many companies that have implemented mobile banking and mobile payment products, there are clear frontrunners that have overpowered this marketspace. Apple Pay, Android Pay, Google Wallet, MCX/CurrentC, and Samsung Pay have defined this new payments industry and are companies that financial institutions should pay close attention to as they assess these services:
APPLE PAY™
Apple Pay Features:
• Biometrics: Available on the iPhone 6 and 6 Plus,
and iPad with Touch ID. The thumbprint reader embedded in the home button functions as an authenticator during transaction processing.
• Secure Element: Payment and consumer data
security is built into the device.
• NFC: Applicable models of the iPhone use NFC to
connect to a merchant terminal.
• Tokenization: Apple Pay was the first to use EMVCo’s
issuer tokenization specifications, which require issuers to implement a tokenized bin in order to secure their card data.
As the first to market, Apple quickly became the leader in the mobile payments race, controlling both the hardware and the software used for Apple Pay transactions. Apple also set the tone for mobile payment processing by utilizing the existing payment infrastructure which allowed them to gain support from the major network providers: Visa™, MasterCard™, and American Express™.
A challenge that has been met by card issuers was Apple’s announcement to charge fees to financial institutions for transactions processed via Apple Pay. Credit card issuers can expect to pay .15% of the transaction amount to Apple for each Apple Pay
transaction and debit card issuers can expect to pay $.005 for each transaction. Since the revenue generated from these transactions is typically offset by fraud losses and existing processing costs, additional fees associated with this payment method have caused concern for financial institutions who would like to offer this service.
Soon after the service was launched, there were several media stories regarding fraud associated with Apple Pay transactions. This fraud was associated with previously stolen information that had been stored on an iPhone. As a result, Apple enforced stronger enrollment policies for cards added to Apple Pay, including a requirement for card issuers to provide confirmation to cardholders upon registration for this service.
While Apple has brought their product to the forefront, one challenge that has limited transaction volumes aside from deployment of the iPhone 6 is the number of merchants that accept Apple Pay transactions. Since these payments utilize “tap and go” technology via NFC, merchant terminals need to be set up to accept these types of transactions. While many merchant terminals are equipped to allow both contact and contactless payments, additional software may be needed in order to accept these transactions, which many merchants have not implemented at this time. Apple Pay has started to shift merchants towards the acceptance of contact-less payments as the number of NFC terminals in the marketplace has increased from approximately 220,000 locations prior to implementation to now over 700,000 terminals, with the number continuing to grow at a rapid rate.
ANDROID PAY™ AND GOOGLE WALLET
Android Pay Features:
• Biometrics: Available on all Android devices that
utilize NFC capabilities and have KitKat software version 4.4 or higher.
• Secure Element: Host card emulation (HCE). • NFC: Android Pay uses NFC to connect to a
merchant terminal.
• Tokenization: Requires issuers to implement a
tokenized bin.
Google was the first mobile provider to sell NFC capable devices, launching this capability in 2011. At the same time, they introduced a product called Google Wallet that allowed consumers to load payment information into a digital wallet that would prevent them from needing to
Card Data
3456 7890 11121314
Tokenized Number
1973809291015121
Secure token vault with link between card and token numbers
input their payment information at a merchant location where Google Wallet was accepted. The original Google Wallet provided security by taking the payment information entered by the consumer and replacing it with a new pre-paid card number that was sent for transaction processing. At the same time that Google Wallet was introduced in the marketplace, mobile operators started using a company called Isis Mobile Wallet (later renamed Softcard) which offered an NFC payment platform that utilized the security within the device to store the payment information. Because these providers partnered with Softcard, there was no need or demand for the Google Wallet in the marketplace. (Google Wallet has recently been relaunched as an app for Android and iOS that is a quick, free method of sending and requesting funds.)
In 2013, Google started including security system Host Card Emulation (HCE) in their Android products operating on KitKat 4.4. HCE is an on-device technology that permits a phone to perform card emulation on an NFC-enabled device without relying on access to a secure element. At the same time, Softcard was struggling due to the fact their business model assessed fees against both card issuers and merchants for
payment processing. Google took advantage of this situation and purchased Softcard in 2015.
While this product has not been launched beyond the original beta issuer program, it is expected to have a much further reach than Apple Pay due to the fact that Android devices have
greater deployment within the marketplace. In addition, Google has announced that they do not intend to assess fees from card issuers for Android Pay transactions. Android Pay will have a payment Application Programming Interface (API) associated with it that will allow mobile banking providers the ability to incorporate this service into their existing platform, creating a seamless experience for consumers while attracting them to a financial institution’s mobile app versus a separate app on the device. MCX/CURRENTC
Merchant Customer Exchange (MCX) is a merchant owned mobile
commerce network that includes retailers such as WalMart, Target, CVS, Kohl’s, and several additional national merchant chains. MCX was created as part of the ongoing dispute between retailers and payment networks over the cost of transaction processing, commonly known as interchange fees. Originally, MCX was created in order to develop a payment processing platform that would circumvent the payment networks by utilizing other transmission methods, including ACH. This idea attracted numerous merchants to MCX, which requires the merchants to invest in the company and grants exclusivity to MCX for mobile payments. CurrentC™, MCX’s mobile payment app, is still in the testing phase; however, initial response in the merchant marketspace was not positive due to a provision within the MCX merchant agreement that required participating merchants to only allow mobile payments via the MCX app. Many merchants felt that this limited their revenue opportunities due to the fact that MCX’s solution had not yet been released and due to Apple Pay’s increasing popularity with consumers. As a result, many merchants have ignored the exclusivity requirements associated with their agreements in order to accept other mobile payments.
On October 26, 2015, JP Morgan Chase (Chase) announced that they had created a partnership with MCX to take over processing for the CurrentC app. This announcement will allow CurrentC to be a viable player in the mobile payment arena and also changes MCX’s
philosophy of trying to circumvent the payment networks for transaction processing. Under this agreement, Chase will provide special pricing for MCX clients that will significantly reduce the costs associated with processing of transactions. This partnership allows Chase access to MCX’s merchant network, which processes more than $1 trillion transactions annually and represents over 100,000 locations within the U.S. This partnership also allows Chase to tokenize transactions on behalf of MCX and links Chase Pay to merchant loyalty programs.
This payment app will be unique from other mobile payments options in that it is not device specific. Consumers
with the CurrentC app will scan a QR code at the merchant location that will then be used to securely process the payment.
SAMSUNG PAY
In February 2015, Samsung announced that they had purchased a company called LoopPay. LoopPay was a Magnetic Stripe Technology (MST) provider whose technology would allow Samsung to enter the mobile payment field. MST works by copying the magnetic stripe of a debit or credit card, allowing a mobile device to be held near a point of sale terminal so it may read the information from the device as if the card has been swiped. Originally, this was a piece of equipment that was outside of the device; however, Samsung has developed a way to place this equipment inside mobile devices. This provides Samsung with a small advantage in the current market, as many merchant locations have not converted their point of sale terminals from magnetic stripe processing to EMV processing. This allows consumers to use Samsung Pay at more locations than those that rely on EMV technology for transaction processing.
In April 2015, Samsung started issuing this technology on all Galaxy S6 and Galaxy S6 Edge phones. These phones will continue to include biometric fingerprint scanners, as well as NFC capabilities that will be used as Samsung Pay transitions from MST to EMV technology. It will be interesting to see how many consumers actually utilize the Samsung Pay app on the Galaxy devices due to the fact that they are Android powered. Android Pay has announced that it will be automatically loaded on all Android devices sold by AT&T, Verizon Wireless, and T-Mobile. This means that even if LoopPay is included in the device, Android Pay will be positioned first when users start their devices for the first time, requiring a manual shut down of Android Pay and selecting Samsung Pay instead. As with Android Pay, Samsung does not intend to charge issuers for transactions processed via their payment application.
HOW ARE CONSUMERS RESPONDING?
Due to the introduction of what is commonly referred to as “The Pays,” consumer awareness of mobile payments has dramatically increased over the past couple years, but the question still remains – are consumers ready and/or willing to replace their traditional methods of payment with their mobile device? The Federal Reserve’s report on mobile
financial services shows that 22% of consumers who have access to a smartphone reported that they had made a mobile payment in the last 12 months, which is an increase from 17% from the previous year. The following chart shows how consumers utilized mobile banking products over this period:
Consumer Usage of Mobile Payments in the United States
Consumers are drawn to the convenience of using mobile devices for payments. 35% of respondents cited convenience as their main reason for adopting mobile payments, while simply purchasing a new smartphone was the reason provided by 33% of consumers. In addition, 20% stated that the reason they started utilizing mobile services was seeing an announcement from their financial institution offering the service. On the other hand, many consumers are not utilizing these services due to concerns with security. Of the people not using mobile banking, 62% stated that it was due to the fact that they did not feel the process was secure.
Which of the following security aspects are you most concerned with?
Source: Federal Reserve Report on Consumers and Mobile Financial Services 2015
Another factor to consider is the number of consumers in the marketplace that have the correct devices to leverage these payment options. Since there are specific makes and models of devices that have the ability to perform mobile transactions, some consumers will need to upgrade their mobile devices to use these latest payment services. Trustev, a company that helps merchants and financial institutions prevent online
Mobile Payment Usage in the Past 12 Months, 2013 to 2014
(Percentage of smartphone users)
16% 16% 11% 10% 9% 9% 5% 3% Made an online/ in-app purchase Paid for a product or a service at a store
Source: Federal Reserve Bank, 2015 Mobile Payment Report
Made a payment using a text message Paid for parking, a taxi or public transit using an app Used an app to receive loyalty reward points Received money from another person’s bank account Transferred money to another person’s bank account Paid bills online through a mobile Web browser or app
All of the stated reasons Someone intercepting my data My phone being hacked Losing my phone or having my phone stolen Someone using my phone without permission to access my account Companies misusing my personal information Malware or viruses being installed on my phone Other 43% 22% 17% 9% 4% 2% 2% 0%
fraud, found that only about 1 in 5 people (20.7%) in the U.S. who have an iPhone have tried Apple Pay. Of those who have used Apple Pay, 56% report that they only use it once during a typical week, and 15.3% say they never use it during the week. The numbers currently are lower for Samsung Pay and Android Pay. Only 14% of people who have the Samsung Galaxy S5 or S6 have ever used Samsung Pay or Android Pay, according to Trustev. Of those who have, only 36.17% use it once during a typical week and 38.3% report they never use it.
Apple Pay Usage Survey
Source: Trustev
Android Pay/Samsung Pay Usage Survey
Source: Trustev
HOW MERCHANTS ARE ACCEPTING MOBILE PAYMENTS
In addition to consumer response, it is important to know how many merchants accept payment through these newest technologies. Low merchant acceptance could influence the consumer’s ability to use these services. As a result of the fraud liability shift dates instituted by the payment networks that became effective October 1, 2015, merchants are at a crossroads. This shift means that if an issuer and/or merchant were involved in a fraudulent
transaction that was not utilizing EMV technology, the issuer and/or merchant would be liable for the loss associated with the transaction. EMV (which stands for Europay, Visa, MasterCard) uses data encrypted chips molded into payment cards to reduce instances of fraud. There are two versions of chips that can be utilized for these plastics:
• Contact Chips - require the merchant to have a slot for the card to be inserted into
• Contactless Chips - require merchants to have terminals that use NFC “tap and go” processing technology Due to several factors, including the number of contactless chips and the cost associated with implementation, many merchants have determined that use of NFC technology was not the best method of acceptance as they planned for EMV roll out. The introduction of tokenized payments has changed the marketplace, creating scenarios where many merchants now need to consider NFC implementation. The global market for mobile payments will be worth $720 billion in transactions by 2017 -- up from about $235 billion in 2014. E-commerce on a smartphone or tablet (referred to as m-commerce) has become a significant part of online purchasing. Amazon has proven this to be accurate by reporting that nearly 60% of their 2014 holiday volume was generated through a smartphone or tablet, a 10% increase over the same period in the prior year. With consumers slowly adopting this technology and the amount of sales volume expected to be generated from the acceptance of mobile payments, it is anticipated that more merchants will join the ranks of those who accept these types of transactions.
The early results from the adoption of Apple Pay are promising. Apple Pay has expanded beyond the United States, with implementations in the U.K. in July 2015 and Canada in November 2015. Within the U.S., Apple Pay is now accepted at 700,000 merchant locations with several additional large merchants such as Starbucks, KFC, and Chili’s restaurants adding this service in 2016.
The relaunch of the CurrentC payment application could impact the number of merchants who add other mobile payment applications. It is expected that merchants could accept multiple mobile payment options as well. Merchants such as Rite Aid and Best Buy have been longtime
supporters and members of MCX, however, both have announced plans to install NFC capable terminals in order to accept mobile payments such as Apple Pay.
Mobile payments are also starting to be accepted at locations that traditionally accepted only cash. USA Technologies has implemented Apple Pay at over 40,000
APPLE PAY
Trustev asked 1,000 iPhone 6/6+ and 6s/6s+ users if they have ever used Apple Pay:
Of the people who answered “yes,” this is how often they used it in a typical week:
YES NO
20.7% 79.3%
NEVER ONCE PER WEEK 2–3 TIMES PER WEEK 4–10 TIMES PER WEEK 11–20 TIMES PER WEEK 20+ TIMES PER WEEK
0% 10% 20% 30% 40% 50% 60% 15.3% 16.3% 7.7% 2.4% 2.4% 56%
ANDROID PAY / SAMSUNG PAY
Trustev asked 1,000 Galaxy S5 and S6 users if they have ever used Android Pay/Samsung Pay:
Of the people who answered “yes,” this is how often they used it in a typical week:
YES NO
14.04% 85.96%
NEVER ONCE PER WEEK 2–3 TIMES PER WEEK 4–10 TIMES PER WEEK 11–20 TIMES PER WEEK 20+ TIMES PER WEEK
0% 5% 10% 15% 20% 25% 30% 35% 40% 38.30% 10.64% 4.96% 1.42% 8.51% 36.17%
Coca Cola vending machines and intends to add this service to an additional 100,000 machines by 2016. In addition to these vending machines, USA Technologies has added this service to other self-service transactions, such as laundromats and parking meters.
WHAT FINANCIAL INSTITUTIONS SHOULD DO Financial institutions are at a similar juncture as merchant locations when it comes to payment processing and acceptance. The transition to EMV chip cards is expensive, and while it does mitigate fraud losses for card present transactions, the amount of fraud associated with card not present transactions is expected to grow as this becomes the easiest target.
Because Apple Pay and Android Pay have implemented features that allow these payment methods to be utilized for in app purchases and Apple Pay’s “Pay Anywhere” feature allows consumers to use Apple Pay for online merchant purchases, mobile payments have the ability to reduce the risk of fraud. It is clear that plastics are not going away anytime soon, and probably never will, as there has yet to be method of payment ever removed from the industry. This gives financial institutions time to see how these new payment options perform in the marketplace.
It is also clear that the operating system and features available on a smartphone will dictate how quickly mobile payments change the payment landscape. With Apple Pay, Android Pay, and Samsung Pay all integrating their wallets into mobile operating systems, as well as relying on NFC capabilities that are not available on all makes and models of mobile devices, these factors will also weigh heavily on consumer adoption for these services. There is potential for mobile providers to offer incentives to consumers to upgrade their devices in order to sunset older technology that is more difficult to support, which would have a direct impact on the number of users of these payment methods.
Financial institutions should be prepared for growth associated with increased deployment of new technology to the marketplace. Since consumer experience is a high priority, financial institutions should be looking at ways to integrate mobile payments into their already existing mobile banking products.
Consumers respond to processes and procedures that are easy and convenient to use. Mobile payments offer these features along with increased security of payment information. These factors and the expected growth of merchant acceptance of mobile payments creates an
environment where financial institutions will need to begin the implementation process of these payments now in order to ensure that they are strategically positioned within the payments landscape. While these types of payments do increase processing costs, the consumer need for a solution, as well as added security, should outweigh the increased expense associated with this technology. The trends and models associated with mobile payments should be closely watched over the next several years to ensure that financial institutions have positioned themselves positively in this market and that they continue to enhance this service to ensure that consumer demands are met or exceeded.
About the Author
Rebekah Higgins is the Vice President for
Synergent’s Payment Services division. She has been with Synergent for 17 years and has worked with credit unions of all sizes, helping them embrace the changes in the fast-moving payment industry. Rebekah is responsible for the supervision, coor-dination, and operation of the Card Services and Check Processing departments, along with ensuring the delivery of ATM, debit, credit card and item processing products to over 100 credit unions throughout the Northeast.
Resources
Board, Federal Reserve. Consumers and Mobile Financial Services 2015. research. Washington DC: Board of Governors of the Federal Reserve, 2015.
Etherington, Darrell. http://techcrunch.com/2014/12/26/amazon-2014-holiday-sales/. 24 December 2014. 2 November 2015.
Gokey, Malarie. http://www.digitaltrends.com/mobile/apple-pay-partners-news/. 20 October 2015. 6 November 2015.
Heun, David. Chase, MCX Team on a Pro-Merchant Mobile Wallet. 26 October 2015. 3 November 2015.
Merchant Customer Exchange. 2015. 4 November 2015. NearFieldCommunication.org. n.d. 2 November 2015.
Roy, Kaushik. What Is Host Card Emulation? 2015. 4 November 2015. Stenovec, Tim. http://www.techinsider.io/not-very-many-people-use-mobile-payments-2015-10. 31 October 2015. 2 November 2015. Thad Peterson. Mobile Proximity Payments: A Disruption in the Force. Research. Boston: Aite Group, 2015.
Wolpin, Stuart. http://www.tomsguide.com/us/mobile-wallet-guide,news-20666.html. 15 October 2015. 2 November 2015.
Editor’s Note: Payment services and mobile wallets are being updated daily. The data in this paper is current as of 11/20/2015.
www.synergentcorp.com 800.341.0180
PO Box 1236, Portland, Maine 04104
