First swipe. Then click. Now tap — the verbs describing how we pay for things are changing as commerce evolves.
And to hear executives in Atlanta’s payment industry tell it, the world has arrived at a crossroads where the future methods for exchanging value are in the process of being determined.
Or, as Boston Consulting Group put it in a 2014 report: “Never in the history of the payments industry has there been a time of such disruption and opportunity across regions.”
That’s because transactions are becoming increasingly global, as e-commerce grow worldwide and as travelers come to expect a similar payment experience whether in Atlanta or Asia. They’re also going more mobile as the smartphone reinvents the wallet, throwing a wrench into the old question of cash or card.
The shift away from paper has accelerated. In 2000, checks made up 80 percent of non-cash payments. In 2012, the last year the Federal Reserve tracked the statistic for its triennial study on the topic, check volumes had plummeted to 15 percent. Combined, debit, credit and prepaid cards made up 66 percent of payment transactions in the U.S., with debit cards leading the pack.
At the same time, some innovations have been slow on the uptake in the U.S., and the connected world has introduced previously unforeseen security challenges.
One core conundrum now driving innovation (and regulation) is how to speed up the payment process while at the same time enhancing security in a world where fraud costs issuers $7.1 billion per year and threats gravitate to the weakest link in the payments chain.
“Speed, certainty and security are really important components of a system that engenders confidence and enables commerce to work more efficiently,” said Brian Egan of the Federal Reserve Bank of Atlanta’s Retail Payments Risk Forum.
And that has big implications for the economy as a whole.
“In a lot of ways the cost of payments is a tax, and if I don’t have to pay that tax, then the cost of the goods and services that are being exchanged should be lower,” Mr. Egan said.
The problem is that the incentives aren’t always aligned on security. Greater security often means more “friction,” the small headaches that make completing a transaction just a few seconds slower, like entering a code or signing a receipt. Getting this balance right can determine which methods take off and which stall out.
EMV Helps Drive Mobile Adoption
The average American has four payment cards in his or her wallet or purse; if you’re in that club, you’ve probably been receiving new cards in the mail embedded with computer chips. And when you’ve taken them to Target or another store, they’ve probably asked you to insert the card into the reader rather than swipe it the way you’re used to.
That’s thanks to the move to EMV, named after Europay, MasterCard and Visa, which banded together to develop it in Europe two decades ago. While it’s the standard in most of the world, it hasn’t caught on in the U.S. until recently.
Why the lag, especially when the chip-and-PIN technology is known to be much more secure than the magnetic strips from which information is intercepted relatively easily? There are a few reasons, but basically because the introduction of new payment methods always presents a chicken-and-egg problem, experts say.
“Consumers will use a new payment system if it’s widely available, and merchants will put a new system in if it’s widely used. But you can’t get the merchant to do it unless there are lots of consumers that carry the cards,” Allen Lipis, a long-time electronic payments expert, told Global Atlanta.
But with high-profile breaches of consumers’ card information at retailers in the last few years, their inertia was finally overcome, says Dave Lott, also of the Atlanta Fed’s risk forum.
“When that happened, the payment system kind of woke up and said, ‘We have a serious weakness here that criminals are really starting to exploit on a large scale, and we need to start putting in place protections,’” Mr. Lott said.
As of Oct. 1, credit card associations like Visa, MasterCard and American Express shifted liability for any unauthorized transactions onto the merchant if the customer presents a chip card that can’t be read by the register.
“I think some retailers are making an economic calculation about the risk of fraud liability versus the cost to upgrade,” said Jason Oxman, CEO of the Electronic Transactions Association in Washington, who added that it was a no-brainer for electronics stores, jewelry stores and large retailers subject to fraud and cyber attacks. “The big box stores – they’re done already.”
Because of this, some industry watchers believe the EMV has been a godsend for mobile payments, another area where the U.S. has lagged the world.
Shrewdly, some say, Apple Inc. waited for the shift to introduce its Apple Pay service, which relies on registers embedded with the tap-to-pay technology in widespread use elsewhere globally: near-field communication. If merchants were upgrading their registers anyway to comply with EMV, they reasoned, they’d also incorporate NFC.
The entry of Apple into the space was heralded as a watershed moment, but mobile still accounts for a tiny fraction of transaction volume, and relatively few Apple iPhone 6 and 6 Plus users have even tried the solution. At the same time, competition among mobile wallets is heating up, with Samsung Pay and Android Pay entering the scene and stores like Walmart and the 80 members of the MCX Merchants group formulate their mobile wallet solutions.
“By no means is the scene set for how this is going to operate,” Brian Mahony, chief strategy officer at Atlanta-based Elavon, told Global Atlanta.
Security is key — and the phone presents new options both for protecting transactions and making sure the right person initiates them. Apple Pay and other methods use “tokenization” to send a code to the merchant instead of the full card number. At the same time, fingerprint readers and cameras can help verify the identity of the user. In short, it’s a space that is evolving quickly.
Technology attorney John Yates of Morris, Manning & Martin LLP, agreed, saying mobile payments is still the “Wild West,” a bit like the competition among operating systems that occurred upon the release of the IBM personal computer in the 1980s.
“We’re going to see consolidation, we’re going to see standardization both domestically and internationally, but we haven’t seen it yet,” Mr. Yates said.
This holiday shopping season will go a long way toward driving mobile adoption as U.S. consumers are hit with the reality of slower EMV transactions, where the card has to stay in the reader while the chip is authorized, said Sean Banks, principal of Atlanta-based TTV Capital.
“The latency transaction speed at the point of sale will be fairly slow, and it will lead to a bunch of frustrated shoppers,” Mr. Banks said.
Still, whether mobile will “take off” is a relative question, considering its low starting point, he said.
“I think this is a long game. Big companies— Samsung, Google and Apple — are the ones that will ultimately be the winners, not the little guys, because they can afford for wait to adoption to come. I still think it’s a long cycle before it overtakes 10-15 percent of the swipe volume.”
Can Atlanta Capture the Disruption?
So what does all this mean for Atlanta, a city whose financial technology sector largely revolves around large firms with tried-and-true business models focused on taking a small cut of millions of transactions?
It means opportunity — if they’re proactive about fostering innovation, says Blake Patton, managing partner of Tech Square Ventures.
Atlanta missed the boat on things like bitcoin, the virtual currency; Square, the card reader that drove card acceptance for thousands of small merchants; and PayPal, the electronic wallet introduced early by eBay.
“That innovation is going to happen, period. The only question is how much of it we’re going to drive here,” Mr. Patton said.
Holding the keys to the payment rails and relationships with hundreds of thousands of merchants, processors can provide immense value in helping budding fintech entrepreneurs match their solutions with market needs, he said.
“I think they’re going to look at the sort of land that they hold as their ability to disrupt,” he said.
Mr. Yates, the Morris, Manning attorney, agreed, saying that Atlanta’s status as a business-to-business hub, while making it less visible than Silicon Valley in the media, gives it a position in the financial-technology space that is starting to get noticed by investors.
“The proximity to the processors is very unique. It allows the local entrepreneur to get a good inside look at what are the issues, what are the problems, what are the challenges, where might these large companies be going — and then tailor the entrepreneurial solution of the fintech company to address that need. That’s a unique benefit that we have,” he said.
Worldpay, the London-based firm with its U.S. headquarters in Atlanta, is already moving that direction by relocating its headquarters to Midtown, closer to Georgia Tech and the intellectual capital that can help churn out tailored solutions in an increasingly on-demand world.
For business, the company is creating payments offerings targeted to specific industries like grocery store chains, while working to address new changes at the point of sale, like customers ordering a coffee in advance for pickup or retail outlets accepting cards on an iPad to free up space at the checkout counter.
Building on mobile, Chief Strategy Officer Steve Karp sees a future where beacon technology enables merchants to offer coupons or debit payments from your phone based on location, without removing anything from your pocket — though he concedes it’s key not to be too early to the market with some things.
Other examples of efforts to reduce friction abound. In the case of Uber, the ride-sharing service, the passenger exchanges no money with the driver, and the payment happens seemingly magically in the background after hopping out of the car. McDonald’s and Google are testing a voice-activated payments system. To handle the issue of fraud in e-commerce, companies are looking at new ways to identify a cardholder based on their typing patterns or an iris scan from a webcam.
“If the way I type on the keyboard or move the mouse have already identified me to that computer, then why do I have to prove that I’m anyone else but the person that has been using that computer all along? When we get that friction removed, to me that’s the big ambitious play,” said Joe Kleinwaechter, vice president of innovation and design at Worldpay.
That’s especially true as e-commerce grows from $1.9 trillion in 2015 to $2.4 trillion globally by 2023, with e-wallets like PayPal and China’s Alipay continuing to take share from traditional credit card payments. Nearly a quarter of that spending will happen directly on mobile phones, Worldpay projects.
But the Internet of Things takes the conversation one step further, as connected devices interact with each other with or without human guidance, Mr. Patton says. The payments applications are myriad: Refrigerators can order milk when you’re running low. In a factory setting, a robot can order raw materials when they’re in short supply. Already ParkMobile, a Netherlands-based mobile payments firm with an Atlanta office, sees cars as the “largest wearable” and is working to integrate its parking payment solution into the connected dashboards being introduced by auto makers.
In a world where connectivity and security are paramount, Atlanta’s advantages in mobility, cybersecurity and logistics can only bolster its position as a leading hub for financial technology, Mr. Patton said, pointing to cutting-edge sectors like drone delivery, the sharing economy and the use of big data and sensors.
“Fintech is a kind of pervasive opportunity, but I think Atlanta’s opportunity is that we’re already good at all the other things.”