The Future Of mPOS In An EMV World
Even if you’ve never used a card swiper attached a tablet or smartphone yourself, chances are you’ve seen one. Any pop-up booth, stall, or merchandise table you see (at a theater, concert, convention, sporting event, or even along the street) that takes credit cards is probably relying on a mobile POS (mPOS) system with a card swiper.
Mobile POS systems are essential for on-the-go businesses, artists and craftspeople, food trucks, and many other kinds of enterprises. Even larger companies are starting to add mPOS to their setups as a way to clear out long lines. The advantage to mPOS is that these systems can go virtually anywhere, so long as you have Wi-Fi or cellular signal.
For businesses that don’t have a storefront, can’t open a merchant account because they are just starting out, or sell only infrequently, mPOS is often the only solution. Most mPOS offerings are pay-as-you-go aggregators, and so the requirements are less stringent than merchant accounts. That’s not to say merchant account providers don’t have mobile offerings — they do. They’re just not as well known.
In 2015, the mPOS market was valued at $2.08 billion dollars. It’s projected to rise to $38.38 billion by 2024, according to a report by Transparency Market Research. Not only that, but Juniper Research predicts that by 2021, mPOS will account for 20% of all retail transactions, up from 4% in 2016. Clearly, the industry isn’t going anywhere.
But it will change and adapt as market trends and other factors come into play — factors like EMV, better known as chip cards. Chip technology came to prominence in 2015 when the liability for processing fraudulent card transactions shifted from the card associations to the least-secure party — with chip cards, that means merchants.
Well over a year after the transition, EMV is still a hot topic. Let’s take a look at EMV technology and some of the ways it could re-shape the mobile payments space.
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Why EMV, Anyway?
EMV (which stands for Europay, Mastercard, and Visa) cards use a microchip in the card to transmit your payment information instead of the black magnetic stripe on the back of the card. Most of Europe, as well as Mexico, Canada, and other developed countries have already transitioned to EMV because of its heightened security and ability to reduce (some kinds of) credit card fraud. EMV readers rely on dipping the chip card into a slot, rather than swiping.
With credit card fraud running rampant in the US (the country accounts for about 25% of credit card usage, but nearly 50% of card fraud), the payments industry and the US government collectively decided it is time to do something. Enter the EMV liability shift.
Banks and credit card companies are embracing EMV because it’s more secure than standard swiped payments. With magstripe cards, all of your payment data is recorded on that little black stripe and is transmitted through the network every time you pay for something. The information is static, meaning it doesn’t change — which makes it very easy to get hold of the data. EMV uses dynamic authentication instead. The microchip in the card makes it possible to perform more advanced authentications. As a result, it is nearly impossible to clone a chip card (that is, steal a credit card number and create a copy of a card).
Obviously, this has no bearing on Internet transactions. In fact, while EMV decreases Card-Present fraud, it’s usually accompanied by a rise in Card-Not-Present (i.e., Internet) card fraud.
How Widespread is EMV?
You might already have an EMV card sitting in your wallet. Banks and card associations have been re-issuing chip cards for a while now. The data is fragmented, but according to the New York Times, about 75% of all credit cards issued in the US have chips as of June 2016.
On the merchant side of things, Mastercard claims that as of September 2016, it has 2 million merchants on its network who accept EMV payments, or about 30% of merchants. It also claims that more than 1.3 million of those merchants are “regional and local merchant locations.” However, it’s not clear whether that includes mobile businesses, such as those that rely on Square. (Square, for the record, says it has about 2 million active merchants; PayPal has about 8 million merchants, but not all of them use PayPal Here, obviously.)
One of the biggest challenges in EMV adoption has simply been getting both consumers AND merchants to adopt it. Merchants were reluctant to get the new hardware, partly because not enough consumers had chip cards (and partly because of the cost). Now that most consumers have the cards, they are frustrated that two-thirds of merchants don’t accept them.
In short, EMV is growing, but it’s going to be a while before we see the market hit even close to total saturation.
How Will EMV Affect Mobile Processing?
On the surface, EMV doesn’t have any direct influence on mobile processing. There aren’t any special requirements or any other technology hurdles that significantly affect mobile payment processing apps any worse than traditional POS and major hardware manufacturers.
That said, one of the biggest hiccups in the entire shift to EMV has been the whole process of getting hardware certified. Adding EMV support requires new programming — slightly different standards for each card association. Then it has to be tested and approved. The whole certification process has created a backlog that has companies stuck waiting for the OK to enable their EMV capabilities. That backlog is why you’ve seen plenty of businesses with terminals that can accept chip cards, but they’re not active. That’s also why some mPOS services don’t have EMV hardware yet.
But just because there aren’t any special requirements doesn’t mean we won’t see any changes in the mPOS space as a result of EMV adoption. Let’s take a look at a few of the changes we could see:
1. The Death of the Free Card Reader
Overall, availability of EMV readers for mobile POS apps is hit-or-miss. Some companies, such as Etsy, don’t seem to have any interest in putting out an EMV-capable reader for the time being. SumUp, a company that is already operating in Europe, has been advertising that it is coming to the US since 2015, is finally launching with its EMV- and NFC-capable reader.
But despite that, mobile merchants (at least the ones whose service providers support EMV) are slightly better off than traditional retail merchants. Overall, the price for EMV terminals is higher than mobile hardware, and retail merchants are more likely to need a large quantity of hardware, so it can cost a lot more upfront to switch.
Entry-level terminals with chip capabilities will cost you about $200 to start with, and could easily run upwards of $500 for wireless connections and/or NFC payments. A survey by TD Bank found that the average cost of installing an EMV-compliant terminal was $450 — lower than initial projections of $1,000, at least, but still more than your typical mobile hardware, which runs $30 (for Square’s Chip Reader) to $150 (for PayPal’s Chip Card Reader) at the moment.
Traditional merchant service providers have been hocking their “future-proof terminals” since well before the liability shift. With support for magstripe, EMV, and NFC (the “contactless” or “tap-to-pay” mobile transactions), these terminals have all available methods of credit card payments covered. You’re not going to have to upgrade to a new terminal next year, or the year after, or even the year after that…
The EMV hardware that mobile POS apps use might be inexpensive, but it’s not future-proof in the slightest. Terminals are fairly standardized in their features, but mobile reader designs are far more fragmented.
That’s a Problem Because…
Mobile readers are limited by trends in smartphone design, and since the rise of mPOS, card readers have connected to smartphones via the headphone port.
Now, Apple has removed the headphone jack from its iPhone 7. That’s not an earth-shattering crisis. But if the trend spreads, in a few years, all Apple devices could be sans headphone port, including the mPOS-preferred device: the iPad. When merchants start updating their current devices, they’re going to have to decide between getting a device that’s compatible with their payment hardware or switching processors to get compatible hardware.
mPOS companies that want to hold onto their merchants have three options: (1) Let customers make do with whatever adapters they can get, (2) develop a reader that uses the Lightning port or (3) go to Bluetooth only.
The adapters aren’t a bad idea, but they could be potentially awkward, depending on the length of the cable. Most smartphones these days — and definitely tablets — are pretty bulky. Trying to hold the phone, stabilize the card reader, and swipe or dip the card at the same time might be more headache than it’s worth. And then there’s the cost of the adapters themselves, which could add up depending on how frequently they get lost or damaged.
Creating Lightning-based readers is also an option. Some already exist, in fact. (The Magtek iDynamo connects via Lightning, but it retails for upward of $85.) It’s fairly likely given that Apple is banking on the Lightning port succeeding the headphone jack, which the company intends to keep the technology around for a good while. Whether it’s possible to create an affordable Lightning reader is the question.
Bluetooth has two significant advantages over the other solutions: (1) It has guaranteed compatibility with all kinds of smartphones, so you don’t need to worry about device-specific issues. That makes Bluetooth the most future-proof technology. (2) Because there’s no physical connection, it is a lot less awkward to handle the reader and the phone or tablet.
Bluetooth will certainly drive up the cost of readers. But that’s already happening as EMV readers reach the market. The typical magstripe reader retails for $10-$15. Most pay-as-you-go companies, like Square and PayPal Here, will give you at least the first one free as an incentive to try them out.
The lowest price I’ve seen yet for an EMV reader is $30 — and that’s with just chip card support. If you want EMV or Bluetooth, it’s going to cost you more.
I think the days of the free card reader are numbered — and we might even witness its death throes by 2018. It makes sense for companies to phase out their free readers all together to encourage merchants to adopt EMV. Admittedly, that’s something that will likely irk a lot of businesses — but rebates and other incentives could help relieve the tension. PayPal offers a $100 rebate on its reader for businesses that process $3,000 in three months. Square has a $1/weekly payment plan for its Contactless + Chip reader.
And let’s not forget there are several companies that still don’t have an EMV reader yet, or have designs that rely on the headphone jack (Spark Pay, Intuit GoPayment, and PayAnywhere, for starters). Those stragglers, rather than trying to catch up with soon-to-be-outdated technology, might consider just getting ahead of the game with a future-proof device instead.
2. EMV Will Spur Adoption of NFC
One of the biggest pain points in adopting chip cards is simply how long a transaction takes — rather than swiping the card through the reader, it must remain in the card reader’s slot for the duration of the transaction. That issue was such a big concern that CVS shut off its EMV capabilities until after the winter holiday season, and most experts suspect CVS wasn’t the only company to do so.
Admittedly, Visa and Mastercard have introduced solutions that reduce processing times. But Square recently found that the slow transaction times are the number 1 pain point for consumers, with a whopping 87% of those surveyed indicating that they are dissatisfied with how long the transactions take.
The slowness of chip cards, perceived or real, has led retailers and consumers to look at alternatives. The obvious solution is NFC, the technology that powers contactless and tap-to-pay features in Apple Pay, Android Pay, and similar apps. Tap-to-pay generally works fast — faster than EMV. And most contactless payment apps rely on tokenization, which transmits single-use numbers in place of your actual card numbers. That makes NFC, like EMV, very secure.
The biggest barrier to NFC is simply educating consumers about it. Square’s research found (unsurprisingly) that security is a top concern for consumers, but many are not aware of just how secure mobile payment apps are. But those who are aware of the convenience and security of mobile payments will seek out merchants who accept NFC, and they are willing to spend more (and tip more).
As I said earlier, “future proof” terminals are already equipped with EMV and NFC. On the mobile side of things, the Miura M010 already supports NFC. Square’s Contactless + Chip reader and PayAnywhere’s Apple Pay reader also support contactless payments, but there aren’t many other options yet. However, with documented proof of just how much consumers dislike EMV, and the likelihood of mPOS providers needing to re-think their hardware designs anyway, it’s possible that we could see some, if not most, companies add NFC support to their devices.
Adding more support to this idea is the fact that NFC and EMV payments use the same back-end infrastructure, making it easier for mPOS companies to add contactless payment support.
All things considered, I think that it’s very likely that NFC — which has long waited in the wings of the payments space, desperate for a champion — could finally get the attention and respect it deserves, as mPOS providers update their technology.
3. mPOS Could Add Support for Debit
A major source of contention with the shift to EMV is that there are two forms of verification used to complete a transaction: chip-and-PIN, and chip-and-signature. Chip-and-PIN transactions are often regarded as more secure because signatures can be forged.
Not only that, but in the U.S., PINs have been used more for debit transactions, whereas signatures are the preferred verification for credit cards. In other countries that rely on EMV, PINs are the default for both.
In May 2016, Walmart filed a lawsuit against Visa, suing for the right to require chip-and-PIN transactions instead of being forced to support both. Home Depot, which experienced a huge data breach in 2014, filed an antitrust lawsuit against both Mastercard and Visa, claiming the companies conspired to block chip-and-PIN technology from becoming popular in the US.
Financial institutions claim that PINs do nothing to stop cloned or counterfeited cards, which is the type of fraud that EMV cards seek to prevent. Instead, chip-and-PIN guards against lost or stolen card fraud, which makes up a smaller percentage of all fraudulent transactions than cloned or counterfeit cards (14% versus 37% percent).
In addition, the Aite Group estimated that implementing chip-and-PIN would have cost an additional $1 billion for banks and $4 billion for merchants.
So What Does That Have to Do With Mobile POS?
There’s no obvious answer in the PIN vs. signature debate — I think only time will tell which verification method becomes more prevalent. But if PINs do win out, mobile POS apps will have to re-evaluate their card reader designs (again). A few mobile readers with PIN already exist — the Miura M010, for example, which is available through PayPal Here, Shopify, and Square.
But this raises another question for mobile POS services — if PIN verification becomes mandatory, will they finally allow merchants to process debit, not just credit? Debit offers lower interchange rates than credit, but the only common mPOS app that has supported lower rates for debit is Flint, which went under quite unexpectedly in February 2016.
I think it’s likely that if mobile processors must adapt to support chip-and-PIN transactions anyway, we could start to see support for debit. But that’s still a VERY big “if.”
4. mPOS Will Blur the Lines of Commerce
One of the hottest buzzwords right now is “omnichannel,” as in “omnichannel commerce” — the idea of being able to sell and interact with consumers seamlessly online and in-person.
It’s not a surprise, with the way technology is changing how consumers shop. They might look up an item with a laptop, scout it out in person in store, and later place an order through a mobile app. Omnichannel is all about being able to catch potential customers at every point.
mPOS companies are in a prime position to take advantage of this. All you have to do is look at Square: With its free online store, eCommerce integrations, robust mPOS app, inventory management, and add-on services, it fits the omnichannel bill perfectly. PayPal is also an excellent example. It powers online and in-person payments, and has partnerships with more robust POS apps such as Vend in addition to its mobile app, PayPal Here. eCommerce companies such as Shopify and Etsy have also chosen to venture into mobile payments, putting them in the realm of omnichannel as well.
There’s an obvious draw here: convenience. No more reconciling online orders and retail purchases with a separate inventory. Everything integrated perfectly with virtually zero effort. Sell online and even through social media, set up a storefront, or run a pop-up booth for a day — and you can just as easily do all three! The lines between these different spheres of commerce are becoming blurred, and it’s hard to tell where mPOS ends and retail or eCommerce begins.
Admittedly, this has very little to do with EMV beyond a need for these companies to offer chip card readers. But it isn’t even in the “maybe” column of possibilities. We’re already moving toward omnichannel, and mPOS providers are leading the charge.
The Future Looks Bright, Despite Bumps in the Road
mPOS isn’t going anywhere. Neither is EMV, for that matter. Both consumers and merchants are just going to have to get used to chip cards (or switch to EMV). Despite how rough the transition has been so far — and the potential for bigger changes on the horizon — it’s hard to deny the appeal of being able to sell anywhere, anytime, to anyone. As mPOS grows, companies are going to roll out more features and improved services. Merchants are going to be the ones who benefit, and that’s a great thing.