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Wait Just a Minute: Europay MasterCard Visa (EMV) and the Speed of Mobile Payment Adoption

AcxiomJune 22, 2015

My last piece mentioned three reasons why mobile payments, especially mobile wallets, are a very hot area in tech right now:

  1. The retail store has become the hub of a new cross-channel shopping experience increasingly mediated by technology.
  2. The on-going rollout of smart cards into the US market.
  3. The increasing impact of mobile and wearable devices on retail.

That post discussed the first trend.  In this post and the next, we’ll cover the second and what it means for the speed at which mobile wallets may be adopted by US consumers.

Let’s first lay some foundation.  EMV was established in 1996 as an interoperability standard for chip-based or “smart” cards.  The aim was to ensure interoperability between cards, POS terminals, ATMs, and back end processing systems.   EMV cards have a small processor which can perform basic processing on significantly more information than can be stored in traditional magnetic stripe cards.  They can thus perform advanced cardholder verification, using techniques like data authentication, PIN entry and cryptographics. The chip itself creates a one-time digital signature for each transaction, making it much harder for criminals to commit many forms of card fraud.

The chip also provides a critical capability for the next generation of mobile payments.  It can interact with card readers via radio waves using either radio-frequency ID (RFID) or near field communications (NFC).  Since smart cards are to a certain extent very small portable processors with limited memory, contactless payments can easily be implemented in devices with larger footprints.  Thus the ability to embed payments in mobile devices and allow contactless payment mechanics.

The rollout of EMV-based smart cards into the US (but also worldwide) thus provides a fundamental infrastructure on which contactless mobile payments can be built.  According to the Aite Group, the penetration rate of EMV/NFC-enabled terminals was approximately 28% in December 2014.  It is expected to grow to approximately 60% by the end of 2015, and reach a 90% penetration rate by EOY 2017.

Card issuers are pushing EMV for the simple reason that when a card is lost or stolen, the card issuer protects the consumer from any fraudulent charges.  In the US, that amounts to $5B out of $3.2T in card purchases, both in-store and online. Not a lot as a percentage, but a very large nominal amount.

But what incentive do U.S. merchants, who have to spend many thousands – in some cases hundreds of thousands – have to upgrade to new terminals?  Until this year, they didn’t have one.  But on October 1st if this year U.S. merchants who do not switch to EMV become liable for fraud charges occurring at their establishments, not the card issuers.  The size of risk they will be exposed to has been significant enough to move them to invest.

How aware are merchants of this change?  Take as an example my daughter’s physical therapy practice.  Five people in a non-descript building who often have trouble just getting me a bill to submit to my insurance company, are investing in a new EMV terminal.  They know about the upcoming risk shift as well as the day it will be implemented.  They don’t know how much exposure they have, but they know that they don’t know and prefer to buy insurance in the form of a terminal rather than take fraud risk.

But just because the terminals that allow for contactless mobile payments will be in place in a majority of U.S. merchants by next year, that doesn’t mean U.S. consumers will suddenly switch to paying by phone. When it comes to their money and how they actually use a payment mechanic, consumers are notoriously conservative.  It took until 1999, approximately fifty years from their introduction, for transactions from credit cards to exceed payments by both cash and checks.  Even with the faster adoption curves for technology in the 21st century, it would not be surprising for it to take twenty years for mobile payments to exceed card-based purchases.  To date, mobile payments have really gone nowhere.  That includes Google Wallet, which uses contactless, mobile phone-based technology.  Even Starbucks – the one unabashed U.S. success story for mobile payments – has only achieved a 16% penetration rate for mobile (as a percent of total revenues) in the five years since their mobile app was introduced.

However, the Starbucks app only covers payments at Starbucks, and the payment mechanic is embedded in an app that gives the owner many other benefits that incentivize use.  This means I still have to keep my wallet and cards for all other purchases.  That is not the same as giving up that wallet and completely depending on my phone for transacting all my purchases.  On the one hand, that could accelerate adoption.  God only knows that I’m tired of sitting on that lump in my back pocket created by all the different payment cards I carry and all the receipts I generate. On the other hand, it could slow adoption.  After all, I can more easily lose my phone, which I put down anywhere and can accidentally forget (or someone can take while I’m not looking).  This compares to a physical wallet, which is kept securely hidden in my pocket (no comments from the peanut gallery please) or purse and, while relatively inconvenient, is what I know and am comfortable with.

Which of the two competing pressures will have a greater impact on adoption in the U.S.?  In my next post, I’ll share how I’ve become the cool kid in my neighborhood thanks to LoopPay.