By Ken Musante
Eureka Payments LLC
If you are like me, you are paranoid about competition from nontraditional sources. Not competition from other ISOs and acquirers. We can all foresee that and develop strategies to help us become successful. It's the game changers that concern me.
I understand most prognosticators believe Visa Inc. and MasterCard Worldwide are not vulnerable to upstarts and that, while nontraditional business lines will grow faster than Visa and MasterCard, they will not cause an appreciable dent in the card brands' business. And it is exactly that confidence that causes me to worry. Since going public, both Visa and MasterCard have radically increased their fees. Not interchange: their fees. Assessments went up approximately 20 percent at both firms, and the network fees increased by over 300 percent. Cross-border fees at both brands also skyrocketed.
Interestingly, however, each of these increases occurred within nearly identical time frames and continued to allow for record profits, despite the wobbly economy. Eventually these higher fees and the brands' hubris will allow for competitors to overtake them.
With that in mind, I posted the following on the GS Online MLS Forum: Many of you have seen the article (and press release) on AT&T and Verizon's new wireless venture to displace credit and debit cards with smart phones. I'm interested in the impact you all expect from this launch. How vulnerable are Visa and MasterCard? If you do not see this as a threat to them, why not? Do you see any other threats to Visa and MasterCard?"
In short, a Bloomberg article discussed the collaboration between Verizon Wireless, AT&T Inc. and T-Mobile USA for a smart phone program that enables near field communication payments. The solution is purportedly designed to work with Discover Financial Service's payment network in a three-city trial to allow customers to pay with the wave of their smart phones.
BILL PIRTLE started us off with an oft echoed sentiment: "I don't see it as anything to worry about. Most people over 35 don't trust PayPal, and you'd think that same age divider will exist here. Younger consumers might try, but I have much more confidence in keeping track of my credit cards than in my cell phone. I'm sure I'm not the only one who uses the house phone to set off the ringer on the cell phone so I can find the darn thing."
CARDPLAYER did not even take the threat seriously. "Ken, are you kidding?" he wrote. "Love to help, but really..."
POB SERVICE SALES believed the solution may gain a following but questioned the solution's security. He said, "When you think about it, it is a stroke of genius for the smart phone companies and cellular phone service providers, 'cause with this new service they just opened up a whole new revenue stream. ... And the banking industry will be crying foul here shortly over this as they will begin to see a dent in their revenue soon. "My question is ... are these phones PCI compliant? Seems like some hackers are gonna get rich before this is perfected, but then again maybe they have good security on these things."
CLEARENT illuminated why he believes this new solution will falter when he said, "This will require consumers all having app-enabled phones and ... their issuing bank (or the regular bank) supporting that system.
I am not sure that will happen anytime soon, because I don't see banks investing a lot of time and effort in making that work. They have too many other irons in the fire, so to speak, to care about ... how their cards are supported.
"I see this more in the small-ticket, contactless world in the near and long term. We will see more phones with apps that allow for contactless, as there are still few cards with this capability.
"Let's not forget, as long as security is important, the swiping of a physical card is still a key step to avoid fraud. Until the card associations are comfortable with phone or mobile applications that have that same safety factor, the odds are strong that the cost for these transactions will remain higher."
THECREDITCARDMAN brought up discussion points on why this solution might work. "As was discussed in another thread, I think this is the strongest attack to the current stranglehold that V/MC currently has," he stated. "Other potential invaders such as Gratis/Revolution tried to storm the system from within, with a little twist.
"Putting aside the security issue for the moment, which is a major hurdle but not insurmountable, the cell charge potential is realistic. The time frame is unclear, but consider the 'younger' generation are umbilical tied to these devices, [which] are the future of processing.
"My empirical and superficial evaluation is that the cell charge providers, who already have a built-in infrastructure, need only minor technological advances to actually be a legitimate contender. They have the consumer base, they are tremendous marketers and they have the internal ability to collect funds.
"It is a natural progression for a maturing industry with unused capacity to seek compatible markets to grow and expand profits. They see a multibillion dollar opportunity to invade a space that is ripe, and with the proper pricing (no interchange?), a decent market share is achievable." Inopportune or great opportunity?
WWW.PAYMENTLOGISTICS.COM believes the solution could lead to greater opportunity for all of us. He wrote, "From an acquirer's standpoint, I see it only as an opportunity: more equipment sales, more opportunity to differentiate your company as a payment systems expert and new ways to market an existing system.
"In the article Ken linked to, it references Discover's participation. I don't see any significant difference from traditional acquiring and contactless payments than with this new venture. It's just a creative way for Discover and its issuing partners to gain more market share.
"Think about it. All they are doing is replacing a credit card with an electronic device - in this case a cell phone. This technology is not new either - RFID [radio frequency identification] chips can be embedded in just about anything. And what's to stop Visa, MasterCard, AmEx and their issuing banks from doing the same thing?
"As long as there is chargeback liability, acquirers will be needed, and these transactions will have to run over traditional payment networks. I don't see it as a significant threat to Visa and MasterCard - just an innovative way to gain market share for Discover and other participating issuers. An opportunity Visa and MasterCard have as well.
"In the article it says the wireless carriers are experts at processing payments. My guess is they won't process a single payment under this program and, instead, will just be glorified sales outlets for issuers/card brands that jump on board.
"It's not like AT&T or Verizon are going to manage an issuing program. They might provide a technology and billing conduit, but the program in my estimation will most certainly be underwritten and managed by banks and their vendors. [This] puts a whole new twist on private-labeled program but probably nothing more than that."
CARDPLAYER added, "Look no further than PayPass 'tap-n-go.'... how many NFC-enabled (NFC = near field communications, aka, contactless) bankcards are in circulation? How many readers? ... A contactless V or MC built into your phone is about as exciting as a stale pretzel.
"FDC [First Data Corp.] ran an experiment and gave a bunch of consumers NFC chips that could be placed on the back of their phones as stickers. No traction on that pilot. When was the last time a merchant asked you about an NFC reader because their customers were demanding to 'tap-n-go'?
"The way this becomes viable is if the cell carriers enable cell phone purchases to be billed to your cell phone account. Now you have a purchase mechanism that operates outside of, and competes with, the bankcard credit/debit infrastructure. But can the cell companies raise enough capital to fund any purchase volume and carry the outstandings? Can they manage risk? What happens when you lose your phone?
"Classic chicken and egg ... and the same thing that happened with PayPass ... merchants don't want to buy the hardware until the cards are out there, and consumers don't care about the cards because they don't see the readers anywhere." I read that Bloomberg article, and terms like 'game changer' are only being bantered about to attract investment capital, not because somebody invented the next bread slicer."
I'm not sure consumers are yet ready for charges to be assessed through cell phone carriers. In addition to the tariffs and surcharges that will push up costs, many consumers do not own their own phones or pay their own cell phone bill. Other considerations also come into play. In Part 2 of this discussion, we will address them.
Until next time, when in doubt, sell something.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at email@example.com. For more information, visit www.eurekapayments.com.
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