By Venkat Kalyanaraman and Sunil Rongala
MRL Posnet Private Ltd.
Mobile devices and payments are two peas in a pod. This is self-evident if we take the growth trajectory of the mobile POS (mPOS) into account. The reasons for the migration from countertop POS terminals to mPOS are portability, a comparable level of security, form factor and - most importantly - lower cost.
For most developing countries, cost will be a primary factor in determining the success of mPOS implementation; the relatively higher cost of countertop POS terminals has limited their spread.
The proliferation of mPOS is critical because it ties in with the plans of central banks, which are promoting electronic payments in lieu of cash. Electronic payments are an economic stimulus and have low transaction costs.
Mobile POS terminals are available that are approved by the Payment Card Industry (PCI); accept mag stripe and Europay/MasterCard/Visa (EMV) cards; and are priced below $30. And their prices are likely to decline as volumes increase. (This doesn't include the cost of the phone; however, businesses typically do not purchase mobile phones for payment acceptance, so mPOS is likely a function they will add to a phone already in use.)
This low cost makes mPOS viable in countries where acquirers absorb the asset and maintenance costs of countertop POS equipment. For example, the asset cost in India of a countertop terminal at the lower end is about $110 (after adding import duties), and the maintenance cost comes to about $7 a month. For this to work economically, merchants must do business of about $3,000 to $3,500 a month, assuming a 20-basis-point spread.
Most small to midsize merchants do insufficient business to cover the cost. Thus, the reason the spread of countertop terminals has stagnated in India in recent years is no mystery.
Countries in Europe, Asia and regions of South America have a large number of PIN-based cards. In India, all debit card transactions will have to be authenticated by PIN as of April 1, 2013.
This is already the case in a number of countries. In fact, over 50 percent of POS transactions are currently being made with debit cards. Thus, for mPOS to be implemented, as a practical matter, cards have to be PIN-authenticated, or mPOS will be marginalized.
Cardholder PIN authentication has to be done on a PIN-entry device (PED). Two types are in use:
Therefore, we ask the pertinent question: What is the best solution - balancing cost and security - that can sustain the mPOS (r)evolution worldwide? For mPOS to succeed, it should be capable of safely accepting magnetic and EMV cards, as well as safely authenticating PINs.
A solution that balances cost and security is a PCI-approved mag stripe and EMV card reader used in conjunction with one of the two following options:
The solution of using either OTP or OBA with a mag stripe plus an EMV acceptance device also works because:
Adoption of mPOS will take off throughout the world when the payments industry begins to grasp that transactions can be both secure and low-cost.
A one-time password (OTP) in the payment processing realm is a password that is valid for one transaction only. The strength of OTPs is that, unlike PINs, they are not vulnerable to multiple attacks, and should they be intercepted by fraudsters after they are used, the criminals will be obtaining worthless data that is no longer valid.
Out-of-band authentication (OBA) is a way of authenticating transactions that uses two separate channels simultaneously to identify users. In payments, one channel used for OBA authentication is typically the network used by the merchant's payment acceptance device; a cellular network is commonly the other channel. This makes it unlikely a hacker or malware could access or infect the entire authentication process.
Venkat Kalyanaraman is the Chief Infrastructure Officer at MRL Posnet Private Ltd., a technology-driven transactions facilitator based in India. He holds a Masters in Business Administration from the University of Texas in Dallas. Sunil Rongala, MRL Posnet's Head of Risk Containment and Business Strategy, is a professional economist and holds a Ph.D in Economics from Claremont Graduate University in California. Email Kalyanaraman at firstname.lastname@example.org and Rongala at email@example.com.
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