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The Green SheetGreen Sheet

The Green Sheet Online Edition

July 24, 2023 • Issue 23:07:02

Payments, a retrospective:
The changing point of sale

By Patti Murphy

Point of sale technology has a rich history that dates back generations. Its modern history reflects a steady progression from manual card imprinters to electronic devices capable of handling various payment form factors, including wearables.

But it was the advent of electronic terminals that gave way to independent sales organizations (ISOs) and their sales reps. Prior to this, banks dominated the market, accepting paper charge slips from merchants, treating them as deposits that cleared like checks.

"The banks and their partners built a solid, very sturdy and reliable system of getting payments authorized and settled," said Mark Dunn, founder of the consultancy Field Guide Enterprises. But along the way, "the pricing for the transaction became complex and somewhat expensive, from the merchant's point of view."

Ken Musante, president of Napa Payments and Consulting, agreed. Musante got into the business in 1983, the same year the The Green Sheet launched. "Back then, there were four or five categories of interchange," Musante said. "Now we have hundreds" that vary based on type of card, authorization method and merchant category.

"Electronic terminals, and the sophisticated networks they connect to, came about in response to widespread fraud, which really took off in the early 1980s," explained retired industry consultant Paul Martaus. Since then, the devices have evolved from being incredibly rudimentary machines to ultra sophisticated devices that track things like sales, inventory and employee scheduling.

Card and card data security have also taken on added importance throughout the years. The card brands took the first step by adding holograms to cards. They also devised the Payment Card Industry Data Security Standard (PCI DSS) to ensure merchants were taking necessary steps to protect consumer card data.

More recently EMV chips and chip-reading devices were introduced to protect against in-store card fraud. Many processors also employ end-to-end encryption to protect sensitive cardholder data as it is transmitted between the merchant's terminal and the processing network. Now managed by the PCI Security Standards Council, PCI has evolved with the industry to create standards encompassing these processes and far more.

Banks exit the business

"The original value prop for the merchant was that using the machine would lower their rate," recalled industry veteran Don Apgar. When merchants used knuckle busters to imprint card data after checking the card number against a paper list (warning bulletin) of closed and stolen card accounts, they paid about 4 percent of the ticket to the bank that "acquired" those charge slips. Going electronic dropped that rate down to 2 percent.

But the advent of electronic processing required extensive infrastructure investments that banks weren't inclined to make. So, Apgar noted, the banks forged "sponsorship" deals with independent processors and served as card-brand guarantors of the processors' merchant portfolios. "This was never meant to be an industry," he said. "It was only supposed to be a stop gap" until banks could take back the business. But once residuals were introduced and the ISOs and processors began accumulating that money, there was no turning back, Apgar added.

Reflecting on this history, Musante said, "The ISO has changed this business."

In the 1990s, many of the largest banks—JPMorgan Chase, Citibank, Bank of America and Wells Fargo among them—formed joint ventures with leading processors, such as First Data (now Fiserv) to sell card processing. More recently, some of these banks began building the infrastructure needed to bring payment card processing back in house. Chase was the first to do so, creating Chase Paymentech in 2008. BofA followed in 2019.

From knuckle busters to mobile & contactless

The global POS terminal market was valued at $94.4 billion last year and is expected to continue growing at a rate of 6.1 percent between now and 2030, according to Grand View Research. Traditional, countertop POS devices dominate, accounting for nearly 62 percent of global revenue. Hardware includes card and network devices, barcode scanners, cash drawers, receipt printers, tablets and monitors. Grand View said it expects mobile POS to be the fastest growing segment between now and 2030.

Almost as soon as terminals started popping up in stores, demand emerged for mobile and contactless payment acceptance. Contactless payments—being able to make a payment without a physical contact between the payment card and the terminal—can be supported using a range of technologies, including radio frequency (RFID), near field communications and QR codes.

The first use of RFID for payments was not a bankcard, but the ExxonMobil Speedpass, introduced in 1997. Motorists typically used a key fob or a transponder affixed to their vehicle's rear window to communicate with the pump. Today, as cars become more connected, some consumers are making payments using dashboard screens. Analysts at J.P.Morgan predicted in a recent report that in-vehicle payments volume would hit $86 billion by 2025.

For the most part, mobile and contactless payments were experimental in the 1990s. Ferne Glemby, director of business development at CardPlus Empower LLC, recalled for The Green Sheet in a 2021 interview how her first experience setting up a mobile terminal was at a theater in 1999. The setup consisted of a hefty Hypercom T77 card reader connected to a car battery atop a rolling cart. "We pieced together mobile terminals, car batteries and manual imprinters that we called knuckle-busters," she said.

In recent years, both Visa and Mastercard have developed technologies that let businesses accept payments from contactless cards or mobile devices using their own mobile devices. Mastercard calls its product Tap on Phone; Tap to Phone is the moniker Visa uses.

The mobile payments used today were conceptualized and rolled out by smartphone manufacturers beginning in 2011. Apple, alone, has more than 500 million Apple Pay users worldwide. The company also claims that Apple Pay is used in 88 percent of mobile wallet transactions. (Mobile wallets are digital wallets consumers use to store credit and debit cards.) In 2022, 12 percent of U.S. POS transactions were classified as mobile; in 2017 it was just 3 percent, according to the website Statista.

NFC has become a go-to technology for in-store card payments. Most credit and debit cards issued today use NFC to support tap-and-go payments, which took off during the COVID-19 pandemic. Mastercard reported that 46 percent of consumers worldwide now use contactless payments. "NFC was the first technology change that was consumer driven," Apgar said.

QR code payments also took off during COVID and are now widely used in restaurants for menu ordering as well as payments. Concerns about touching surfaces during COVID led many consumers to seek payment form factors like contactless and mobile – 46 percent, according to research by Nielsen Consumer LLC.

Mastercard research revealed that 51 percent of Americans now use some form of contactless payment; the same percentage told Mastercard they were using cash less often or not at all since the pandemic began. Merchant categories where consumers are most likely to use contactless payments include grocery (85 percent), pharmacy (39 percent), retail (38 percent), and QSRs (36 percent), according to Mastercard's research.

Ecommerce comes of age

The internet changed the bankcard landscape in several ways. First, it eliminated the need for dial-up terminal connectivity (as did mobile POS devices). It also led the way toward more value-added services, such as loyalty programs.

Perhaps the biggest change, however, was the birth of ecommerce. Amazon was one of the first companies to sell online, starting with books and CDs in the mid-1990s. Today the company is a retailing giant, with over 300 million active customer accounts and nearly 2 million selling partners worldwide.

"The advent of selling via the internet changed merchant sales enormously," said Dunn. "Gen Z and younger buyers go to their smartphones and tablets first rather than thinking of jumping in the car and heading to the mall."

Ecommerce, like contactless payments, saw explosive growth during the pandemic. "There are two types of merchants," Apgar said. "Those that want to keep costs down and those who want to invest in technology that makes it easier for customers to shop. COVID really accentuated that split." end of article

Patti Murphy, senior editor at the Green Sheet, has been following and writing about payments for 40 years. She has been working with Green Sheet for 25 years. Patti is also co-host of the Merchant Sales Podcast.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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