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IP connectivity: Where is it headed?

By Ken Boekhaus

A new year offers a chance to think about the future. Let's break out the crystal ball to see what the future holds for one emerging technology solution in the payment processing industry: using the Internet rather than a dial or leased line as a transmission medium for transactions.

The main enabler behind this new trend is broadband availability for businesses. With a broadband Internet connection already in place, why couldn't businesses use it for processing payments and possibly eliminate the need for one or more expensive phone lines? The bonus is fast transactions, and I'm talking leased-line-fast transactions.

Since terminal manufacturers now support Internet protocol (IP)-based connectivity in their newer models, many readers are probably familiar with the technology. But where is it headed in the long term? I offer the following four probabilities:

1. Merchants will buy IP-enabled POS terminals

IP connectivity will give merchants a reason to toss out that old Tranz terminal and buy a new IP-enabled one. This will likely create a spike in new terminal sales and, in turn, create a glut of older, used dial terminals in the marketplace. Although there are now devices that convert dial terminals to IP, I don't see justification for the added cost and complexity except perhaps for recently purchased, higher-function dial terminals.

2. Merchants will switch their telephone service to VoIP

Voice over IP (VoIP) uses an Internet connection rather than dedicated telephone wires to transmit phone calls. For years the Baby Bells have been socking it to businesses, which pay much higher fees for telephone service usage than residents pay. VoIP can use any broadband Internet connection. This opens up the opportunity for a host of competitors, including telecommunications companies in other regions, EarthLink and start-up companies like Vonage, to offer telephone service now.

Competition means lower prices, and this will be merchants' incentive to switch. How will this affect merchant level salespeople (MLSs)? They can bundle VoIP with IP connectivity and sell it as a package, or even take it a step further: What if the IP-enabled phone had a card swipe attached to it? Could we see merging technologies?

3. Merchants will create corporate networks using a VPN

I predict that smaller merchants with multiple locations will create a "corporate" network using virtual private network (VPN) technology over the Internet. This technology provides networking capability similar to the giant retailer chains' leased line networks, but it uses only an Internet connection. It is like creating a private network within the Internet.

Smaller merchants will be able to pass pricing and sales data from store to store and their headquarters just like the big boys. They will also be able to centralize their payment processing through an in-house mini switch. For MLSs this likely means that it will become increasingly difficult to sell to regional chains as more sophisticated players take over this space.

4. Help desks will use remote diagnostics to fix terminal problems

I believe that help desks will use remote diagnostics to analyze and rectify not only problems with networks but also with POS terminals. This is analogous to using remote PC software to access a PC over the Internet. Remote diagnostics, however, are not so far-fetched. Precidia Technologies Inc., for example, has developed tools to remotely analyze network issues and debug network devices that convert legacy terminal communications to IP.

The crystal ball gets fuzzy if we try to look too far into the future, so the following are possibilities rather than probabilities:

Bypassing the processor

The Internet is nothing more than a huge router of data. You can send a message anywhere in the world by attaching an IP address to it. This makes it possible to split transactions. American Express (AmEx) and/or Discover transactions could bypass the processor and be sent directly to AmEx and Discover for authorization and settlement.

If we take this one step further, why couldn't Visa- and MasterCard-branded transactions bypass the processor and be sent directly to the card Associations? Or, imagine the transactions bypassing the processors and the card Associations and going directly to mega-banks such as Citibank, Bank of America (BofA) or JPMorgan Chase & Co.

Bypassing the card Associations

We could go full circle with a card issued by BofA and not bearing any card Association logos. Does this seem too far out? I would bet the farm that some of the larger issuing banks have kicked around this idea more than once. Often times the only difference between a bad idea and a good idea is a matter of time.

I could describe many more interesting IP connectivity "what ifs," but those are best discussed over drinks. But, if there is a way for the banks to regain control over the industry, you can predict that it will happen. Whatever happens, rest assured that the Internet will continue to have a major impact on the way payments are processed. Hold on to your hats and enjoy the ride.

Ken Boekhaus is Vice President, Marketing and Business Development for Electronic Exchange Systems (EXS), a national provider of merchant processing solutions. Founded in 1991, EXS offers ISO partner programs, innovative pricing, a complete product line, monthly phone/Web-based training, quarterly seminars and, most of all, credibility. For more information, please visit EXS' Web site at or e-mail Boekhaus at . EXS is a registered ISO/MSP for HSBC Bank USA, National Association.

Article published in issue number 060201

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