Trends & Tactics

NFC Stalwart Isis Preps for a Rollout

Isis, the smart-phone-based payments machine owned by three big mobile-telecommunications carriers, has stuck with near-field communication (NFC) through thick and thin while other mobile-payments providers have either avoided the high-powered but demanding technology altogether—think PayPal—or scaled back their commitment to it—think Google Inc. with its Google Wallet.

But after a slow start and a seemingly lukewarm reception in its two test cities of Austin, Texas , and Salt Lake City, Isis in August deemed its progress sufficient to merit a national rollout.

Isis also got a lift when two big card issuers, JPMorgan Chase & Co. and American Express Co., declared that they were on board for the rollout. Chase said several of its credit cards would support the Isis digital wallet while AmEx said it would add its Serve platform, which provides under- or unbanked consumers with payment services, to Isis.

“Isis is definitely on a roll here,” says mobile-payments researcher Rick Oglesby, a senior analyst at Boston-based Aite Group LLC, by e-mail.

In one respect, the Chase and AmEx developments were not unexpected. Chase, which has $110 billion in credit card receivables, participated in the pilots from their start last October, as did AmEx with its consumer and small-business cards.

Isis’s other announced issuer partners during the test, Capital One Financial Corp. and Barclaycard, haven’t said what they will do with Isis going forward.

Isis has not said how many consumers participated in the tests or how much they charged. Nor has it given many details about the planned national rollout, which will start this year.

“Given the scope of this effort, there will not be one date, but rather a series of actions across our various partners to ensure a seamless customer experience,” an Isis spokesperson says by e-mail. “For example, merchant terminal deployments, sales-rep education, etc. One of the important lessons we learned in our pilots was around getting the initial experience right.”

NFC-based mobile payments can happen where contactless debit or credit cards are accepted. Isis says 4,000 locations in the two test cities accept contactless payments, which entail the user tapping a card or NFC phone by a terminal, but many such locations are vending machines.

Anecdotal evidence reported by Digital Transactions News July 17 indicated that brick-and-mortar merchants in Austin and Salt Lake were not seeing many Isis transactions.

The Chase and AmEx announcements, however, may demonstrate that Isis is getting some traction after testing began months later than originally planned.

“To roll out something on this scale, one of the most important qualities you have to have is to be resolute,” says payments consultant Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group. “No one can say Isis isn’t resolute.”

Isis has said that, on average, active users tap more than 10 times per month and that two-thirds of them opted to receive offers and messages from an average of seven brands. A key advantage to NFC technology is its ability to facilitate loyalty programs and electronic coupons in addition to payments.

But NFC payments require a network effect of sufficient bases of consumers with NFC chips in their smart phones and merchants with contactless-reading point-of-sale terminals, as well as commitments from card issuers.

So far, there aren’t a lot of NFC-capable phones or terminals in the U.S., and technology-research firm Gartner Inc. recently scaled back its earlier estimates of NFC volume (“Gartner Sees a Lot Less NFC in the Future,” July). Google, meanwhile, although not abandoning NFC for its struggling Google Wallet, has reduced its role.

“We still haven’t seen consumer adoption at scale; this will be the big challenge left,” says Oglesby. “They’ve clearly got a product that is of interest to financial institutions and to payment networks, now they need to nail the consumer and merchant value drivers.”

Oglesby believes Isis will benefit from the payment card networks’ push to get Europay-MasterCard-Visa (EMV) chip cards adopted in the U.S., which also will facilitate NFC payments.

Meanwhile, the relatively low number of NFC-enabled smart phones is growing rapidly, especially with sales of Samsung’s Galaxy S4 phones booming. But Apple Inc. so far has resisted adding NFC capability to its popular iPhone.

“Their challenges are many,” says Ablowitz. “They have to get an active merchant base, they have to get a broad and consistent user base, and they have to win over the remaining handset maker, Apple.”

Isis’s owners are the mobile networks AT&T Mobility, T-Mobile USA, and Verizon Wireless.

Groupon: Not Just Dongles Any More

The acquiring business, already fraught with rivalry, became even more competitive last month with an announcement from daily-deals giant Groupon Inc. that it will supply traditional point-of-sale terminals to merchants as part of a new initiative under its payments division.

The Chicago-based company, which last year jumped into the mobile-acceptance business with an app for mobile phones and tablets, says that starting immediately it is offering the Vx520 terminal from San Jose, Calif.-based VeriFone Systems Inc. to merchants that don’t want to use a phone or a tablet.

It is buying the devices in bulk and reselling them for $150 apiece. The company will also reprogram existing VeriFone and Ingenico point-of-sale devices to work with Groupon’s software.

The company, which has been testing the new hardware program with “beta” merchants, is also offering its established point-of-sale pricing, 1.8% plus 15 cents for Visa, MasterCard, and Discover. As a promotional offer, processing for the first $5,000 in credit card transactions is free. And Groupon is carrying over from its mobile service such features as online applications and online transaction reporting.

While the new program places Groupon squarely in what is a traditional bread-and-butter business of independent sales organizations, Sean Harper, Groupon’s director of product, says the company is responding to merchant demand. Some stores the company talks to want many of Groupon’s payments features, such as the pricing and online applications, but don’t want to deal with replacing cash registers with tablets and card readers, he says.

“A common thing for a merchant to say is, ‘A lot of that stuff is a no-brainer but moving my whole business over to an iPad for a POS, I’m not sure I’m ready for that,’” says Harper.

He says the terminal program will create a base of merchants for Groupon that will be ready to move up to tablet-based services later on. “That shift in technology is inevitable,” he says. “It’s just a question of when.”

Groupon, which formally calls its payments division Breadcrumb Payments by Groupon, will not disclose how many merchants it serves currently for POS payments or how many it projects it will sign up for the terminal-based program. Nor will it say anything about the beta merchants, other than to say they are scattered around the country.

Though it appears to be a beneficiary of the new program, VeriFone won’t comment about it.

Scott Holt, vice president of marketing at Roam Data Inc., a Boston-based company that makes dongles for Groupon as well as other payments providers, calls the new service “an interesting play.” He says it will allow Groupon to win business from a core of merchants that are not interested in mobile POS. “There’s still that merchant that likes having a countertop device that does one thing,” he notes.

Adil Moussa, principal at Adil Consulting, agrees the new service will be a “way to get in the door to talk to merchants.” But it could be symbolic of something larger, he adds. Groupon is among a cadre of payments outsiders capitalizing on the shortcomings of incumbent players, he says.

“It looks like companies outside of the payment industry are actually doing what companies in the payment business failed to do: provide real value-add to merchants because they understand what merchants care about and how much they are willing to pay for those value-add products,” Moussa says in an e-mail message.

Moussa recently issued a report on small merchants in the United States, with an analysis of their POS usage. His survey revealed 68% of small merchants use conventional POS terminals, but 22% are using app-based devices.

Still, Groupon could run into some flak, besides competition from established ISOs. Moussa says many small merchants are unaware of how much they actually pay for card acceptance, and so may balk at Groupon’s pricing, believing their fees are lower. “Many merchants believe they pay way less than they actually do,” he says.

And Roam’s Holt says Groupon may have a hard time moving merchants that are cemented into existing acquirer contracts. Harper says, however, that the company can rely on the annual turnover of merchants going off contract. This movement, he estimates, accounts for anywhere from 15% to 30% of merchants every year.

In any case, what’s important to Groupon isn’t so much POS technology as it is transaction volume, both as a business in itself and as a way of supporting the core daily-deals business. Says Harper: “It’s important transactions flow over Groupon’s pipes. We’re flexible about how they get there.”

Despite Headwinds, Merchants Get Set for EMV

More than 60% of U.S. card-accepting locations will have the point-of-sale terminals needed to accept Europay-MasterCard-Visa (EMV) chip cards by a key 2015 deadline and nearly 90% will be ready in 2017, research firm Aite Group LLC predicts.

A recent report from Boston-based Aite examines the re-terminalization of merchant locations triggered by the payment card networks’ plans announced in 2011 and 2012 to wean America off of fraud-prone magnetic-stripe credit and debit cards.

Aite senior analyst Rick Oglesby predicts that 62% of acceptance locations in 2015, an estimated 6.6 million, will have the hardware needed to accept EMV cards as well as near-field communication (NFC) payments, which the networks are promoting simultaneously with EMV to jump-start mobile payments.

In October 2015, the networks’ planned liability shifts will make merchants, instead of card issuers, responsible for counterfeit-fraud losses from transactions originating with EMV cards used at non-EMV terminals.

Aite’s estimates, however, have a lot of moving parts. Besides standardized EMV-capable hardware, the transition to EMV will require software upgrades, processor certifications for EMV, and merchant education and awareness of the chip card standard, as well as merchants’ willingness to play ball. Aite found that 75% of 350 merchants it interviewed in the first and second quarters had never heard of the networks’ EMV migration plans.

Even among those merchants aware of EMV, 37% said they did not plan to upgrade their equipment before October 2015. Fifty-three percent said they planned to meet the deadline and 10% didn’t know.

Aite’s basic assumption, based on a total of 491 interviews with executives of small and mid-size merchants, is that the average merchant replaces a terminal once every 5.7 years. In all, merchants replace about 17% of all terminals every year.

But some merchants soldier on with ancient but functional terminals—6% reported their equipment is 10 or more years old, 2% of terminals are 8 to 10 years old, and another 6% of terminals are 6 to 8 years old. Thus, Aite estimates 84% of terminals could be expected to have been replaced in six years.

But if sales efforts by merchant acquirers to induce the changeover are factored in, 88% of locations could have EMV/NFC hardware by 2017, according to the report.

Aite also interviewed executives from 22 merchant-acquiring companies and 48 POS technology providers. The equipment acquirers are deploying today is increasingly configured to accept EMV cards. Aite expects 75% of terminal deployments this year will be EMV-capable and nearly 100% next year.

That, however, doesn’t mean a terminal can actually accept an EMV card. It needs software too, and that area lags, says Oglesby.

“What’s really happening is the device manufacturers are putting that chip in and getting the devices out,” but they’re not activated for EMV payments, he says. Such activations in many case will require manual software upgrades, a time-consuming process.

“It’s going to be more than your normal software upgrades over the next few years,” he says.

Amazon Payments ‘Lite’ Debuts

In all the buzz over the past year or so about mobile and e-commerce payments, little has been heard from Amazon.com Inc.

That eerie silence ended last month when the e-commerce kingpin started rolling out a new, streamlined version of its 6-year-old Amazon Payments service.

The new platform, which includes a simplified application programming interface, front-end widgets, and a testing “sandbox,” minimizes integration time by stripping away payments-related features available with the regular Amazon Payments product, says Tom Taylor, vice president of seller services for the Seattle-based company.

These important but non-core functions, summed up as “order management,” include pricing, shipping, and inventory-control integrations. With the new version, “all we’re doing is processing payment,” says Taylor.

Of course, the older Amazon Payments platform, including order management, is still available. “We’re just releasing a new option,” Taylor says. Integration time for the new platform, he adds, depends on how complicated the merchant’s site is, and how many sites it operates. “It could be,” he says, “as short as a day.”

What is not new is that the streamlined service relies on payment credentials, shipping addresses, and other information Amazon now has salted away on its servers for some 215 million customers. That data allows it to reduce payment to three clicks on a PC keyboard or mobile device.

Pricing for all Amazon Payments services except the Flexible Payments platform (which has its own pricing schedule) starts at 2.9% plus 30 cents and descends from there as volume builds, bottoming out at 1.9% plus 30 cents, in line with fees from other processors such as PayPal Inc.

Amazon will not disclose how many online merchants use Amazon Payments, nor will it say how many have already signed up for the new platform, which went live commercially mid-summer. “We went out with a beta a few months ago with a few sellers and got a good response, so we opened the doors,” Taylor says.

The company did pass on the names of some client merchants, along with their comments. SewingMachinePlus, for example, told Amazon that the service quickly became the preferred method of payment on its site, though it isn’t the only wallet-based method.

Visual Apex, which sells home-theater gear, said half of its orders are now on the platform. The Clymb, a seller of outdoor apparel, reported a 10% lift in its conversion rate by adding the service.

While the new service may well appeal to small sellers because of the easier integration and a built-in mobile interface, some observers wonder whether it will put off as many potential clients as it attracts, since some will be looking for the order-management integration.

“[Amazon] may be thinking this is the way to get us positioned with a larger number of merchants, which may or may not work,” says Beth Robertson, an independent payments-industry analyst. Up to now, she says, Amazon Payments “has appealed more to small businesses because of the inclusion of those [non-core] features. Historically, it is what has helped them attract share.”

One supposed obstacle won’t be hampering the new version of Amazon Payments, says Taylor. Ever since the Web juggernaut launched its payments service for other online merchants in 2007, critics have said it would struggle to sign up business because potential clients would distrust Amazon as a competitor and would balk at sharing sales information with it.

But Taylor says the only information the platform requires merchants to pass on is the total amount of the sale. “[That distrust] hasn’t really played out in reality,” he notes. “There isn’t any information to be worried about sharing.”