Many Questions Hang Over Samsung’s LoopPay Deal And What Will Come Next

There’s a simple reason why Samsung Electronics America Inc. bought LoopPay Inc.: It wants a “truly digital wallet.”

That’s the reason given by David Eun, Samsung executive vice president and head of the mega-corporation’s investment unit, Samsung Global Innovation Center. “We have a shared vision to inspire users to transition to a truly digital wallet,” Eun tells Digital Transactions News in an email. “This acquisition will help accelerate that transition by providing the ultimate solutions to the consumer’s pain point of mobile payments and [enabling] retailers to create the best consumer experience possible for our users.”

Samsung’s deal for Burlington, Mass.-based LoopPay was disclosed earlier this week. The handset giant has declined to disclose the purchase price.

Samsung is widely expected to announce a mobile-payments service when it introduces its flagship Galaxy S6 smart phone at the Mobile World Congress event March 2-5 in Barcelona, Spain. Rumors that the service will rely on LoopPay’s technology surfaced in recent months. Neither Samsung nor LoopPay would comment on the rumors.

What attracted Samsung to LoopPay, which currently requires a fob or phone case to work at the point of sale, is its technology’s ability to interact with magnetic-stripe point-of-sale terminals. In a process called Magnetic Secure Transmission, LoopPay’s wallet sends a signal that exploits the same magnetic field at a POS device that any mag-stripe card uses when swiped.

In this way, LoopPay devices are said to work with more than 90% of existing POS terminals. Wallets like Apple Inc.’s Apple Pay, by contrast, rely on near-field communication (NFC), which so far is restricted to an estimated 220,000 NFC-equipped terminals. Thus, in theory, LoopPay would hand a Samsung wallet a considerable acceptance advantage over the mobile service from rival Apple.

“With NFC technology available at less than 10% of POS terminals in the United States, [Magnetic Secure Transmission] really solves the big issue of retailer acceptance that has been the biggest barrier for the mobile-payment platform from reaching mass adoption,” Eun says.

Any new payment method requires merchants that will accept the method, consumers that want to use it, and, in some instances, issuers to provide the card or technology.

All three factors are unknowns in regard to any Samsung mobile-payments service. While LoopPay’s technology could solve the problem of merchant-acceptance locations, there are doubts.

“The ubiquity component is overstated,” Rick Oglesby, head of research at Double Diamond Payments Research, tells Digital Transactions News. “Many mag-stripe POS terminals are behind the counter, so LoopPay may work technically in [more than] 90% of terminals, but logistics will prevent it from working in many of the locations.”

It will work best where merchants use consumer-facing terminals, Oglesby says, which largely are big-box retailers like Target Corp. and Wal-Mart Stores Inc. This is especially true as the Merchant Customer Exchange, a retailer-backed mobile-payments consortium, prepares its own mobile wallet, called CurrentC, which does not rely on NFC. “Having a mobile-payment solution that will work at MCX merchants is likely the big win and impetus here,” Oglesby says.

But, Samsung may have to contend with other hurdles besides competing mobile-payment services. The U.S. payment card industry is migrating to EMV chip cards that require cardholders to dip credit and debit cards into POS terminals, eschewing the mag-stripe reader.

Nor is Samsung forsaking NFC. Its current Galaxy S5 contains an NFC chip, and the S6 is expected to.

“We also saw LoopPay to be a stronger solution than the existing solutions in the market,” Eun says. “It is not about being first in the market, it’s about changing user behavior. Consumer habits of using plastic now are changing and transitioning into using smart devices. So, we hope to make payments more convenient and secure. Again, we are very focused on providing the best user experience and this tech accelerates that change in consumer behavior.”

Still, some observers wonder whether LoopPay’s orientation to mag-stripe technology is a step backward for Samsung.

“LoopPay allows for mobile payments to be made at any point of sale that accepts magstripe, but the big problem with this approach is that it’s based on legacy technology,” says John Gessau, director of product management at ACI Worldwide Inc., a Naples, Fla.-based payments company, “and that means the scheme will carry a lot of the same security baggage (for instance, the ability to skim the magnetic stripe remains).”

Gessau suspects the acquisition of LoopPay, and a subsequent payment service relying on its technology, is but the first phase of a larger plan.

“Notwithstanding, I can't help feeling that this is all rather backward,” he says. “As the world takes steps toward EMV and enhanced security features, Samsung is taking a step toward mag stripe. There must be a strong strategic intent to capture the opportunity in the mag-stripe space now, while following with a solid phase-two plan.”

Samsung says LoopPay chief executive Will Graylin will continue in that role and become general manager of Samsung Mobile Payments. LoopPay, which will remain based in the Boston area, is Graylin’s third mobile- payments company. Graylin founded Way Systems Inc., a mobile POS company, in 2002, and sold it for $6 million to Verifone Inc. in 2010. And in 2012, Graylin left Roam Data, another mobile POS company he started in 2005. POS terminal maker Ingenico S.A. eventually acquired Roam. Graylin and George Wallner, founder of POS terminal maker Hypercom Corp., started LoopPay in 2012.