Samsung Pay’s Mag-Stripe Emulation Advantage Might Be Short-Lived

The debut of Samsung Pay in the United States is just a month away, but the ongoing migration of U.S. credit and debit cards to the EMV chip standard may already be eroding the nascent mobile-payment service’s unique advantage.

Samsung Pay uses near-field communication (NFC) and, uniquely, a radio-frequency version of magnetic-stripe data to make contactless payments. Called Magnetic Secure Transmission (MST) by Samsung, the mag-stripe emulation technology means a compatible Samsung smart phone could send payment data to almost any point-of-sale terminal that accepts mag-stripe transactions.

Consumers, when using Samsung Pay, won’t have to switch their devices between NFC and MST because the phone will sense which linkage to use, says Dom Morea, senior vice president of business development at Atlanta-based First Data Corp., a processor that supports Samsung Pay. Both NFC- and MST-based transactions made in Samsung Pay will be processed as card-present transactions, Morea says.

“Samsung Pay has the smarts to say it’s not sensing an NFC reader and will transmit the the payment as MST,” Morea tells Digital Transactions News. Whether a POS terminal is equipped with NFC or not, the consumer will tap to pay, he says. The handoff between the two technologies will be seamless to the consumer, he adds.

There are an estimated 8 million POS terminals in the United States. Such ubiquity, coupled with the ability to make contactless payments with the merchant not having to add any new equipment, puts Samsung Pay at an advantage over NFC-only services such as Apple Pay and the upcoming Android Pay from Google Inc.

But it won’t last for long.

“The capability for Samsung Pay to emulate a mag-stripe is a differentiator, but I think the advantage will be short-term, as NFC-enabled terminals are increasing as EMV terminals are installed,” Thad Peterson, senior analyst at Boston-based Aite Group, tells Digital Transactions News via email. Most POS terminals shipped in the United States in the past few years have EMV, mag-stripe, and NFC readers, though not all merchants have activated the NFC capability.

Another issue is that EMV-enabled cards default to EMV whether or not the mag-stripe is available, Peterson says. “If a consumer were to try to use the mag-stripe emulator with a card that was designated EMV, the transaction would be directed to the EMV transaction flow,” he says. That could limit a consumer’s ability to load a card that can work in Samsung Pay, he notes.

Consumers, also, will have an impact on Samsung Pay. “Right now at least, because the market is in transition with the type of POS devices, the majority of stores that consumers are shopping in are still working with mag-stripe readers even if they have readers in place that can work with chip technology,” says Beth Robertson, managing director of Robertson Payments Services LLC.

The hurdle for Samsung Pay is getting consumers to want to use mobile payments, she says. “Merchants are still using the mag stripe, and consumers are still familiar with it. It’s not so much a different consumer experience, but a wider acceptance.”

Indeed, consumer inertia is strong. A study released in May found that 55% of consumers chose not to use a mobile device to make purchases, favoring instead their usual payment method.

Another potential complication—as always—is competition. Samsung Pay not only has to contend with mobile wallets from PayPal Holdings Inc., Apple Inc., and Google, but CurrentC from the retailer-controlled Merchant Customer Exchange consortium is also expected to be released commercially in the coming months.

“Samsung faces an uphill battle in the U.S. after Google releases its Android Pay application,” Peterson says. “Google has an agreement with AT&T, Verizon Wireless, and T-Mobile to be the Android mobile wallet of choice on all Android devices sold by these companies, including Samsung. While we don’t know what that will look like yet, I would think that it will be easier to load and provision an Android Pay wallet sold by these companies and that will be a challenge [for competing wallets].”

Google’s ability to wed Android Pay with the smart phone’s operating system also may give it an advantage over Samsung Pay, Peterson says. “That said, [Samsung Pay] may have a real opportunity in other markets where Apple is much less dominant.”