Shazam And Adaptive Payments Unveil PIN-Debit Acceptance on Smart Phones

One week after announcing it is testing dual-message PIN debit, the Shazam debit network said on Tuesday it will introduce later this year a product that will let merchants accept PIN debit transactions on smart phones. The product, developed by Fort Lauderdale, Fla.-based authentication-technology vendor Adaptive Payments, comes as networks like Shazam are looking at ways to introduce PIN debit into more environments in the wake of major new rules regulating debit interchange and transaction routing.

With the new product, which Shazam will roll out by late September or early October, merchants with properly equipped iPhones can offer consumers the choice of paying with a credit card or with a signature- or PIN-based debit card, the first time the PIN option has been offered on a mobile device, according to the network. Consumers enter their PIN on their own mobile phone after swiping their card through a cradle attached to the merchant’s phone. This so-called out-of-band authentication divorces the PIN entry from the transaction device, which some experts say keeps the PIN safe . “The real innovation is PIN debit via out-of-band authentication,” says Terry Dooley, senior vice president and chief information officer at Johnson, Iowa-based Shazam.

At the same time, the form-fitted cradle, which also charges the phone and indicates whether it has a cellular signal or not, contains a mag-stripe swiper that encrypts transactions at the read head using the Triple-DES protocol. The reader comes from ID Tech, a Cypress, Calif.-based maker of card readers and PIN pads. Pricing for new Shazam service has not yet been announced, but Dooley says a version for Android-powered phones will follow shortly after the rollout.

The service relies on a platform developed by Adaptive Payments known as Pentagon. Ralph Bianco, chief operating officer, says the company is in talks with other networks and banks about using the service. Both banks and merchants are looking to accept PIN debit on mobile devices, he says, because it is subject to significantly less fraud than signature debit. Fraud losses on signature debit were 7.5 times greater than the losses on PIN-debit transactions in 2009.

That advantage has taken on renewed importance with pricing restrictions imposed on big banks by the Federal Reserve that set interchange rates at the same level for both types of debit. The new rules, which slash interchange on average by more than 40% for banks with more than $10 billion in assets, take effect Oct. 1. “Issuers don’t have a lot of interchange to cover fraud losses,” Bianco notes.

Merchants, too, like PIN debit’s lower chargeback costs, according to Dooley, who says merchants have been telling Shazam they want to “drive down the fraud” they see linked to electronic transactions.

Some observers welcomed Tuesday’s announcement, pointing to a need among mobile merchants to accept PIN debit. “It’s about time PIN debit is considered in the mobile-acquiring space,” says David Fish, a senior analyst at Maynard, Mass.-based Mercator Advisory Group who follows the acquiring business.

With the Pentagon platform, transaction messages flow first to Adaptive Payments’ servers, where the company matches them with the PINs entered by consumers through the separate mobile channel. The complete transaction set is then delivered to the Shazam switch.

The new mobile service is the latest in a string of PIN-debit developments announced over the past 11 months by Shazam, which has almost 1,500 member financial institutions and covers 30 states. Last week, the 35-year-old network said it is testing a dual-message PIN-debit protocol that it plans to introduce as an option early next year. PIN debit has traditionally followed a single-message protocol, combining authorization and settlement in one message. The new protocol splits these elements into separate messages so PIN-debit payments resemble credit and signature-debit transactions.

This development became especially important with the advent of PIN debit in new environments such as mobile and the Internet. Last September, Shazam announced it was working with three companies, including Adaptive Payments as well as Acculynk Inc. and CardinalCommerce Corp., to let cardholders use Shazam PIN-debit cards on retail Web sites. Dual-message transactions let merchants more readily handle cases, such as out-of-stock situations, where there is a need to separate authorization from settlement.

Shazam says it is also working with Adaptive Payments on a person-to-person payment solution. In January, the network announced it had made a “strategic investment” in Adaptive Payments, without disclosing the amount.