Payments

08:00 PM
Bruce Lowthers
Bruce Lowthers
Commentary
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Redefining the US Payment System

How EMV, smartphones, and tokenization are changing the customer experience.

They say cash is king. If you're analyzing a company's spreadsheets, that might still be true. But in the consumer marketplace, cash is rapidly going the way of the cassette tape. Cards -- credit, debit, prepaid, private-label and co-branded -- are everywhere, direct money transfers are widely available to those shopping online, and smartphone payments are becoming more and more common. Soon, most of us won't even remember the last time we actually used cash to pay for something.

With that change in payment preferences, though, there comes a change in expectations. Where and how customers can access and control their funds is important. Security, particularly after so many data breaches, is extremely important. But what will truly drive customer behavior is the experience you offer them and your ability to customize it and make it personal.

[3 Keys To Making Payments More Secure]

EMV potential
Most of the world converted to EMV years ago because chip cards, particularly when used with a PIN, dramatically lower rates of card-present fraud and increase cardholder security. The microprocessor technology embedded inside the card also makes cards much harder to replicate when numbers are stolen -- particularly poignant in the wake of recent breaches at major retailers.

Though security is the driving force behind chip technology, the most promising opportunity may be the ability to help issuers personalize card use for consumers. Smart cards, in conjunction with data analytics and loyalty programs, can provide issuers far more information about consumer behavior, which can be used to encourage them to use a particular card at a particular time or place in order to drive loyalty and boost spending.

Consumers have come to accept that more and more data about them will be collected. In exchange, they expect that information to be used to provide them more useful, better personalized experiences.

For instance, analysis of transactional activity could help you predict when customers are facing a major life event -- to which your institution could immediately supply an answer, again, in the palm of their hand. For example, a customer using a bank credit card to purchase baby items might be interested in loan rates or other information about buying a home or a larger car to accommodate a growing family.

Mobile: A nonstop portal to customers
Mobile devices are reinventing financial services -- faster than ever. Your customers probably already can deposit money through a picture from their phones, pay bills, transfer money, possibly even access an ATM right in the palm of their hand. Merchants have individual apps that keep shoppers within their stores, track what they're shopping for, and drive them automatically to use their store's credit card.

Sales and use of mobile continue to grow, and most users carry their phones everywhere they go. That means "bankers hours" are gone. In order to stay competitive, financial institutions must recognize and adapt to this personal, anytime, anywhere form of commerce. To do that, it's important to focus on your core competencies -- holding money, moving money, and extending credit -- and consider how to deepen client relationships in those areas.

The good news is that, since they have their phones always on them, you have a nonstop portal to your customers. You can see what they're doing in real-time, respond to them instantly, and provide feedback that demonstrates your value to them. For example, as customers become less and less likely to use a checkbook, they are becoming more likely to rely on your website, text message updates, and other portals to track their spending and balances.

Security also can be a benefit of mobile commerce. Many mobile payment applications already carry data in the cloud, meaning none of a customer's card or payment information is stored on the device. That way, if a phone or other device is lost or stolen, it can't be used to steal such information. Secondly, most people will notice a missing phone much faster than they'll notice a missing payment card; this also shortens any period of risk.

Tokenization fills the gaps
To increase the security of mobile and online payments, many cybersecurity and payments experts advocate tokenization. Such a system creates a secure link between an actual payment card account and a unique identifier -- possibly a "pseudonumber," which transmits in place of an actual card number in order to keep the true number safe while remaining compatible with current POS and processing systems.

The goal of tokenization is to fill in the gaps from other security methods. For instance, EMV chip technology decreases the risk of card-present fraud but has limited or no effect on online transactions. Tokenization could be used to confirm a consumer when he or she performs an online transaction while preventing that consumer's information from being openly transmitted over the Internet, where the data could be stolen.

The best mobile wallets and apps carry consumer data in the cloud, but not all do. Tokenization could be used to transmit information for apps that are less secure, so consumer data can't fall into the hands of criminals.

The future is now
Enter an elevator today, and rather than seeing everyone facing the door quietly, you'll see every head down looking at a cellphone or other mobile device. Consumers already are accustomed to using their mobile apps and Internet sites to research purchases, shop, and carry on with their financial lives in the palm of their hand.

Ultimately, consumers want everything they have now and more -- more speed, more security, and a more personalized experience. Chip cards, smartphones, and tokenization all can be expected to play a role in making that happen. But it's up to you to keep up. Financial institutions that don't keep up won't last.

Bruce Lowthers is an Executive Vice President for FIS; he is responsible for the North American Card Solutions division, which delivers approximately $1.1 billion in revenue from debit, credit and prepaid card processing and ancillary services supported by more than 1,700 ... View Full Bio

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KBurger
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KBurger,
User Rank: Strategist
7/10/2014 | 11:03:22 AM
Re: Fragmentation
Interestingly, thanks largely to the Target card breach, the mag strip is finally being discredited in the US. The EMV chip capability that Bruce discusses has been widely used in Europe but has been resisted in the US largely because of the fragmentation everyone in this chain has noted. So it looks like if anything is going to possibly unite banks, merchants & card companies it may be around security -- but probably less because of great insight into consumer needs, and more because no one wants to be the next Target.
Byurcan
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Byurcan,
User Rank: Author
7/10/2014 | 9:47:34 AM
Re: Fragmentation
One of the main impediemnets to accomplishing this, is that since the U.S. is such a large country, there are so many competing bank/mobile oeprator interests. In smaller countries, where there's a few big banks that have most of the business, and/or not as many mobile operators present, it's easier to set up mobile payments schemes. 
ChrisMurphy
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ChrisMurphy,
User Rank: Apprentice
7/10/2014 | 9:37:56 AM
Re: Fragmentation
We need the smartphone equivalent of the magnetic card strip -- a technology that's universally accepted at point of sale that any financing provider can access. (Though, as long as we're dreaming, lets' make it a wee bit more secure than magnetic card strips.)
Nathan Golia
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Nathan Golia,
User Rank: Author
7/10/2014 | 7:51:57 AM
Re: Fragmentation
That's true — i just went to my local bagel shop and they have a mobile payment option, but I don't really see the utility of setting it up since this is the only place I could use it. They tried to eliminate credit cards in favor of it but it didn't take and so I can still use my card. Universal is good!
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
7/10/2014 | 6:44:11 AM
Fragmentation
There are many options for banks, as you point out, and mobile might be the most obvious one to jump on right now. However, the lack of consensus between banks, mobile network providers, mobile phone makers, retailers and so on creates a huge problem.

Many consumers would love to pay for things by waving their smartphone over a device, or transmitting a payment from their e-wallet of choice. The problem is, however, that without any clear direction from all of the parties in the payments chain, customers don't know what to do. Even if they have an e-wallet, they still need to carry cards for most of the retailers who don't offer any of the new types of payments in their brick and mortar locations.

Do you see any movement (in any direction) that would give customers some guidance? When will banks/retailers/mobile players start to align?
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