Smart Cards - Just Around the Corner

   Those of us old enough to have voted for or against George H. W. Bush for president may remember the anticipation 20 years ago over a technology that placed a small microcomputing chip right in a payment card. As that technology was adopted in Europe and other places we were told that those "smart" cards were coming our way. Right around the corner, we were told.

   I thought of that reading a lead story on the PYMNTS.com website this week. The article focused on   the release of a white paper on the implementation of EMV in the U.S. The paper was sponsored by Gemalto, a significant provider of EMV-compliant card solutions, with an assist by VeriFone, an equally significant provider of EMV- compliant POS solutions.

   Leaving the motivation behind the paper aside for a moment, it does provide some interesting insights into the EMV debate. Not the least of these are some suggested reasons the migration to smart cards and EMV will be different this time around, and by implication, why it's take so long to get here in the first place.

   Let me say from the outset: I have no horse in this race. I am neither a proponent nor an opponent of EMV, smart cards, NFC or mobile payments. Like most consumers, my bank sends me a card and I use it. I don't question the technology.

  What I do wonder, like most inquisitive people, is just who pays for all this new stuff. There's a great line in the Jerome Lawrence/Robert E. Lee play Inherit the Wind. Henry Drummond, the lawyer-protagonist, tells the jury in his summation, "Gentlemen, progress is never a bargain. You always have to pay for it." So assuming that EMV represents progress in payment systems, I wonder how it gets paid for.

   Give Gemalto props for a paper that brings together most of the salient points of the EMV discussion in one pretty tight package. Unfortunately, the paper blunts its main argument - that the stars are in alignment for EMV. It does so by relying on some less-than-dynamic logic. Such as the old chestnut that the American payment system is positively antediluvian. We're reminded time and again that "(m)ost of the world has fully migrated or is in the process of migrating to EMV chip technology..." Or, "(g)iven the prevalence of EMV chip technology in the rest of the world..." we lower primates here should get with the program, lest we keep scraping our knuckles on a worn path of magnetic-striped cards.

   I have relatives in Europe. When we get together I often quiz them about their banking and payment systems, from a consumer standpoint. Just to compare notes. Far from being a bunch of silverbacks, I think we do a pretty good job in payments over here.

   The Gemalto argument also relies too heavily on Visa's August 9, 2011 announcement of its carrot-and-stick approach to goose the adoption of EMV. The carrot is a merchant dispensation, beginning in October of this year, from having to validate compliance with the PCI Data Security Standard - provided three-quarters of a merchant's transactions originate from chip-enabled terminals.

   The stick is Visa's intention to shift liability for counterfeit fraud (in the case of a chip card presented for transaction to a merchant who has yet to install chip-reading terminals) from the card issuer to the merchant's acquirer. Ouch.

   But unless merchants upgrade their equipment to accept mobile contactless NFC payments as well as chip cards, they won't benefit from the carrot -  escaping the annual PCI compliance validation. So says veteran industry analyst Avivah Litan in another article. She also points out that even if merchant processors do get to go directly to GO and collect $200, they still have to have their compliance validated by other card brands like MasterCard, American Express or Discover.

   And while you can say you'll shift liability to someone else, ultimately that cost will be shifted to someone else. And we know who that will be.

   None of this is meant to diminish the security advantages of EMV over our current magnetic-stripe card system. But if you're pinning your hopes on the American payments industry being shamed into putting on a clean shirt and adopting EMV, or on merchants, card companies, and processors all playing nice in the sandbox, given the litigious and legislative history of the last eight years, we might not be as close to EMV as you think.

   So, while EMV and chip cards might be right around the corner, the road to that corner still appears pretty long and still filled with some formidable obstacles.

   That's my opinion. What's yours?

  
  

Can Carriers Recapture the Mobile Mojo in the Battle over Mobile Payments?

   Get the women and children off the field. The big boys are attacking. The war of the wallets--as in mobile wallets--is underway. Some of the biggest names in payments and mobile communications are engaged. As Amir Efrati and Anton Troianovski write in today's Wall Street Journal the object of the war is to settle once and for all who gets to control your money that you spend using your smartphone.

  On one side is a coalition led by Google that includes payment powerhouses MasterCard and Citigroup, as well as mobile carrier Sprint Nextel. They've lined up big box retailers like Toys R Us, Gap and American Eagle Outfitters to accept Google wallet payments.

   On the other side isVerizon Wireless. The largest mobile network in the U.S. is partnered with competing carriers AT&T and T-Mobile USA in a payment venture called ISIS. Their vision is a mobile wallet that consumers would use to make payments, as well as redeem coupons on their smartphones.

   Like many combatants, Google and Verizon were once allies. Verizon's marketing of smartphones that use Google's Android operating system provided a bulwark against its rival AT&T, which had exclusive marketing rights to Apple's game-changing iPhone until this year. Verizon and other carriers were enormously successful in pushing Android into the market place. Today Google's Android is the leading mobile phone operating system, installed on more than half of all smartphones sold worldwide.

    However, Google tried to change the rules of the game itself last year when it marketed its own phone, the Nexus One directly to consumers, in competition with the carriers that had helped make Android a success. But its effort to smash the American mobile market model, where the carriers control consumer sales. failed. Google was forced to retreat on Nexus One.

   So now both sides are bogged down in negotiations that revolve ostensibly around security. Verizon says if Google's wallet were to be included on its phones it would need to be integrated into Verizon's hardware. But Google says it has its own "Security Element," a chip that limits access to your security information to only those trusted programs on the chip itself.

   But my first rule of business is that everything in this world comes down to money--in this case, yours. So the security issue is a proxy for the real battle, which is who gets to own you, the customer, and your  money. Karen Webster, in a post on pyments.com, writes that the dispute may "be about security, certainly, but is also about control--control who has access to [the] customers and the services they are provided."

   Efrati and Trioanovski are more blunt. They say that the standoff between Verizon and Google is an example of how mobile carriers have lost control of the content that their phones deliver. The iPhone saw to that. Developers who pump out apps like Angry Birds and word games seem to have more influence over consumers than the carriers who have those consumers locked into contracts. So the carriers, say Efrati and Trioanovski, have chosen the mobile wallet as the battlefield where they will make their counterattack to recapture that control.

   For now Verizon and its allies seem content to sit on their massive retail networks and begin trials for the ISIS concept next year. Google and Sprint, on the other hand, seems to be relying, for now, on the creative destruction of the market place to vault it to dominance. Its goal is to make Secure Element the de facto standard for near-field communications, writes Webster. If Google's planned acquisition of Motorola's mobile business goes through, expect to see Motorola phones featuring NFC, according to Efrati and Trioanovski.

   Webster believes that the flaw in all of this is that regardless of who wins the battle, a carrier will remain the gatekeeper that controls your access to your money and how you make mobile payments. The third rail here might be a cloud solution, she writes, where your mobile wallet can follow you regardless of which carrier or communications technology is involved. 

   At one time in the U.S. the standard was that your mobile number went with your phone and your carrier, rather than with you. It took some intervention to change that thinking but today I have the same mobile number that I've had with three different carriers. The question is whether there is enough creative-destructive force in the universe to drive the mobile payments away from carrier-based solutions to the Cloud. One thing is for certain: Just like with number portability, there are probably regulators and multiple committees in Congress that would probably be willing to help the carriers figure all this out if they can't do it themselves.