Dear Fintech Genome People: a hard QUESTION.
-> Why are iZettle (in Europe) and Square (in the USA) so successful?
-> Why is the hardware (little square or little card reader) needed to turn a smartphone into a POS terminal?
-> Why are smartphones not turned into POS terminals without hardware extension (once they have NFC and most cards now - especially in Europe also have NFC)?
I am highly thankful for any answers, any thoughts!
Dear Fintech Genome People: a hard QUESTION.
The origins are different but both automate card data entry and establish “card present” pricing with the card schemes which is priced lower due primarily to lower fraud risk.
iZettle provides for chip and PIN user authentication where most debit cards in Europe were enabled for PIN only, without the possibility for manual entry. Thus, it enables merchants to accept EMV cards using devices that did not have secure chip readers and pin entry devices.
Square first solved for enabling merchants to “acquire” magstripe cards qualifying for card-present risk scoring. Users most often signed the screen to authorize the charge. Square now has an EMV reader and PIN entry device as well.
At least for Square, the transactions are routed via the hardware provider gateways making them the acquirer of the merchants’ transactions.
There are very strenuous requirements for PIN entry and EMV card/pin authentication. Ordinary phones and tablets are not designed to these standards.
NFC does open the possibility for low-value payments. Apple does not enable/allow payments using NFC esp with third party apps. Other hardware makers allow NFC based payments, but there are very strict rules around creating and delivering card credentials to a phone for payments. The major card schemes are providing this tokenized card data a service to card issuers.
Dear Rod, Thank you so very much for your amazing answer! This teaches me a lot and makes me understand the situation much better. I am HIGHLY THANKFUL to you and also to the creators of FinTech Genome!
Thanks a million,
hi @Rod welcome to Fintech Genome and thanks for a very thoughtful reply. I am a little knowledge is a dangerous thing in this space, so take this for what it is worth. My impression has been that NFC has been forecast as a disrupter for ages and yet here we are still forecasting it…If NFC just makes it a tad quicker to pay by CC, it is a minor convenience not a game-changer. If it enables bypassing the CC rails, that is a game-changer. Which is it do you think?
What impresses me about Square (don’t know Zettle so well) is how they can do both Card Present (offline) and Card Not Present (online). It is the combo that gives them cash flow view per merchant that is critical to financing. Methinks financing is the pot of gold?
Thanks for your reply. I will attempt to persuade you on NFC. There are two radically different perspectives, markets with EMV chip and PIN and markets without it.
- NFC offers a significant speed improvement, >3x, and convenience over pure EMV chip and PIN. This requires issuers and acquirers to adopt/adapt and migrate. An impediment to change for markets with chip and PIN is the need to coordinate any additional card services supported by the cards and POS devices (i.e. Giro, ELV, ID)
and find the party (s) willing to pay for the convenience. We made this move in Czech Republic over a couple of year with more than 50% of transactions using NFC by the end of 2015. Merchants and consumers were eager to adopt this game-changing tech.
2). Markets that continue to support card swipe and EMV with signature enjoy a relatively quick and well practiced workflow at the point of sale. Thus, I posit that chip and PIN debit in the US will eventually migrate cardholders to NFC or Credit Cards that continue with chip and signature. This distinction will split by merchant verticals, restaurants need/want signature while convenience and grocery will go NFC.
There are examples of card based, account to account payments where NFC could be a natural step but would require another wholesale change of POS and issuer routing by participants that are not necessarily interested in the disintermediation of cards. However, most probably we are heading straight to the mobile or other proximity devices where we will pay in a single step interacting with merchants and our accounts using any number of approaches to accounts of the payer and payee.
Agreed re financing…and broadened to “risk”. Merchant acquiring pricing is all about risk as is credit to merchants and consumers.
It is going to be fun!
Thanks @Rod Got it, makes sense. America is the big one AFAIK that is doing Chip and Signature because although that is less secure it does not require any user behaviour change. So if NFC can be both secure and easy then it will take off.
If apple and the other device vendors had started or placed nfc focus on Europe, mobile NFC would be well ahead. But, new interchange Fee regs did not fit with Apples pricing model and locking out app developers on apple devices did not sit well with Europeans. So they chose to change the acceptance network and consumer behavior in the US all at once. Easier to get issuers onboard in US with 80% credit card coverage in five interfaces and huge scheme support including free token issuance.
There are so many more layers to this onion.
Where are you located? Our paths might cross some day soon. I am in USA from today til aug 1st. Then back in Prague.
hi @Rod First re location, I am based in Bern, Switzerland, but I am going to be in NYC Wed this week and Mon-Wed next week. Where in USA will you be?
I agree, it is a complex onion. I am not a payments expert, I just think the switch to EMV and maybe NFC creates opportunity particularly while Bitcoin adoption is accelerating may change the game, a theme I explored a few years ago here:
The CC networks are very powerful at stopping change, but crypto also looks like an unstoppable force. Interesting times!
Thought you would appreciate this article out today:
Thanks @Rod Anecdotally I have found more vendors refusing paper/coin. Nor do they want Credit Card due to fees. So future is either Debit Cards or Prepaid on phone. The latter is taking off like a rocket in countries like India. Makes sense as one can be offline. All in all it does not bode well for the CC networks.
Account to Account (PSD2 payments) will hit the card penetration inside of five years, in Europe. Rest of world still has high interchange so merchants have to live with it for now. It will be interesting to see card and direct payment offers compete with one another through rewards and convenience. It will eventually go back to a discount model for loyalty but most probably driven by individual merchant offers to consumers not payment method driven….and 10 years in the making.
Prepaid mobile accounts already won the battle in underdeveloped markets.
Hi @Rod Thanks that is very valuable. That first statement “Account to Account (PSD2 payments) will hit the card penetration inside of five years, in Europe.” is pretty stunning. What is the data backing that up?
There is no data that could back it up.
Hypothesis is based on the general rule that new tech, especially pmt transition, takes 10 years, i.e. Plastic to mag stripe and MS to EMV.
But acct to acct is not new and is further mandated with ubiquity and pricing equilibrium that should at the very least be familiar and competitive. What could possibly go wrong?..fraud?
Would be faster but market and tech has to catch up and scale at least on the front end.
Makes sense. Opportunity calls when data is still murky