The electronic point of sale (POS) terminal has been working hard for us for many years, securing card data on its way to processing when we make in-store purchases. For this workhorse technology, innovation has seen slow adoption.
In this article, we’ll focus on the US market and look at current events that may show we are on the cusp of an innovative step change, particularly for mobile POS terminals. We will also venture a couple of predictions.
US ADOPTION OF MOBILE POS TERMINAL PRECURSORS
First, let’s take a quick stroll through the history of selected POS terminal innovations that led to today’s mobile POS terminals.
Magstripe: The first magnetic stripe card POS readers were introduced in 1979, more than 50 years after the “zip-zap” machines that imprinted embossed card data onto carbon paper.
EMV chip: 1996 introduced the EMV standard (short for Europay, Mastercard, and Visa), and in 1999 we saw the launch of EMV chip readers globally. The US sat out the initial launch of chip and broadly implemented EMV in 2015, forcing it via the EMV liability shift, where fraud risk was assigned to non-compliant links in the payment value chain. Year 2000 upgrade fatigue and a large merchant lawsuit against Visa and Mastercard were key factors in the delayed US rollout.
Contactless cards and terminals: Contactless cards from Visa, Mastercard, and AMEX and the corresponding readers are advances on the EMV chip card and were launched globally in 2007-2008. The US is still struggling to make contactless ubiquitous but has had a sharp increase in adoption during the COVID-19 pandemic.
Digital card-based wallets: In 2011, Google launched Google Wallet and Android Pay, followed by the Apple Pay wallet in 2014. Shortly after, contactless payments were integrated into wearables as well. Adoption is rising but still has significant room for growth. This technology is still facing headwinds from the slow adoption of contactless terminals.
NO-TOUCH PAYMENT IN STORES
The push towards no-touch payments induced by the COVID-19 pandemic increased their penetration and crystalized them into three main types of experience:
First, NFC-based contactless got a significant push, enabling the use of both contactless cards and digital wallets like Apple Pay and Google Pay in stores. Many merchants have had their terminals updated to enable contactless payments.
Second, QR-code-based mobile wallets without NFC capability. Notable contactless holdouts with huge footprints, such as Walmart and Kroger, went with a different approach, using their own QR-code-based apps and mobile wallets – aptly named Kroger Pay and Walmart Pay. These are in fact app-based card-on-file wallets that process payments as e-commerce.
Amazon is enabling both approaches in their physical stores, i.e. Whole Foods, Amazon Fresh, and Amazon Go. These had already supported NFC contactless, and they are rolling out QR code payments in stores using their Amazon.com payment credentials. Whether this will continue to be card-only or include the ability to pay by bank account (ACH; Automated Clearing House), like the Amazon online experience, remains to be seen.
Third, buying online (from the mobile) while in a store. Despite higher transaction fees, some merchants are starting to encourage buying online in their stores, with consumers ordering from their mobile phones/apps and picking up their order on the spot. Some examples are Starbucks, McDonalds, and Chick-fil-a, who offer a hybrid experience where mobile ordering and payment is one option, together with in-store kiosks and human cashiers. Chipotle is taking it a step further, also experimenting with mobile-order-only restaurants, where staff at most assist customers with placing orders online.
THE NEXT BIG THING?
We are focusing on the card-friendly US for this article, so we will gloss over the various cardless wallets, QR-based systems or faster payments-based systems taking over Asia and Latin America, not to mention central bank digital currencies (CBDC).
In the US, one candidate for the ‘next big thing’ in the POS terminal space is moving to commodity hardware and leaving behind the clunky terminal. Everyone has an NFC-enabled, 4G/5G/Wifi-connected, fast, secure, advanced computing device in their pocket that is constantly evolving – their iPhone or Android-based mobile phone – so why not use it to take card payments?
Well, the payments industry has been experimenting with this idea for a while now, with standards such as PCI SPoC (Secure PIN on COTS), which defines the security requirements for a COTS (commercial off-the-shelf) device to capture PIN numbers. Notably, it does not allow the device that accepts the PIN to also read the card data via NFC.
Then there’s the PCI CPoC (Contactless Payments on COTS), which defines the security requirements for a COTS device to be allowed to capture NFC payments. It does not allow the same device to capture the user’s PIN. See a pattern?
The news this year is that PCI has a new standard, Mobile Payments on COTS (MPoC), which is in the industry request for comments stage. It is said to be an evolution and unification of CPoC and SPoC, bringing more flexibility to contactless payments on off-the-shelf devices by allowing the same device to gather the contactless data and accept a PIN.
This could allow hundreds of millions of phones to accept NFC payments, via cloud/app-based solutions, virtually overnight and without further hardware. Needless to say, this could have a transformational effect on the industry.
Nonetheless, the forces both for and against phones being used for taking payments are significant and, in my opinion, it is hard to predict an immediate step change.
Headwinds to adoption include market fragmentation, the significant investments already in place, consumer inertia, and the need for a very significant penetration of new payments tech to allow the average consumer to fully participate. In addition, competing emerging technologies, such as online payments in the store, QR-based payments, Open Banking, real-time payments, crypto/CBDC, could also push down adoption. On the other hand, the ubiquity of phones and a potentially great customer experience could provide significant tailwinds to adoption. What do you think is the future of this technology?
Let’s zoom in once more on the 60% of the US market that has an iPhone. Another piece of slow-motion news is Apple’s projected entry into payment acceptance. They acquired Mobeewave back in 2020 and have been hard at work integrating their tech into the iPhone. The resulting ‘Tap to Pay on iPhone’ has been announced as an initial partnership with Stripe, launching in 2022. It will be fascinating to see Apple enter a new industry where they can leverage the outstanding market penetration of the iPhone in the US, together with their solid reputation for good UX and security and privacy.
Apple’s other fintech venture, the 2019-launched Apple Card, is still working up its market share, but it has a cult following. Where other cards compete on perks but feel opaque and have a dated user experience, the Apple Card pushes transparency and ecosystem integration. It feels like a digital service that happens to have a backup physical card. The revolving CVV, lack of card details on the physical card, notifications and other security features make it feel secure. Apple Card aims towards financial inclusion, particularly towards the young (easy application, consideration without hard credit pull, skipping a secured card while building credit), while also appealing to the high-end market with the titanium card and Apple positioning.
A similar philosophy, applied to Tap to Pay on iPhone, could have interesting implications:
Financial inclusion: enabling micro-merchants and sole proprietors to move away from cash in a secure and trusted way. Pay your neighborhood plumber for that emergency fix or your neighborhood baker for that fresh loaf – you don’t have to reach for anything other than your card or phone.
Ecosystem plays: once a merchant enters the Apple ecosystem, one can imagine business financing and business Apple Cards as easy next steps based on Apple and partners having access to their financial data.
With Apple entering what was an exclusive Android space in downloadable Tap-to-Pay capabilities, some might worry that they will steal market share. To the contrary, it will likely be the spark that truly takes the capabilities mainstream (like how 5G mobile was adopted in the US), and the uptake will lift up both camps.
No matter the front runner in the adoption race, the boost of R&D dollars from both sides will create a big winner in the consumer and their card acceptance experience.