Standing in line at Starbucks, customers are presented an array of options beyond just flavors and foam: They can pay with cash, credit, debit, a Starbucks card or with their mobile phone in two ways.
That list is expected grow in the coming years, not only at Starbucks but at retailers around the country, and an enormous hacking of customer data at Target that was revealed five months ago has only intensified the pace of changing the way Americans pay for goods.
Usually, the conversation about where to go from here is presented narrowly, either in terms of the security of new cards, or perhaps the convenience of paying by phone. But behind the scenes, there are other issues in play, including the jealous guarding of customer data. And there is an enormous amount of money to be made, especially for businesses catering to the cash-free consumer.
“There is money at stake all around the room, whether it’s the banks and payment processors or the retailers,” said Suzanne Martindale, a staff lawyer at Consumers Union who specializes in payments. “It’s a battle between the two parties.”
Every time a customer pays with a credit or debit card, the retailer pays a fee to have the payment processed. According to the Nilson Report, a payment card trade publication, merchants in the United States spent $71.7 billion on these fees last year.
The most immediate change will occur with EMV, the technology that uses an embedded chip to protect against counterfeit cards, and can also require a PIN to keep thieves from using stolen cards. Widely used in Europe and elsewhere, EMV is considered more secure than magnetic strip cards mostly used in the U.S.
At the end of April, Target said it would speed up its introduction of chip-and-PIN technology on all its branded credit and debit cards and would be fully equipped by early next year.
Visa and MasterCard are pushing EMV technology and have instituted new rules that say retailers will bear more fraud liability by the end of next year if they do not have the capability to process such cards.
Some retailers are hoping that the move to EMV cards would lessen interchange and other processing fees, with more competitive and potentially cheaper networks that process PINs instead of signatures.
“Banks and networks for years have claimed that a significant component of interchange is the cost of fraud,” said Mike Cook, assistant treasurer at Walmart. “So one would hope with the investment merchants are making to implement EMV or chip technology, as fraud goes down, that interchange would go down.”
Several leading retailers, including Walmart, Target and Gap, have also banded together to form a group called the Merchant Customer Exchange, known as MCX, which aims to come up with a mobile payment system of its own.
MCX would allow retailers to circumvent the credit card companies, tapping directly into customers’ bank accounts.
Retailers said they would also then retain control of their customer data, rather than having to share it as they might if customers paid with a service like Google Wallet.
To attract customers, MCX plans to offer a loyalty points program to receive discounts on future purchases at stores including Banana Republic, Wendy’s and Kmart.
But MCX, which was announced nearly two years ago, has yet to unveil a working product. MCX declined to comment or to provide an updated timeline.
Chris McWilton, president of North American markets at MasterCard, pointed to failed efforts by mobile telephone companies to develop payment networks some years ago.
“The retailers are going to go through a similar experience if they try to create their own payment network,” McWilton said. “It’s not going to be as easy as they think.”
He also cautioned new entrants against underestimating the security risks.
“We get hundreds of attempted hacks a day on our network,” he said.
“We spend billions on security. Do you really want to play this game?”
That list is expected grow in the coming years, not only at Starbucks but at retailers around the country, and an enormous hacking of customer data at Target that was revealed five months ago has only intensified the pace of changing the way Americans pay for goods.
Usually, the conversation about where to go from here is presented narrowly, either in terms of the security of new cards, or perhaps the convenience of paying by phone. But behind the scenes, there are other issues in play, including the jealous guarding of customer data. And there is an enormous amount of money to be made, especially for businesses catering to the cash-free consumer.
“There is money at stake all around the room, whether it’s the banks and payment processors or the retailers,” said Suzanne Martindale, a staff lawyer at Consumers Union who specializes in payments. “It’s a battle between the two parties.”
Every time a customer pays with a credit or debit card, the retailer pays a fee to have the payment processed. According to the Nilson Report, a payment card trade publication, merchants in the United States spent $71.7 billion on these fees last year.
The most immediate change will occur with EMV, the technology that uses an embedded chip to protect against counterfeit cards, and can also require a PIN to keep thieves from using stolen cards. Widely used in Europe and elsewhere, EMV is considered more secure than magnetic strip cards mostly used in the U.S.
At the end of April, Target said it would speed up its introduction of chip-and-PIN technology on all its branded credit and debit cards and would be fully equipped by early next year.
Visa and MasterCard are pushing EMV technology and have instituted new rules that say retailers will bear more fraud liability by the end of next year if they do not have the capability to process such cards.
Some retailers are hoping that the move to EMV cards would lessen interchange and other processing fees, with more competitive and potentially cheaper networks that process PINs instead of signatures.
“Banks and networks for years have claimed that a significant component of interchange is the cost of fraud,” said Mike Cook, assistant treasurer at Walmart. “So one would hope with the investment merchants are making to implement EMV or chip technology, as fraud goes down, that interchange would go down.”
Several leading retailers, including Walmart, Target and Gap, have also banded together to form a group called the Merchant Customer Exchange, known as MCX, which aims to come up with a mobile payment system of its own.
MCX would allow retailers to circumvent the credit card companies, tapping directly into customers’ bank accounts.
Retailers said they would also then retain control of their customer data, rather than having to share it as they might if customers paid with a service like Google Wallet.
To attract customers, MCX plans to offer a loyalty points program to receive discounts on future purchases at stores including Banana Republic, Wendy’s and Kmart.
But MCX, which was announced nearly two years ago, has yet to unveil a working product. MCX declined to comment or to provide an updated timeline.
Chris McWilton, president of North American markets at MasterCard, pointed to failed efforts by mobile telephone companies to develop payment networks some years ago.
“The retailers are going to go through a similar experience if they try to create their own payment network,” McWilton said. “It’s not going to be as easy as they think.”
He also cautioned new entrants against underestimating the security risks.
“We get hundreds of attempted hacks a day on our network,” he said.
“We spend billions on security. Do you really want to play this game?”