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Note to Payments Innovators: You Need a Value Proposition!

posted by Adam Levitin

The past year has seen two notable innovations in the payments world and a third is coming down the pike.  ApplePay was rolled out last spring, the EMV liability shift went into effect on October 1, and the Fed has convened a task force on designing a faster payment system.  All three of these developments seem unlikely to result in major changes in payments unless they come up with a clear value proposition for consumers, merchants, or both. 

It's far too early to reach final conclusions about any of these projects, but the initial reception of ApplePay and the EMV liability shift suggests that neither is getting much traction.  ApplePay appears to have very low adoption rates so far:

“People don’t know why it is they’d use Apple Pay,” Jared Schrieber, CEO of InfoScout, told Bloomberg. “They are satisfied with the current methods and they don’t know how Apple Pay works.”

Yup. The consumer value proposition in ApplePay (and other digital wallets) is really limited. Sure, you look cool paying with your phone, but if you're like the woman in front of me at Whole Foods this summer, you're going to get very frustrated when it takes a minute to get ApplePay to work.  (I was ready to tell her to write a check.) ApplePay doesn't currently offer significant benefits over paying with traditional plastic cards.  

What about EMV? The EMV payment card liability shift went into effect last week, on October 1. Traditionally, card issuers were liable for fraud on card-present transactions (where the physical card is used in the store).  The EMV liability shift is a change in card network rules that makes merchants liable for card-present fraud if the the transaction is done with an EMV-chip enabled card, and the merchant does not use an EMV card reader to verify the authenticity of the card.  Thus, issuers remain liable for card-present fraud if the card is not EMV-equipped or the merchant uses the EMV reader.  

Card issuers have begun issuing EMV-enabled cards, and I've been seeing EMV-enabled point-of-sale terminals at some merchants, but so far I have yet to encounter a merchant (even those with readers) that would allow me to use the EMV reader on a transaction.  I have been going to an admittedly non-representative sample of merchants--grocery stores, convenience stores, dry cleaners, gas stations--and not to big box stores where card-present fraud is likely a bigger issue (e.g. BestBuy). But at this point I'm wondering if the EMV technology is a story of a party no one shows up at.  

If I'm right, it's probably because once again the value proposition for a lot of merchants isn't clear. Card-present fraud isn't the major credit card fraud problem in the US. The problem is card-not-present fraud, and EMV does nothing to address it. (Even if the reader is used, merchants are worried that the card issuers will finagle a way out of liability with the complex network rules.) So why would a merchant invest money up-front in EMV-card readers, when the savings are small and uncertain and stretched out into the future? Still, I'm puzzled why stores with EMV readers aren't using them, as they've already made the investment. Perhaps they are concerned about the effect of slower transactions--resulting in some abandoned carts. 

And that brings us to The Payment System of Tomorrow:  Today!  The Fed is moving full-speed ahead on developing a faster payment system. But very few consumers actually need such a system. For all the complaints about our dated mag stripe card payments, they work really, really well. It's hard to come up with a clear value proposition for any replacement. But in our Silicon world in which newer=better, we're going to keep spinning our wheels on new products that lack convincing value propositions, and then wonder why no one adopts them. Query why more venture capitalists haven't figured this out and keep throwing money at every payments start up they can find. 


I've had one personal experience at an EMV terminal recently -- I think at a national grocery chain. This involved an additional bit of weirdness not discussed in the story. The terminal first asked me to swipe the card in the normal manner, then asked me to reinsert the card in a different slot that read the chip. The two-step process adds a bit of extra time to the transaction (those bits of time would add up in a busy location) and is unnerving to the customer, who may briefly wonder if his card is not working or will be charged twice. I'm not sure if this is some kind of transitional terminal design or is going to be what we will end up with. It would be strange if we cannot create a terminal that can read both the mag stripe and the chip in a single swipe or insertion.

Not sure you can say that EMV is an 'innovation' that is the USA catching up to the rest of the world. EMV is 20 years old!

Come on America catch up to the rest of the world.


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