Building Fintech's Future
This story appears in the April/May 2016 edition of ISO&Agent. See the full issue here.
Annmarie “Mimi” Hart, CEO and chairman of MagTek in Seal Beach, Calif., has a vision of the payments industry that may seem more like the plot of a Star Trek script. But that sci-fi vision happens to be coming true.
Back when a mobile wallet was still an uncertain concept and the EMV migration was just beginning, she was already looking ahead to the next phase, when consumers would be making payments through “Dick Tracy” style smartwatches that they could talk into much like Captain Kirk would talk to the Enterprise. And, eager to live in that future, she wore such a watch years before the Apple Watch debuted to kickstart the wearable payments movement.
As exciting as it may be to sprint into the future of payments technology, Hart’s philosophy has also kept her company grounded in reality. EMV hardware may be a source of revenue for her company, but Hart does not overpromise the level of security it provides. She has been just as critical of point-to-point encryption.
MagTek’s name may seem anachronistic in a world where the major tech initiatives are all pushing to bring payments beyond the magnetic stripe, but Hart and her company have built a reputation and a network of relationships that has promised it a seat at the forefront of new developments. Hart has been recognized three times by PaymentsSource as one of the Most Influential Women in Payments.
ISO&Agent recently connected with Hart to discuss her opinions on the past, present and future of payments. The following is an edited transcript of the conversation.
ISO&Agent: What are the most important accomplishments our industry has achieved in the past few years and why are these at the top of your list?
I believe the biggest accomplishment our industry has achieved is mobility—taking payments and untethering them from the counter.
This has fundamentally changed the payments business.
ISO&Agent: You predicted for years that consumers would eventually demand a “Dick Tracy style” wristwatch computer for tasks such as payments. What other types of innovative products would you expect to see in the future?
We will see more wearables, whether it’s a wristwatch or something around my neck or something on my clothing. I also think we’ll see things like edibles, implantables and injectables. Today, we put microchips in dogs so if they go astray and get lost there’s still a way to contact the owner. You could conceivably do that to a human being as well. It sounds far-fetched, but these are technologies that are available today.
I could choose to allow something to be implanted in me that would identify me and automatically bring up my payment information when I’m making a purchase. I believe this type of thing will become available, but not within the next five years. It may happen in the next 10 to 15 years though. Of course, it will have to be with the consumer’s consent. No one should be forced to have an implanted chip in order to make a payment.
A more imminent change I believe we’ll see is the ability to use mobile devices for all steps of the payment process. This will make the process simpler and faster for the consumer. POS terminals won’t disappear, they will just change form. For example, I will be able to pay with my phone using souped-up wireless technology and beacons. Customers won’t have to tap or touch something on a traditional POS terminal to make a payment. We can move away from the lineup, funnel and finish payment mode. All that space that’s now used to queue us up for payment can be turned into selling areas, or maybe socialization space depending on the clientele and their preferences.
I also think we’re going to see a major return to voice recognition. Right now we’re very focused on text. We have a whole generation of people that do everything by their thumbs. However, voice is a more a natural way of getting things done. Imagine going into a McDonald’s and instead of interacting with a touch screen, a person could speak her order of two cheeseburgers, French Fries, a Coke and a Pepsi. The computing system at the POS would recognize the customer’s voice and acknowledge the order. It would then be prepared by workers in the kitchen and delivered to the customer. The customer could then verbalize that she would like to pay with her Mastercard and the voiceprint could be authenticated. This type of transaction is much more natural than texting. The voice as a way of doing business—instead of having to interact with keyboards and displays—will be something that we will see more of in the next few years. We’ll get to know more of the Siri and Alexa types.
ISO&Agent: Give us your vision of what you think the payments space will look like in 10 years.
One of the things about payments is that we never end of the life of anything. Despite efforts, we can’t get rid of pennies, for example. Thirty years ago, everyone said we would be living in a checkless society, but we still use checks. Payment is really a matter of convenience. Checks, for instance, are convenient in certain contexts, like making payments to charities or the IRS.
Because payment is all about convenience, I don’t believe there can or will be a one-size-fits-all model. It’s not that everything will be mobile, or everything will be phone-based. There won’t be an exclusive way to pay because there are too many other ways of paying that are convenient within their context. Like my check example.
Another huge improvement will be expanded use of dynamic payment data. Static data is responsible for breaches, not the transport mechanism. We will soon see cards and devices that are stripped of sensitive personally identifiable information and are able to generate digital payment tokens that change with each swipe or tap. We will enter an age where PANs no longer appear on cards or phones or wearables; only non-sensitive “seeds” will be present on the payment-initiating device. The seed value will be useless by itself. The one-time-use feature of tokens generated by digital seeds will greatly alleviate skimming and siphoning episodes, which means we can truly contain counterfeit and card-not-present fraud.
We will also see the rise of at least one more brand, maybe two, that will offer to deliver a different type of payment platform than exists today. I believe this company will have a product that is simple, speedy, safe and sensible. It will have the backing of a financial institution and it will cause the existing brands to look at their business model and make some adjustments. That company with a better mousetrap is going to come along because we’ve made the payment system too complex, too pricey and too burdensome for merchants.
ISO&Agent: Let’s talk about contactless payments. Where do you see the future here?
Over the next few years, wireless technology is really going to take off. And the technology that becomes most readily adopted will not rely exclusively on NFC, which is power hungry and requires that you be within about four centimeters of a terminal. I think the future will be an untethered wireless communication system that doesn’t depend on being within a certain proximity to a terminal.
We’re not quite there yet, but I think we will be in about two or three years. The consumer will definitely make a conscious decision to pay. So it’s not as if just walking by a beacon will accidently send your payment data over the air. And consumers will definitely opt for contactless over contact EMV because of the speed you get with wireless. Tapping and swiping are virtually equivalent in terms of speedy transactions, but “dip the chip” means you have to leave your card in the slot for 20 to 30 seconds or more. That’s clunky. There are ways to make payments more secure without making them less convenient. That’s an improvement worthy of investment.
ISO&Agent: Other countries like Sweden and Denmark are well on their way toward a cashless society. What do you think it will take to bring the U.S. to that point and how long? Will we ever get there?
While it may work in smaller countries, the U.S. is a much bigger country with a much different mindset. We value our privacy too much to let get cash go completely by the wayside. It’s a remarkably convenient exchange mechanism, which makes it more unlikely that people will give it up completely. We may see cash go away for large-value transactions, but for small denomination transactions, cash is simply too convenient to go away completely.
ISO&Agent: We talked about what was happening in Sweden and Denmark with respect to becoming a cashless society and how you don’t think it would really take hold in the U.S. Are there things ISOs and acquirers can glean from how payments work in other countries that might take hold here and if so, how can ISOs and acquirers best prepare for these changes?
Countries like Sweden and Denmark are considerably smaller, less democratic and have far fewer financial institutions than the U.S. Americans are very choice-conscious and very convenience-oriented. They don’t like change or inconvenience. They are suspicious of mandates, especially ones that cede control over money and threaten their right to privacy. Cash is plentiful, negotiable, anonymous, final and trustworthy. But it, too, has drawbacks. It has hidden costs not generally considered by merchants—like counting it, transporting it and protecting it from theft. So ISOs need to look for ways to help merchants take less cash, but not to demonize it. Most payment alternatives are always measured with cash as the yardstick. Is a prepaid card as convenient as cash? Can I use it in as many places? Is it as difficult to counterfeit as cash? Does it have the full faith and credit of the U.S. government behind it? And so on. So cash—just like plastic cards—will be around for decades to come because of its undeniable usefulness.
What we have seen in developing countries is the power of the phone as a wallet—instead of cash—and the ability to take a payment or make a payment with very little infrastructure needed. When you’re building from scratch, you don’t need ATMs or brick and mortar branches if you can give a consumer an easy, ubiquitous, safe way to move money between consumers and businesses or other consumers.
The digital movement of money in many different channels is something ISOs can prepare for and guide merchants on how to accept these new forms of payment. We are going to see consumers swipe, dip, tap, scan, glide, type, nod or wink—these are many different ways of signaling that they are intending to pay. With all those choices consumers and merchants will need a lot of education and coaching from astute ISOs on how wallets and payments will evolve. That complexity gives rise to ISO opportunities for more consulting and selling.
ISO&Agent: Our industry tends to loathe additional regulation, but are there any areas where you believe additional regulation or guidance would be helpful?
I really believe we have too much regulation as it stands right now in the payments space. For example, merchants are getting buried under documentation that’s four feet high and vendors have a much too lengthy and complicated certification process. We have instituted layer upon layer of rules and the net effect is that there are not as many players in the marketplace. In many cases the regulations are too burdensome, making it difficult for new players to enter. If we relied on the competitive spirit more and the idea that people will vote with their pocketbooks and their feet, rather than relying on regulation, we’d be much better off as an industry.
ISO&Agent: How has increased regulation specifically affected the ISO industry?
In some cases, ISOs are being squeezed out of the business by regulations like Operation Chokepoint. For several years now, they have had to accept lower interchange rates because of Durbin, which has put pressure on profits. It has been difficult for many ISOs to stay on top of all the changing regulations, but they have to so they know how it will impact their business and they can adapt accordingly. Regulation has weeded out many players since tens of thousands of pages of regulations make it harder for them to be profitable. In my view, companies have to adapt or die and this, not regulation, should be what ensures the survival of the fittest.
ISO&Agent: Without getting into specific products, do you think the promise of biometrics is overblown? Why or why not?
Although I talked about implantables earlier, I believe the promise of biometrics is totally overblown. Consumers already know about the data breaches affecting Target and many other large companies. They’re protective of their data—and rightly so. Accordingly, many consumers don’t want to give their fingerprint or their iris scan or DNA or saliva for the purpose of making a payment. They want something that will provide them more protection than a password, but they don’t want to give a drop of their blood. They feel it is too invasive and not worth the risk. Once personal biometric data has been provided, a consumer has no way to get it back.
Of course, there are consumers who would be happy to give up this personal information and a bit of privacy for the sake of making payments or performing other transactions without having to carry a device or remember a phrase. However, I don’t think they’re in the majority. We cannot make biometrics a requirement of payment. That would be a grave mistake. We’ve got to be able to offer the consumer a way to pay that strikes a balance between ease of use and intrusiveness, and I think that balancing point is best determined by each consumer.
ISO&Agent: Are there any mistakes you’ve made over your career that could provide a useful takeaway for ISOs and acquirers?
Over the years, I learned to never underestimate the power of the incumbent. So many of us in the industry have ideas about how we could change payment processes and activities, but it’s a daunting challenge. You have to have a very good understanding of the intricacies of the payments system before you can hope to change it. A lot of people look at payments in a simplistic way, thinking they can introduce something novel and frictionless. They don’t necessarily understand all the players, the dependencies and the politics, and they underestimate the complexity of all the moving parts.
ISO&Agent: What do you think is the biggest challenge ISOs and acquirers are facing today? And why do you feel it’s the biggest challenge?
There are shrinking margins, new competitors and changing regulations all the time. The squeeze is on from all directions. ISOs will have to find ways to differentiate themselves. They have to get away from the notion that it’s all about payments.
Payment is only a small part of the consumer experience. I don’t wake up in the morning and think about what I am going to pay with today. I do, however, think about what I need to buy and the steps I’m going to take throughout my day to accomplish this task. In my head, I might think about 10 different things related to the buying process—how much I’m going to buy, when I’m going to do it, where I’m going to go, for example. But the act of paying is only one of the 10 things. From a practical standpoint, ISOs need to develop ways to facilitate the buying process, recognizing that payment is just a piece of the equation. It’s not the whole thing as many in our industry mistakenly believe.
ISO&Agent: How can ISOs and acquirers make an impact with Big Data?
Big data is all part of the notion of delivering value to the merchant that goes beyond payment. Big data can be used to help merchants with cash flow forecasting, product trending, discount timing and more. Big data offers opportunities for ISOs to partner with companies that do it well, package it and resell the services to merchants as part of their value proposition as consultants. It’s another way ISOs can expand beyond payments. They have to be pulling together all the other value-added services that they can deliver to the merchant.
ISO&Agent: How can ISOs and acquirers best meet the challenges they will face over the next few years?
ISOs need to be knowledgeable about technology and the other services they are offering. They need to embrace a broader role beyond hardware salesman and focus on specialization and packaging things that are not necessarily in the payments space currently. Things like better working capital and industry-specific analytics.
They also should provide things that will help the merchant not only sell, but also bond with the customer—like rewards, loyalty points and special offers tailored to the customers. Some ISOs are starting to move in this direction, but more will have to follow suit if they want to survive in this space.
ISOs can’t expect to drop a box on a merchant’s countertop and walk away. They have to deliver more value to the merchant. This all starts with the critical understanding that payment is not a standalone business. ISOs have to make a more concentrated effort to help the merchant provide a better customer buying experience.