The digital payments revolution still trips on its legacy roots
The COVID-19 pandemic was a clear incentive for advancing contactless and digital payment technology — but the systems merchants put in place today could create new problems down the road.
Payments providers expect consumers to increasingly rely on digital payment channels and demand more payment options at the point of sale in the future, according to recent research from the Secure Remote Payment Council. But the processes, standards and coding that retail merchants have in place now do not always easily adapt to the contactless and digital payment wave.
The council fears that antiquated systems will affect funds movement, and the demand to onboard new customers will put excessive pressure on legacy systems.
The Secure Remote Payments Council, through Avenue B Consulting, conducted a series of phone interviews with industry experts this year to determine the most pressing post-COVID issues for retail businesses and debit network processing as well as concerns regarding customer behavior, system technology and security.
The research cited the increase in consumer desire for contactless payments, noting that it may come at the expense of longtime security processes.
"There is a lot of activity in the marketplace to try to make sure there is a sanitized environment when it comes to point of sale or ATMs, and there is a movement to configure screens on POS terminals to get rid of a confirmation tap or pressing a button to start a transaction," said Paul Tomasofsky, executive director of the Secure Remote Payment Council.
The shift could thrust some technologies — such as QR codes, which in the U.S. had been used as a stepping stone to NFC contactless payments — back into the forefront.
There are still some merchants that lean heavily on QR codes and bar codes, such as Starbucks. The option is even more widely used in Asia.
"Clearly, the EMV contactless specification is ahead of the QR codes in the U.S., but they are working their way here," Tomasofsky said during a virtual presentation discussing the research. "Merchants are coming to realize that if they can get QR codes deployed, they have more flexibility than if they are using an EMVCo contactless product with its rules and guidelines."
But U.S. consumers aren't used to QR codes and many remain unsure of how to use it, Tomasofsky added.
"Does the consumer use his camera to take a picture of the merchant QR code, or does the merchant do something to take a picture of the mobile-generated QR code?" Tomasofsky asked. "Depending on how much friction there is, that is where you start getting into concerns about consumer behavior."
Merchants need to avoid scenarios in which the customer doesn't really know exactly where to tap the contactless card or point the mobile phone on the terminal, as every terminal can be different, Tomasofsky said.
Overall, digital payments have added more complexity to the point of sale.
"I think if you asked customers if they want more payment options, I don't think the answer is yes," said John Drechny, CEO of the Merchant Advisory Group. "They just want the option they want to use, to work."
In speaking to merchants on behalf of the MAG, Drechny said he has found the solutions that add other features beyond payments — with the payment integrated within — are increasingly popular.
"Merchants have been experimenting with many delivery methods, whether it is order online or pickup in store, or order and pay ahead for delivery," he said.
When consumers see a payment method solving a problem for them, they will adopt it, Drechny noted. The use of order ahead options has grown dramatically during the pandemic, he added, but that habit will increase in the future simply as a better customer experience.
"Those who have figured out how to solve problems for customers' issues" will get more business, Drechny added.
Tomasofsky pointed out that traditional chip-card transactions that came to issuing banks as card-present transactions are now coming into risk-management networks as card-not-present because of tap-and-go or contactless payments.
"That is a whole different risk formula for the issuers and they have to make changes as well," Tomasofsky said. "An order-ahead transaction is far more complicated now for banks assessing their risk management on that transaction."
It is happening at the smaller businesses as well.
"Traditionally, a pizza place might do 90% card present, but because of COVID and limited seating, it is now reversed to card-not-present because it is a pickup order, and that just creates a different dynamic," he added.
If the forecasts for increased reliance on digital channels and the predictions for growth in online fraud materialize, the research report noted, the payments industry might also want to focus on the deployment of new user authentication methods both online and at the point of sale.
Enrollment in mobile wallets or new digital card accounts must emphasize fraud prevention, because such options are generally viewed as the "weakest link in the chain," said Manish Nathwani, senior vice president of product development at debit network Shazam.
"Consumers are more willing than ever to play a role in fighting fraud, so if you put in some barriers in registering in a wallet for purchasing goods and services, I think they are more willing to do that, knowing of the convenience they have coming their way once they enroll," Nathwani said.
When looking at hardware-based solutions and the increased issuance of contactless cards, merchants have "felt more pressure to enable legacy terminals," Nathwani added. "There are legacy standards to contactless, sometimes known as mag-stripe data terminals, and those emit the old-style contactless data, which the ecosystem has to support as well."
There is always talk about sunsetting the coding in those terminals, but that type of effort would be difficult without clear mandates to guide the work, Nathwani noted.
"That is card security as opposed to identity, per se," he added. "Supporting contactless has not been an easy journey for anyone in the industry, especially because legacy type implementations remain."
COVID-19 and its aftermath bring other payments debates to the forefront, including the PIN vs. signature authorization question. Even though card networks saw EMV chip acceptance growing and dropped the signature requirement to authorize transactions two years ago, some merchants still require signatures.
"There is definitely a movement afoot to keep trying to diminish PIN, some of it from contactless in thinking that to add a PIN after a contactless transaction seems kind of silly," Tomasofsky said. "But PIN has been, over the years, probably the best and cheapest way to authenticate."
The MAG's Drechny said merchants have invested a lot of money into security and fraud prevention, yet throughout that process they still only see what happened with the transaction within their own shop.
"They don't get to see what happened with that card before and after that transaction (for potential fraud)," Drechny added. "It is a huge opportunity in the market today for us to start figuring out how to get out of these (data) silos."
Instead of making decisions on narrow data flows, a far better system would be one in which data is shared and users would follow rules and regulations to keep all users safe, Drechny said.