Samsung's purchase of LoopPay preps the company for mobile payments move, but the initiative will face challenges because of the initial dominance of magstripe technology and other factors.

LoopPay adds a small piece of hardware to your mobile phone. An app on the phone allows you to add cards, and the hardware transmits a signal to magnetic stripe readers on point of sale (POS) devices in stores, fooling the POS into thinking that you’ve swiped your magstripe card.

LoopPay claims to be superior to Apple Pay in 3 key areas. It has acceptance at 90% of retail locations, while Apple Pay is accepted at less than 5%; LoopPay supports more than 10,000 issuers as well as gift, loyalty, and private label etc (Apply Pay supports 90 issuers, though that represents a majority of card issuance in the U.S.); and LoopPay supports a wide range of handsets (Apple Pay only the latest Apple devices).

It's good that Samsung is making a play in this regard, as this will ultimately help to push the industry forward, and keep other players on their toes.  LoopPay allows for mobile payments to be made at any point of sale that accepts magstripe. It has the additional benefit of supporting private label and gift cards; and (potentially) even loyalty. It is going to have immediate value-add for consumers as well as familiarity (swipe then sign). This should go a long way to help with adoption.

It all sounds rather compelling on the surface. The reason for all of this is exactly because they are piggy-backing on magstripe technology, which is a really neat idea. Certainly the fact that Samsung would not need to sign up issuers or merchants to support LoopPay is extremely compelling, as is the fact that it is supported wherever magstripe payments are supported today.

The big problem is that magstripe technology is very legacy. At the very least that means the scheme will carry a lot of the security baggage of magstripe. The app itself can be password-protected, but the ability to skim the magnetic stripe remains. LoopPay claim that they will remove some of the expiry date information to combat online fraud, but this is not data that is difficult to guess using (at worst) a brute force attack.

In many countries it is common to hand over one's magstripe card to a cashier who does the card swipe. This may pose a challenge for wide scale adoption. I’m not sure I’d want to hand over my phone. More significantly though, merchants with EMV readers may instruct consumers to use physical card to make payments  because this the terminal will perceive this as an attempt to circumvent the chip security and demand that the card be ‘dipped’ in the chip reader. It also means that as EMV terminals roll out, Apple Pay’s acceptance will grow and LoopPay’s will shrink.(On its site, LoopPay says it is working on an EMV-related solution to fix what it calls an "inconvience.")

Also, if Samsung embeds LoopPay into the Galaxy S6, they’ll also be limited severely with regard to supported handsets (although they can still sell charge cases and fobs – though this’ll likely struggle to record significant adoption).

Notwithstanding all the above, I can't help feeling that this is all rather backward. As the world takes deliberate steps toward EMV and enhanced security features, Samsung is taking a step toward magstripe. There must be a strong strategic intent to capture the opportunity in the magstripe space now, while following with a solid phase two plan. In the meanwhile my question is, will Samsung make expand beyond LoopPay's function in the Galaxy S6? Luckily we'll soon find out.

John Gessau is director of mobile product management for ACI Worldwide.