The Dash for Digital Cash
As the online world was starting to take off in the mid-1990s, Internet maven Nicholas Negroponte of the forward-thinking MIT Media Lab was proselytizing about “digital cash” and how it would someday be the standard mode of payment.
Though still in its infancy, it seems that Negroponte’s vision is beginning to take root. At Starbucks retail shops, customers can point their BlackBerry or iPhone at a POS station and purchase their coffee without having to reach for their wallets.
Development of such mobile payment solutions is at a fever pitch today, and impending changes are expected to create a dramatically different retail environment. “Mobile Payments Enter a Disruptive Phase,” a March report from Forrester Research, notes that while technologies still must be refined over the coming years, digital micropayment scenarios “have the potential to disrupt existing payment systems” like debit and credit cards.
LP professionals are paying close attention to determine what these changes will mean for security in their store environments. For instance, how will these “touchless” or “contactless” pay systems affect protocols already in place for securing debit, credit and gift cards when there is no magnetic strip or signature to check?
LP departments are also examining how digital payment systems might affect associate training to detect fraud as well as the overall operation of stores, says Joe LaRocca, senior asset protection advisor for NRF.
“The technology is changing monthly,” LaRocca says. “We are always hearing about some new device or some new program that’s out there. The first part always is having visibility into what’s coming down the pipeline in terms of the technology. Then you can make some assessments on how you might approach the risk or fraud prevention aspects.”
‘The fastest way to pay’
While in-store mobile payments are a rare occurrence in retail markets today, the robust adoption of smartphones and other devices — Forrester predicts a U.S. smartphone penetration rate of 57 percent by 2015 — is expected to bring rapid deployment over the next few years.
Leveraging the popularity of its Starbucks Card loyalty program, Starbucks launched its mobile payment solution in January. It is using a proprietary solution through the Starbucks Card mobile app for BlackBerry, iPhone and iPod Touch that allows customers to make in-store purchases at nearly 8,000 locations in the United States.
Starbucks bills its mobile payments process as the fastest way for customers to make a store purchase. They simply point their device at POS scanners linked by a wireless connection at registers. The app displays a two-dimensional barcode that calculates funds in the user’s Starbucks Card account.
“With literally one touch of a button, [the app] brings your card up and it shows you your balance,” says Ryan Records, director of the Starbucks Card. “There’s a little button on it called ‘touch to pay.’ You touch that and a 2D barcode is presented. You wave it in front of the scanner and you’re done. Your new balance comes back automatically to your phone, and that’s all there is to it.”
A broader, more ubiquitous solution based on near field communications (NFC) technology is being pushed by various segments within the payments industry as a means of standardizing mobile payment methods (see accompanying story). The technology employs a chip embedded in the mobile device to initiate payment at a POS terminal. The transaction is routed through the store’s POS infrastructure and deducted from a customer’s bank account or credit card.
Starbucks customers loaded more than $1.5 billion on Starbucks Cards in 2010, a 21 percent increase over 2009. Records says Starbucks could not wait for solutions like NFC to reach critical mass: The company’s app solution is a response to consumer clamoring for faster transactions.
“The real benefit here, and the real thing that we hear back from our customers, is that it is the fastest way to pay,” Records says. “That is something all our consumers are happy about. We went at this opportunity to make that payment faster.”
A balanced transition
Central to any new retail technology solution is striking a balance between risk and reward. LaRocca recalls the transition more than a decade ago when the retail industry moved from manually produced paper gift certificates to plastic gift cards.
“For all intents and purposes, from a retail perspective, we treated [gift certificates] like cash,” he says. “Once you issued them, you were issuing cash. If you lost them, it was like losing inventory. That piece of paper was a physical asset.
“Gift cards were a real game changer,” he says, and the requisite technology and infrastructure “were similar enough to credit cards that people were able to adopt the technology and implement them with a very short ramp-up period.”
That transition was relatively seamless, but cyber criminals found opportunities to circumvent gift card anti-fraud protocols and compromise electronic POS systems. “A door was left open somewhere,” LaRocca says, adding that the paradigm for mobile payments will present similar challenges.
A primary challenge to advancing mobile payment models will be ensuring that transactions are secure. Records says Starbucks built levels of protection into its app solutions, including “the ability for customers to PIN-protect their app. Most people have password protection on their iPhone or Blackberry, but you can add another level of protection in the app with another PIN code.” In such a case, he says, “Even if I had your phone, I still wouldn’t be able to access your application.”
Additionally, Starbucks will allow customers to notify the company and freeze their accounts if their smartphones are lost or stolen. Once notified, the company will transfer the funds to a new card, Records says.
Retailers are weighing anti-fraud requirements as new POS technologies come to the marketplace, says Wayne McBrian, LP director for specialty gift retailer Brookstone.
For instance, a system that would allow a smartphone to capture credit card authorizing data via a high-resolution camera for use in purchasing items likely would not pass LP muster today. In such a situation, LP officials would much prefer customers have their actual credit cards with them for verification, McBrian says.
“Whatever technology comes up … we always work to measure the benefit or the risk/reward,” he says. “If the reward is there, we will find a way to control the risk, but until the risk can be mitigated, then the reward is probably not as effective.”
McBrian adds that, over time, emerging POS technologies have enhanced the work of the LP function. When the advent of online shopping increased card-not-present transactions, retailers were able to devise address verification and credit card approval procedures to circumvent fraud.
“Creating a bogus credit card is easier today than it was yesterday,” McBrian says. “But at the same time, we’ve improved the checks and balances and controls.”
Christopher Cox, vice president of mobile commerce solutions for First Data Corp., says what is likely to seed the mobile payments market will be added transactional value that consumers will realize through smartphones and other devices.
“What’s going to spark the acceleration is some solution that’s rolled out at scale that will grab the attention of consumers, merchants and issuers,” Cox says. “That’s what we are starting to see.”