In 2008, Juniper Research forecasted that mobile payments would reach $600 billion globally by 2013.  Mobile contactless payments have been in place in other countries (Korea, Japan, Spain) for some time and the demand in the U.S. has been increasing, especially with the growth of the smartphone market.  Discover has been trying to increase their market share using reward programs and partnerships, so what better way than to jump on the mobile payment wave?  Joining the leading wireless carrier and cell phone provider partnership is a smart move.

About the Technology

Contactless payments have actually been around for a while.  Introduced with Mobile (Exxon)’s Speedpass in 1997, the technology has only recently evolved and become more popular for several reasons.  Consumers want faster ways to conduct face-to-face transactions.  People are constantly on the move and standing in any line to make a purchase is considered an inconvenience.  There have been recent advances in Near Field Communications (NFC) technology, a more secure payment method for mobile devices.  (Basic RFID was used in the previous contactless cards and devices.)  Merchants are trying to find ways to circumvent interchange and association fees from Visa and MasterCard.  (Merchants persuaded Congress recently to approve a cap on interchange fees.  An antitrust lawsuit filed in 2005 is still pending.)

To enable mobile payments, the mobile phone is equipped with a smartcard which contains payment card data.  Merchants would need to have a compatible payment card reader and, to help prevent fraud, a PIN would be required to complete a transaction.  For merchants already accepting contactless payments, most existing readers are supposedly compatible with NFC devices.

The Faster, Faster Checkout

Some retailers have already instituted Visa’s No Signature Required program and MasterCard’s Quick Payment Service, both of which do not require signatures for swiped credit card purchases ranging up to $50 at certain merchant categories.  Skeptics claim that this business practice can increase fraud, since a cardholder signature is used as proof of purchase at a brick and mortar merchant and most fraudulent transactions start out in small amounts.  Gas stations have long employed this practice, but usually require a billing zip code for fraud prevention.  In this case, a PIN is not enough protection for one group of consumer advocates.  Each country has its own set of government regulations with regards to mobile payments and consumer protection.  Nothing currently exists in the U.S.  Recently, Consumers Union, the nonprofit publisher of Consumer Reports, has requested that regulators “use their current statutory authority to ensure that existing consumer protections are applied to all new payment methods.”  They are also asking that companies providing the payment systems provide consumer rights in their contracts for “zero liability” to the cardholder.  With the current government administration’s involvement in financial matters, a lot more work may need to be done before this becomes reality.

Sharing Revenue

One challenge with this new payment channel involves basic business.  Right now, the major card networks, issuing banks, and payment processors earn the bulk of the revenue from card transactions.  Contactless payments using mobile phones introduces new players – wireless carriers, phone manufacturers, and application providers.  Why wouldn’t the players enabling the mobile payments want some of the transaction revenue?

The Privacy Issue

Retailers and consumers both like the idea of mobile payments when it comes to faster checkouts.  However, they may differ on the amount of information shared.  Retailers would love to gather more information about their customer and the transfer of CRM data wirelessly is the easiest way to do that.  Consumers however, may not want to share anything else about themselves.  Mobile payment applications could limit the amount of data stored, or allow the customer to control what data they want to share, such as loyalty card information and purchase history.

With fraud being a common concern amongst consumers, it still may be a while before mobile payments using NFC really take off.  Sure, there will be the early adopters and people who are tapped to do trials (Discover used employees last year to trial its mobile contactless sticker where Discover Zip payments were accepted).  Adoption requires all the pieces be in place  – consumers with Discover accounts who are also using mobile phones equipped with the NFC payment technology and merchants who have the equipment and capability to accept contactless payments from Discover.

Per Bloomberg, trials for the project, named Mercury, might possibly take place in Austin, Minneapolis, Salt Lake City, and Atlanta, starting in mid-2011.

Overseas, many organizations have formed campaigns against Visa and MasterCard. In Canada, ad campaigns are being run by The Retail Council of Canada telling Visa and MasterCard to “stop sticking it to retailers.” The Retail Council of Canada is a non-profit association that represents more than 40,000 stores of all retail formats.

In Europe, ongoing Interchange battles have reached boiling points. EuroCommerce, the retail and wholesale governing body, is accusing MasterCard of raising interchange rates 160% after the release of MasterCard’s new interchange fee structure. On December 19^th, 2007, an agreement was signed prohibiting MasterCard’s multilateral interchange fees (MIF). These fees apply to almost all cross-border card payments in the European Economic Area (EEA). This card type was prohibited because it is said to inflate the base on which acquiring banks charge. Since 85% of businesses accept these card types in Europe, it is said to potentially harm businesses and their customers. Naturally, MasterCard will raise other card type fees in order to compensate for money lost on fees from MIF.

Australia has already won their battle against interchange. Fees in Australia are capped, and in some cases they pay half a percent. Of course lower interchange rates, in my opinion, have been the result of fear. Card associations are afraid that regulations will be imposed if they do not lower their fees.

It’s only a matter of time before Visa and MasterCard will have similar regulations imposed upon them. But, are these fees price gauging or just a fair network of profit? It seems to me that we are all happy with our sky miles and rewards point, but are oblivious to where money for these rewards comes from. The people that are coming up with these regulations could be forgetting we are in a capitalistic society. Would we haggle over the price of our dinner at a high end restaurant saying the restaurant charged too much, after we already read the price on the menu? Merchants are aware of the rates they are going to pay before they sign their agreements. Perhaps we need to do a better job of educating merchants about Interchange fees and what they are used for.

Since there are many different processing categories for Interchange rates, they can be confusing to most merchants. Merchants pay higher or lower rates depending on, but not limited to, whether or not it was a rewards card, purchase card, or debit card. Rates can also be assessed based on your SIC code and how often you batch your terminal.

I would recommend that all merchants become familiar with the Interchange rate for their industry, as well the manner in which they take their cards (swiped or keyed). This way you can negotiate your rates with your merchant services provider accordingly. Just because your payment processor claims the rates went up does not mean they went up for your type of business. Some processors may even entice merchants with low rate like 1.11%, only to have you start processing and realize that rate does not pertain to your type of business.

Fortunately there are a lot of processors out there that don’t hide fees from their merchants. It is important for merchants to be educated about card processing fees.

If you have received a statement with an increase notice on it, be sure to do your research so you know exactly what is being increased.