Push card to pay?

I have been working diligently for my employer on securing payments. When I saw this article today I thought it was time to post my thoughts. My noble fellow is trying to solve a problem that does not exist and is likely not to exist due to the design of payment card application.

Payment cards are not RFID tags that spit out payment data when they are powered on. These cards have specific commands and responses that a novice would not know to get the card to release payment information. Let’s assume you do 'get' a payment reader and make it 'mobile' for pickpocket attacks in a crowded bus or train as suggested, then the security lies in the information being passed by the card. These cards generate and pass one time cryptographic signatures that can be tied to transaction amount and other transaction specific elements. Let’s assume you do get through all that and you get a account number, now how do you commit fraud with that? How do you find out who the issuing bank is from a 16 digit number in order to change the mailing address? how do you get the social security number for a credit card number?

First off you should know the contactless cards are not being deployed because there was a problem of fraud with magnetic stripe cards in the US market. It was a differentiating factor to get 'early adopter' segment of the population to switch issuers. The business reasoning was invented after the fact to justify the decision by the large issuers. The very early Chase project in Texas was using Unique ID from a TI chip on the back of a Nokia phone that was sent to a server, then the server was translating the chip id to a payment account number in a for processing. Is that any more secured than magnetic stripe?

Secondly, the whole value marketing proposition of contactless payment cards is based on quick transactions. In regions around the world, consumers are paying for their transit fare without taking the card out of the wallet. As they acquire contactless payment cards, they would expect the same results, and yet with a switch or even worse biometrics that would be inconvenient to say the least.

The gentleman's suggestion to solve the problem will increase the cost of the cards and reduce throughput significantly at production facilities. The credit card production facilities are not like the fabs for RFID tags for Wal-Mart. Credit cards are manufactured in secure facilities long before anyone's data is even on the cards. The introduction of the switch is being discussed by some of the card manufacturing firms already, but the problem is it’s not cheap, easy or production ready.

The change to embed the switch will cost everyone more, card manufacturers, card personalizer and card issuers. Secondly, with the switch and all its connections the card will need to be very sturdy to last at least 3 years in wallets, ATM machines, ice scraping use and much more abuse.

There needs to be a cost benefit analysis that shows that we have a problem that requires a switch to be solved. I would end this post by saying, to the outside world that payment cards is a secure cards, view from the inside is that we are in risk management business and not risk elimination. When and if the benefits outweigh the cost significantly enough, that is when the payment or banking world adopts new concepts.

Round 2: Merchants vs. Card Associations

Today another LLP filed another big case against VISA and MasterCard over interchange. This times its not big name merchants but smaller regional merchants that have been gathered up by a firm in Minneapolis that is leading the charge against the two associations. Much like Walmart these smaller merchants will pass the savings along to the consumer, because we all know that merchants are in operation to save the consumers.

I believe the core problem with Interchange is that for so long its been a hidden secret that few knew and even fewer understood. Every merchant think there is no need to compensate the card issuer for the risk he carries by delivering fund to the merchant at the end of the day while carrying an IOU signed by the card holder for 21 days. The merchants do not take on the cost of card issuance, management, billing, risk processing and customer service, so to them its just plastic that should be cheaper to accept.

If they are all losing money on accepting credit card they should try not accepting it. The fact of the matter is that the merchants know they see a lift in ticket size with credit cards. They cannot afford to not accept credit cards, they just want to do it without paying their share into the 4 party system.

The fact of the matter is without the associations rules like "honor all cards" and "no surcharge" the merchants will be raking in $.50 per transaction on top of what they are charging for good as cost of doing business. Only way for the consumer and merchants to really understand the value that cards brings is to understand the pricing models that support the credit card business.

Associations are taking steps to edcuate and bring transparency to the issue, Visa has this primer on Interchange available on their site, a good start that shows that its not a secret and the associations are willing to show how the system works.

AMEX: The Real Issue for you is Merchant Fee Not VISA or MasterCard

So Walgreen gets a break on AMEX merchant fees, and rumor has it that Costco pays about 10 cents on AMEX transactions, but what about the rest of the merchants? AMEX went to court to get VISA and MasterCard to change their rules so that credit card issuers can issue AMEX prodcuts. AMEX keeps on forgetting that cardholders are only half the problem. Credit Card payment system is a three party systems, card issuers, cardholders and merchants. Its important that the three parties derive value from the system, otherwise it is unbalanced and favors one over others.

Issuers like MBNA and Citi are happy to issue AMEX along with VISA and MasterCard if it gets them more cardholders. The issue is how is AMEX going to increase the number of merchants that accepts AMEX. VISA and MasterCard claim about 21 Million merchant locations, AMEX is falls way short of that number. It remains to be seen how will AMEX balance the lower merchant fees to get more merchants and yet pay the high "interchange" or "transfer fee" to its new issuers.

It also remains to be seen how many other merchants are going to wake up and protest againts high merchant fee charged by AMEX. It time to AMEX to come out and compete in the market now, they got the wins in the courtroom, lets see how they do on the main street.

Here we go

Finally, I have a blog... It seems like I am the only guy that did not have one, so I finally took the plunge.

Look for more post with more insight and my random thoughts.