Friday, February 20, 2015

A Retailer Strategy for the Payment War

Retailers need to help themselves in the payment wars. The solution to high swipe fees; charge backs; reversals, and monopolistic practices of the financial services industry is creating a new form of payment acceptance that retailers control. Some national chains attempted to do this with the CurrentC approach, a disaster in the making because it limits consumer choice (see Retailers must let consumers choose their payment method but let the marketplace influence consumer payment choice by controlling the pricing of payment methods.  If retailers let the payment services industry cram the EMV boondoggle in their places of business then they acquiesce to increased costs and lower margins after spending precious capital improvement budgets deploying the boondoggle or a haphazard response to the boondoggle.

Retailers now let the payment services industry dictate the equipment to originate payments in stores.  Retailers need to design payment equipment with payment system architects and point of sale (POS) manufacturers.  With custom built devices and new standards created by retailers and given as specifications to the POS equipment manufacturers, plastic with a stripe or a chip will be an overly expensive device that consumers rapidly abandon.

Retailers can piggy back the current requirements and specifications to their new device and surcharge for plastic (or discount for non-plastic) card payment by use of easy configurable settings on their custom POS device. Further, the POS device must easily allow or disallow certain payment options all together. If acceptance of credit card transactions is too expensive then retailers can configure the device not to originate payment without a personal identification number (PIN).
Configuring the device to accept the currently accepted methods of payments though will not give retailers the real advantage in the payment wars. The design of the POS device must accommodate payment evolution and not just telephone currency, digital currency, and e-checks. The device needs to accept non-chained based digital currency issued by independent issuers of digital currency. The device must be configurable to lower risk of payment acceptance by authenticating various elements of the payment data in real time.

For example a customer uses an e-check application on their phone. The POS device communicates the amount of the purchase to the e-check application. Once the phone user authorizes the use of the e-check application (by a method dictated by the phone and its user) then the payer application creates an electronic signature on top of the e-check already signed with the issuing bank’s public key. Interception of this data by an attacker is worthless because the payer signature uses hashed data built from data within the phone (also stored at the financial institution), the geo-code, and the local time (sent unencrypted with the message).  The FI accepts the check in real time (after validating the signature) and settles the money to the retailer bank on the same day. The FI notifies the retailer of the action in real time. The FI does not need an acquirer, merchant number, or to pay a swipe fee. The POS device routes using the routing number stored within it (just like use of the bank identification number (BIN) used by payment cards acceptance devices today).

If retailers architect a good solution then a POS device and electronic wallet soon will negotiate the cheapest payment option for both the retailer and the consumer (based on the configuration of both devices) and the retailer or the customer may not necessarily know what method originated the payment especially if actually resides in the same consumer account.

Next Blog: White Elephants roaming the Payment sphere