On October 1, merchants who accept credit cards were faced with a pretty big decision to make: either accept new technology or accept responsibility for fraudulent purchases.
Payment networks including American Express, Visa and Mastercard shifted responsibility to merchants for fraud if you didn’t upgrade to payment terminals that accept a new breed of credit cards that are widely considered more secure against fraudsters. These are called EMV--short for Europay, MasterCard, and Visa. And they are the most advanced generation of credit cards, equipped with small microprocessors, or chip, that secure point-of-sale transactions by encrypting the personal information of the cardholder.
The expense and headaches attached to the upgrade are notable, however. It can cost between $250 and $300 per new machine, and the new cards require dipping rather than swiping, which must be explained to consumers. But those downsides masked a potential benefit: most of the new terminals also come with capabilities that let you accept payments from digital wallets, says Thad Peterson, senior analyst of Aite Group says. That could potentially increase the adoption of this new technology--obviously good news for the likes of Apple, Square and other digital wallet providers.
For the uninitiated, a digital wallet is a piece of software code embedded in an app that lets consumers store their credit, debit, or bank account information using a mobile device, where they can access and use it for payment. While still very new, this payment vehicle is likely to become far more prevalent in the next five years, Peterson adds.
Until last September, when Apple released its iPhone 6, with its embedded Apple Pay capability, there was no unifying technology standard for wallets. But the Cupertino, California-based tech behemoth changed all that, simply through its heft and influence in the market. Its phones enable such payments through something called near-field communication, or NFC. The technology transmits payment information via short bursts of radio waves directly to the register. Apple uses NFC to send a "token" with encrypted details about the transaction, rather than the actual account information of the cardholder.
While some industry estimates place the number of Apple Pay users at less than 1 million, Aite’s Peterson says digital payments using NFC are likely to explode by 2018, particularly as the standard is embedded in subsequent generations of phones. As evidence of the shift, in the last two months, Google released Android Pay for its devices. Along with Samsung Pay from the eponymous smartphone maker, both are both NFC-enabled. And by 2020, Peterson expects NFC payments via mobile phones to increase to an estimated $536 billion, from its current level of an estimated $112 billion for 2015.
And for the time being, the beginning of digital wallet adoption will start with those new payment terminals you’ve been struggling to adopt.
“The market will coalesce around the operating system that allows the most capabilities,” Peterson says. “In the next five to six years, the dominant [digital wallet] players will be Apple and Android."