“That will be two bits, sir.” Remember the old movies where the newspaper salesman would say that to a customer fishing in his pockets for a quarter? As for me, I’ve never liked the way loose coins jingle in my pocket as I walk. It just seems so silly to carry quarters, nickels, dimes and pennies, given the value they represent is so nominal. But the annoyance pays off when I happen upon a bell-ringing Santa and his donation bucket. It feels good to give them up.
Why do we carry cash at all? Because it is self-representing of value, and hard to counterfeit. The trouble is the “carrying it” part. So twenty five or so years ago, we moved to credit cards, where the card is supposed to be hard to counterfeit, the charges are against credit accounts, and we write one check per month. Charges became easier to track for consumers, and merchants loved the fact that they can spend more than they carry in their wallet. Both sides of the transaction benefited from the move. The credit card companies said grace over the transaction, and grew their revenues by charging fees to all involved.
Soon, currency and coinage will be all but forgotten for most of us, like rotary dial telephones, which themselves replaced the now-forgotten process of using an operator to connect calls. The inevitable shift from the cash-preferred payment model of the past to where we are going to be in ten years or less – cashless, card-less, and soon, phone-less commerce – is already well underway. The only sure bet is that a move to electronic transactions will open the door to many innovations in process, and market efficiency will eventually win out.
Let’s start with your wallet or purse. Today as you left your house it’s likely that you grabbed three things. Your phone, your wallet / purse and your keys. But that’s all about to change.
So, as the commercial asks, “What’s in your wallet?” Most people have a driver’s license, credit cards, business cards, photos and cash. When you think about it, a credit card really only serves as a pointer at the credit account to charge a transaction, and proves that the card – not you – was a participant in the transaction. Your signature or PIN proves that you were ostensibly there as well – sort of. So, why can’t all of these proofs-of-presence be stored on and delivered securely from a smartphone? The answer is “yes,” and that’s where we are heading – at least for the near term – with ApplePay. Consumers and Apple benefit, but what about the merchant? Where’s their benefit?
Merchants, especially big ones, desperately want to marginalize the Visa/Mastercard/Amex middleman, shifting increasingly to a private credit or direct debit model and eliminating card processing fees completely. This is why, despite the paradigm shift opportunity that ApplePay presents in disrupting way consumers pay for products, the largest retailers – Walmart, Target, Best Buy, Walgreens, Rite-Aid and CVS – are not biting. They don’t want to substitute one profit-cutting middle man for another, replacing the credit card networks’ top line revenue grab with Apple’s hand in their pocket instead. For a great analysis of this tension, see the recent article in Re/code.
Smart retailers realize that keeping a payments network standing between them and their customer is no longer necessary. All of the funds transfer plumbing already exists to allow a disintermediated connection between merchant and consumer, and reliance on a middle man for processing payments is really as unnecessary as requiring an operator to connect your phone calls. The risks to a large merchant in eliminating the credit card network middleman are minimal, since the effect of the PCI model has been to shift more and more of the fraud liability to them – just ask Target.
For now, Apple, Google, and PayPal are in an arms race to play the role of the “master payment token” under a traditional payment processor model. All three of these titans want to build market share and add revenue by moving payments to an all-electronic method, but want to charge fees like the credit card networks have been able to for years because of a “triopoly” among Visa, MasterCard and American Express.
This misses an important point – one that the landline phone companies learned the hard way when VOIP disrupted their world: once you remove the incumbency of proprietary hardware requirements (the phone jack and POTS network) by making the transaction process all-electronic, efficiency and profit will take over. In this case, it is the merchants who will ultimately seize the benefits by processing payments themselves, verifying available funds in real-time, and extending revolving credit to their customers.
We see this already with most retailers. The most challenging element of in-house payment process is the establishing proof of presence and automated verification of identity. That’s where BIO-key comes in, with the same secure, privacy-preserving mechanism of identifying a person automatically that has been deployed for years in Prometric Testing Centers through our OEM LexisNexis, and by ITxM, one of the largest blood centers in the country, to identify each and every donor that comes into their facilities in a couple of seconds.
BIO-key Identity as a service (IDaaS) or a merchant’s own BIO-key Identity repository will allow a merchant to instantly confirm who they are dealing with, and assure that the whole transaction is trustworthy from the start. A consumer will have an even easier time making payments than having to produce their phone, and their enrollment persists across devices and needs only them, not their phone, to make it work.
The merchant’s disintermediated relationship is with its customers. The foundation of the trust in that relationship is identity assurance. With BIO-key, the merchant can manage secured biometric data, so that an identification is reduced to simply checking those biometric measurements to confirm that the person is who they claim. Once the merchant has a positive ID of their customer, they will take it from there. In this future scenario, merchants and consumers benefit from biometric authentication. What about the benefits to the credit card networks and Apple? The merchants just don’t give two bits.