It’s quite remarkable what some money and ambition can do for electronic payments. Consider the case of Pay By Touch Solutions.
Only a few months ago, the San Francisco vendor of fingerprint-authentication systems for in-store payment was on a collision course with a major East Coast competitor selling essentially the same technology. It could replace credit cards and checks but not PIN debit, perhaps the fastest-growing form of electronic payment. And it had no product for e-commerce.
Then came a $130-million infusion of capital from investor groups last fall, and Pay By Systems was on a roll. With a $47-million offer, it immediately outbid CyberSource Corp. to snap up the assets of CardSystems Solutions Inc., gaining a big—if troubled--chunk of the merchant-processing market (“Behind Pay By Touch’s Strategy for CardSystems,” Trends & Tactics, November-December 2005). It had already signed contracts covering some 7,000 outlets.
But that was just the start. In a surprise move, the company in December put up $82 million to buy its chief rival, BioPay LLC. The Herndon, Va.-based company had been a scrappy competitor, getting its system into 1,600 stores. Its chief executive and majority shareholder, Tim Robinson, liked to needle his West Coast rival. And a year ago, when BioPay asked a court to declare it wasn’t treading on Pay By Touch’s patents, Pay By Touch counter-sued with a patent-infringement case.
Now all is forgiven. “You have to realize they’re not bad guys, they have made good progress [in the market],” says Robinson.
It turns out Pay By Touch has a lot more progress in its plans, and not all of it in physical stores. Coming soon: Pay By Touch-authenticated transactions on ATM cards and on the Internet. “Our revenue opportunity is quite large,” says Robert Ziegler, senior vice president and general manager for ATM Direct, an Irving, Texas company whose technology allows consumers to enter PINs securely on computer screens when they’re ready to pay online merchants. Pay By Touch quietly acquired its assets out of bankruptcy last year in a deal that now could open the Web to PIN debit, a form of payment growing at 20%-plus annually.
PIN debit also represents a gaping hole in Pay By Touch’s strategy in physical stores, one the company is moving fast to plug. Here’s the issue: Pay By Touch pushes so-called token-less transactions. The whole idea is that its technology should replace a card, check, key fob, mobile phone, or any other payment device. Consumers designate payment accounts they want to link to their fingerprints when they enroll, and from then on they can leave home without purses and wallets. Meanwhile, Pay By Touch stores mathematically derived templates of the fingerprints in a massive central database, ready for retrieval whenever an enrolled consumer walks into a Pay By Touch-enabled store, touches a sensor, and enters a search code.
Two problems: Credit card transactions through Pay By Touch receive card-not-present pricing from the bank card systems, since there’s no card and hence no card swipe. That makes credit cards even more expensive at a time when many of them are at the boiling point over card interchange. Pay By Touch says it’s talking to the bank card networks about this. But one way around the problem is to allow consumers to use their PIN debit cards. Pricing on these transactions has been rising but is still much less than credit and signature debit payments.
Here’s where the other problem comes in. The ATM networks have no card-not-present category. By their rules, all POS transactions must be swiped, with cardholder entry of PINs for authentication and guarantee of funds to merchants. That has kept PIN debit out of token-less payment systems.
Until now. Eric Bachman, chief operating officer of merchant services at Pay By Touch, says one ATM network, which he refuses to name, has agreed to change its operating rules to mandate that banks accept Pay By Touch scans in place of PINs for guaranteed funds in a process the network refers to as “biometrics as proxy for PIN.” Bachman in December said he expected to name the network by the end of January. Another unnamed network, Bachman says, is very close to following suit. “We’re making very good progress,” he says. “I think we’ll see live transactions in the second quarter of 2006.” If so, Pay By Touch will have handed merchants a lower-cost payment option and given itself entrée to a rapidly growing payment type.
The biggest development of all, however, could be Pay By Touch’s move onto the Web. ATM Direct’s technology will likely undergo tests with at least one electronic funds transfer network starting the first half of 2006. A full commercial rollout involving at least one major merchant should be in progress by the end of 2006, says Ziegler.
The company is already in discussions with Internet merchants and hopes to secure agreements to flow transactions through regional EFT networks beyond ACCEL/Exchange, the Bellevue, Wash.-based network with which it expects to conduct a pilot early this year. “We’re in aggressive conversations with a majority of the EFT networks,” says Ziegler.
Up to now, EFT networks have been loath to allow PINs to be used on the Internet, fearing the potential for fraud. But ACCEL/Exchange, a unit of banking processor Fiserv Inc., says it has been in talks with ATM Direct for some time and is in the midst of planning its pilot of the company’s system. “There is going to be demand for this product” among consumers to whom the security of PIN debit will have appeal for e-commerce, says Mike Williams, senior vice president at the network.
ATM Direct, which has seven patent applications pending, will charge online merchants directly for each transaction, absorbing network interchange fees and building them into its own pricing. Ziegler won’t reveal ATM Direct’s merchant fee, but projects that for most merchants it will be roughly half what they currently pay for card-not-present transactions.
The company’s technology works by downloading digitally unique code to the consumer’s desktop, setting up a process of multi-factor authentication in which the company can authenticate the consumer by recognizing the code and by means of technology such as geo-location. The company also sweeps the consumer PC for keyloggers and other trojans. “We turn the consumer’s PC into a recognizable point-of-sale terminal” on ATM Direct’s network, Ziegler says.
When the consumer is ready to buy and ATM Direct is satisfied the PC is secure, the system presents on the screen a keypad for PIN entry. This is called a floating PIN pad because a different numerical configuration is presented each time. This process disables the computer keyboard, allowing entry only by mouse click. Ziegler says that while the clicks initiate the PIN acquisition process, they don’t yield the actual PIN. PIN acquisition is triggered by another process underlying the virtual PIN pad, details of which he won’t discuss. “This gets into our secret sauce,” he says.
Once this process is complete, ATM Direct returns a signed token to the merchant, asking if the merchant wants to go forward with authorization. If so, it creates a transaction message, including a PIN block with PINs encrypted at two-key triple DES, to go to the relevant EFT network for authorization and settlement at the issuing bank. “We look exactly like a PIN debit processor” to the network at that point, says Ziegler.
If it gets traction, ATM Direct may start looking like a cash register to Pay By Touch.
How Contactless Payment Can Piggyback on NFC
If Pay By Touch has been on the march, backers of so-called contactless payments haven’t been sitting still. The latest gambit for this technology, which speeds up point-of-sale transactions by replacing card swipes with radio signals, includes what could be a revolutionary twist: near-field communication (NFC).
The idea of bringing NFC to contactless technologies, which are already making headway, has quite a few observers excited. “It’s possible to think really big about this stuff,” says Michael Friedman, director for emerging technologies at Mercator Advisory Group, a payments-technology research firm.
Last month, JPMorgan Chase & Co., Cingular Wireless, Nokia, Philips, VIVOtech Inc., and Visa USA kicked off in Atlanta the first major U.S. test of NFC technology for contactless payments and mobile downloads, and it won’t be the last. Mohammed Khan, president and founder of ViVOtech, which is supplying contactless readers for the test, says a series of such pilots, involving expanded functionality and larger numbers of users, will be staged over the next 12 months, leading to commercial availability of NFC on mobile phones by Christmas.
By then, he says, U.S. handset users will be able to download virtual credit cards, debit cards, and prepaid cards and use them to pay for a variety of goods both over the air and via contactless readers. “The consumer is going to be empowered with this mobile device,” says Khan.
It’s all starting at Philips Arena, home stadium of the Atlanta Hawks of the National Basketball Association and the Atlanta Thrashers of the National Hockey Association. The pilot involves 150 point-of-sale contactless readers and about 60 so-called smart posters, or promotional posters equipped with NFC chips capable of downloading digital content. Some 250 Season ticketholders who also happen to be Chase Visa account holders and Cingular subscribers are receiving Nokia 3220 phones that contain NFC chips from Philips and ViVOtech software that manages the Chase Visa account.
To pay for food, drinks, or merchandise, or to trigger a download of ring tones, player animations, games, or wallpaper, users hold the phone within four centimeters of either the reader or the poster. At this range, the NFC chips take over, establishing a link between phone and either reader or poster, and then hand off the transaction to either the embedded wallet software (for payment) or the phone’s browser (for the download). Although concessions are being charged to the user’s Chase Visa account, charges for content downloads are being billed by Cingular. The pilot ends in June, along with the basketball season.
So what’s so special about NFC? Its major advantage lies in economies of scale. The Atlanta pilot represents the first use of mobile phones as contactless payment devices in the U.S. since a 2003 project conducted in Dallas by MasterCard International and Nokia, with readers supplied by ViVOtech. Khan says that pilot established the technical practicality of phones as contactless devices, but also exposed an economic issue: handset makers and wireless networks could not justify the cost of contactless chips in phones to support just one function—payment—for just one issuer. “We recognized this wasn’t scalable,” says Khan.
With NFC, though, the economic picture changes. Unlike standard contactless chips, NFC chips allow phones for the first time to be connected at very short range to a wide range of devices and services in the physical world, enabling handsets to perform a broad array of functions including but not limited to payment. The links take place with little or no need of intervention from the user, reducing or eliminating key entry and other clicking and fiddling. “An automated, invisible matching takes place,” says Khan, between NFC-enabled devices.
Since NFC has the ability to bridge across different protocols used in different parts of the world, it brings economies of scale, encouraging phone makers to deploy the technology everywhere. Sony, Nokia, and Philips, early advocates of NFC technology, reportedly hope to reduce the cost of NFC chips to under $5, which would make them usable in the cheapest handsets.
And contactless comes along for the ride. Khan says ViVOtech worked closely with the early backers of NFC technology to make sure it would be compatible with the ISO standard the card companies have settled on for contactless payments.
Still, it may take time to persuade consumers to use something other than the familiar plastic card for payments. And it’s not entirely clear whether the banks and the wireless carriers will be able to work out in all cases which camp will handle payments. “That’s really the crux of the thing,” says Mercator’s Friedman. But for now, it’s NFC’s show, and with it the potential for contactless payment seems to have grown even bigger.