Hoosier Banker 35 OPERATIONS / TECHNOLOGY As 2017 continues to roll along, the change in the U.S. payments system continues at breakneck speed. Driven in large part by the migration to EMV,* the introduction of tokenization, and the focus on faster payments, the change will continue throughout the year. From issuers to merchants, there are lessons to be learned from our experience so far, and opportunities to take advantage of moving forward. In 2016 merchants and issuers continued the migration toward EMV. Thousands of merchants, eager to prepare for the liability shift, rushed payments solutions to their brick-and-mortar stores before routing solutions were available for EMV. Most did not fully understand the costs and benefits of those machines. Issuers did the same, hoping to beat an artificial deadline imposed by a few organizations with significant market influence. Most merchants didn’t realize, and are only starting to now understand, the impact of not programming their terminals with the routing choice and capability they wanted. Instead they got out-of-the-box proprietary solutions that restricted routing choice. This proprietary technology started many merchants and issuers down a path that eventually could evolve into the elimination of routing choice altogether. As proprietary technology is more widely adopted and open standards left behind, interoperability is harmed, and the owner of the technology gains power and control. We saw a challenge to that power last year. Lawsuits and legal battles piled up, as merchants began to push back over the issue of choice. Some merchants wanted to mandate use of the PIN. They challenged rules restricting routing choice based on how a consumer authenticates a transaction. Could all of this confusion and conflict have been avoided? The simple answer is yes. We should require all transactions to have consumer authentication that’s captured at the point of purchase regardless of the form of payment. That authentication should then be passed to the issuer for validation. This authentication solution has existed for more than 40 years in the form of the PIN. Some argue the PIN is static, but so is the token saved in your mobile wallet. Some say the cryptogram is dynamic, because the value changes each time, but the PIN is owned, controlled and can be changed by the consumer. The challenge is that not all transactions require a PIN. If they did, much of this complexity could have been avoided. The security improvements of the chip technology are valuable and, combined with a PIN, make the card a much more secure payment device. When payments are based on widely accepted standards, the system runs smoothly, competition for payments flourishes, and the environment is ripe for innovation. When payments solutions are based on proprietary technology, controlled choice and flexibility and, ultimately, interoperability and competition are impacted. Unfortunately 2017 holds more of the same. We will find out more about the legal challenges surrounding where and how consumers are allowed to use their cards, how merchants are allowed to protect those transactions, and how that may impact you as the issuer. You are required to participate in more programs, without any control of the what or the how. It’s also likely we’ll see more consumer frustration. The news isn’t all bad, though. This year also holds opportunities to expand choice and flexibility for merchants and issuers. The traditional PIN debit networks are providing new opportunities by extending their existing capabilities into traditionally signature-only market segments, like online retail, restaurants and hotels. PINless and new signature transactions can provide significant benefits to issuers and merchants by extending routing choice and payment competition. This may be the first of many instances to come where synergies emerge between the merchants and issuers. Future collaboration between these groups can lead to a better payments system for everyone. It’s been a bumpy migration, as payments solutions continue to evolve. The choices we make as an industry, and how well we learn from experience, will largely determine how much we smooth the way forward for the rest of 2017 and beyond. HB Payments: The bumpy road ahead The SHAZAM Network is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. Article author Paul Waltz President and CEO The SHAZAM Network pwaltz@shazam.net * Europay, MasterCard, Visa
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