EMV technology is just the beginning for smart card-based payments as the science fiction of today could become reality by 2015. Wendy Atkins reports on the technology in the pipeline.

Stuffy, conservative and formidable: these are characteristics that some consumers associate with banks. However, dynamic, adventurous and tech-savvy are also characteristics of the banking industry as it fights to maintain market share in an increasingly competitive sector. Nowhere is this more apparent than in the payments business, where new businesses complete with funky branding strategies are entering the market and shaking it up.

But innovation in 2015 will not be driven only by new market players. “Regulations will have a major impact on banks’ technology decisions over the next eight years, with the Sepa [Single Euro Payments Area] leading to industry consolidation and causing many organisations to re-examine their business,” says Cameron Olsen, vice-president for business development at Smart Technology Solutions.

Steve Lomax, director of sales and marketing at Alaric International, agrees: “This will almost certainly lead to a greater commoditisation of transactions and require ever increasing economies of scale in order to ensure processors remain competitive.”

From fiction to reality

To what degree the banking sector will have turned today’s science fiction into 2015’s science fact is a matter of debate. As Steve Brunswick, strategy manager at Thales e-Security, says: “An example of how long technology adoption takes is evident with the smart card. Carte Bleue was one of the first users of smart cards in payments in 1992, yet only now are they gaining global wallet space.”

And eight years ago, biometrics were considered a limited success in banking pilot schemes and mobile phones were just that – mobile telephones. Today, smart card technology is increasingly widely used in many parts of the world and, although the US has not embraced EMV contact-based smart cards for transactions, it has been at the forefront of rolling out contactless technology for low-value transactions.

The use of biometrics is growing, and selected banks and payments organisations have deployed the technology for applications such as accessing ATMs, cashing cheques or paying for goods at supermarket check-outs. US-based independent grocery chain Dorothy Lane Market, for example, is using fingerprint technology from Pay By Touch. And mobile phone-based payment is growing, with further steps being taken towards offering more complex and innovative banking and payment applications via mobile phone handsets.

Card technology

In many markets, making a debit, credit or even pre-paid payment with a card means using EMV technology. The notable exception to this payment structure is the US, but how long can it refrain from adopting EMV? Richard Sanders, a business consultant at ACI Worldwide, asks: “Is the US’s resistance to EMV sustainable once Canada and Mexico have moved to EMV and roll-out occurs in other markets?”

EMV technology is only the beginning for smart card-based payments. So far, the technology has been applied to basic payment functions on single application cards. “To retain ever more demanding customers, banks will be forced to differentiate their products and services within EMV by not restricting cards to a payment function alone,” says Mr Sanders. This could mean adding a loyalty function to the card or teaming up with other organisations to provide multi-application functions.

“Innovation in the payments industry may not come from new payment instruments, but may well come from allied security issues such as ticketing and access control linked to payment cards,” says Richard Crookston, director of product strategy at VeriFone EMEA.

For Martin Macmillan, business development director at Level Four Software, the ATM could be a vital delivery channel for exploiting multi-application functionality. “Banks’ ATM networks provide a trusted and secure point of customer interaction through which multiple payment types, identity and loyalty applications can be downloaded onto smart cards,” he says. “The ATM network could also support new payment channels as they emerge, such as top-up functionality for contactless cards.”

Contactless technology will also grow, driven by its position as a win-win technology for all stakeholders. “We will see many more low-value payments migrating away from cash to cards by 2015,” says Peter Finlayson, director of policy at the UK’s payments association, APACS.

“So far there has been very limited substitution of low-value cash transactions, as the economics have been stacked against cards. The launch of contactless provides a low-cost, convenient and quick alternative to cash, with the potential to make major inroads into the mountain of low-value cash transactions,” he says.

In turn, this could help to drive the use of new form factors for card-based payments. “We have already seen contactless chips being included in other types of devices, such as key fobs, in the US,” says Mr Finlayson. Mr Olsen says that “the most likely form factor could be with near-field communication in mobile phones”.

There is a lot of hype surrounding this market. Mr Sanders points out: “Contactless cards are likely to give way to mobile payments in the long run, particularly in the youth market. But banks are unlikely to develop the relationship with handset manufacturers and telecommunications operators to make EMV-based mobile payments a major replacement for cash for transactions by 2015.”

The technology could also be implemented in wrist watches and wrist bands. But, as Mr Finlayson says: “One advantage of using regular cards is that you can combine the functionality with other applications, such as Barclaycard and Barclays Connect with [London’s] Oyster travel card.”

Mobile on the move

Mobile phone operators are starting to make the move into payments. “You see Vodafone working with Citibank on remittances, and Vodafone has also been looking at m-payments for at least five years; it’s only a matter of time before they get there,” says Gareth Lodge, European payments analyst at TowerGroup.

“Mobile phone operators are certainly going to be key players going forward, in particular because they are multinational and have got their networks in place already. And I think the banks need to be pretty worried about that. How many customers does, say, Vodafone have compared to some financial institutions? Vodafone wins hands down. Plus it’s in constant contact with the consumer at all times – and there’s more brand affinity with telecoms providers,” he says.

Biometrics possibilities

Biometric technology ticks many of the boxes for convenience and user authentication. Some developments in the macro environment could lead to additional deployments of biometrics for payments. “In the next eight years, biometric passports will become a reality, making the technology far more accessible,” says Nigel Reavley, director of Xiring’s banking business unit.

What is more, the cost of biometric devices is falling.

Fingerprint technology looks the most viable biometric for payments. It can already be bundled with a laptop or mouse, and is available on USB memory sticks.

However, Mr Finlayson is not optimistic about the immediate future of biometrics. “I don’t think they will go forward on a mass scale over the next eight years,” he says. “If you look at the problems with biometrics, it’s difficult to see how they will be addressed satisfactorily. You need something that has a very low false rejection rate, particularly at the point of sale. You have also got the need for an international, rather than a one-country, solution.”

Injectable chips

Another idea – which so far seems only to be raising eyebrows at banking conferences – is the use of injectable chips. As one animal lover points out: “If I’m happy for my dog to be microchipped so that he can cross the English Channel on a family holiday, why shouldn’t I be prepared to go through the same procedure?”

Real-time reality

By 2015, real-time transactions will be a reality, thanks to consumer pressures, competition and regulations. In turn, banks will be under pressure to be even more certain that their ‘know your customer’ strategies and technologies are sufficiently robust.

Banks will respond to this – and innovations across the payments industry – with new technologies aimed at addressing fraud, security and privacy concerns. Although user name/password combinations are the norm for online banking today, many insiders believe use of these will have died out by 2015.

“Strong user authentication to mitigate fraud and money laundering risks are essential for near real-time payments to be viable,” says Mr Brunswick. “Once the Chip Authentication Programme and other forms of two-factor authentication have reached critical market mass, users will no longer accept the risk of logging on without a token.”

New payment products, such as pre-paid, are being developed, as well as new payment channels, such as mobile phones and biometrics. “The key issue, however, is customer appetite and consumer readiness,” says Mr Crookston. “This may become a political issue in some cases.

“In the UK, there is a burgeoning backlash against the ‘surveillance society’ and a growing disquiet in the consumer’s mind about the level of tracking that is possible. In the short to medium term, these sorts of issues will be crucial. The technology issues can be resolved but customer adoption is the major barrier.”

What could characterise 2015 and beyond is innovation based on convenience. Consumers are increasingly favouring uncomplicated, minimalist designs, an approach that could be successfully applied to payments.

“Several years ago, AMEX used the motto ‘Don’t leave home without it’,” says Mr Redding. “I look at all these trends in payments and it’s now the inverse: ‘Leave home without it.’ Why do I have to carry a wallet when all these new technologies are around? That will be the major trend.”

Convenient, innovative and easy to use payment methods are something to look forward to.

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