Is It Over For US Banks in Payment Systems?

A lot of innovation comes from the US right? Well not so when it comes to cards. Almost all others either moved to smart card standard EMV already or are very near completing their migration, except the US. After so many discussions and much delay, Visa and MasterCard announced liability shifts for 2015. That is, unless US banks move to EMV, after that date, they will be taking the fraud losses coming from EMV countries.
This is one side of the picture and I will come back to that. The other side of the issue opens door to all payment system innovation:ContactlessNFC, wallets, mobile payments, “Square” type companies and eventually cashless society. If you search any of those on the internet, you will see that all of these are mentioned either outside of US banking or outside of the US.

Here is what happened. US banks invented short term lending via credit cards many years ago. Established Visa and MasterCard to expand the acceptance. Then excelled in offering revolving credit and made it into a very profitable business. Only co-branding and air miles programs really were add-ons, for many years. Mass mailings and balance transfers became the norm. Yet in technology and therefore innovation, not much if any had been realized (apart from CRM , behavioral modeling, risk profiling, which non really meant innovation at the point of sale for the consumer). US Banks had issuing departments, and acquiring companies and in many cases they didn’t even communicate at all. Without bank emphasis and innovation, acquiring became a commodity business and many retailers saw it as an additional cost hence the lawsuits came about which went on for years between retailers and Visa and MasterCard representing banks. Even the standard issuing card technology has been outsourced by many banks to companies like FDI, T-Sys and Certegy, making bankers only experts on risk, pricing and mass mailing.

So let’s go back to the first paragraph and explain EMV. EMV stands for the initials of EuropayMasterCard-Visa and define global interoperable chip card standards. Chip technology was first used by French Banks in mid 90s to lower the fraud and then other European banks wanted to implement it and their payment system company Europay (of which the writer of this article once worked for 7 years) was their flag carrier to adapt the rules and define the technology in late 90s. Europay was later swallowed by MasterCard yet the name stuck. Later UK banks adopted the chip infrastructure along with Turkish banks, (Turkey is Europe’s second largest credit card market), and today in these three countries 99% of transactions are not only chip based but also verified with PIN rather than signature to boost cardholder confidence against loss and stolen fraud. Observing how fraud losses came down, many countries around world adopted their own EMV liability shift dates and on track to migrate cards, ATMs and POS terminals.

Yes, EMV lowers the fraud losses. But the the advantages do not need be limited to fraud. EMV works on a chip card. A chip is the core of all processing and exists in all computing devices. It is actually exactly the same with the SIM card inside the mobile phones. In fact they are mostly manufactured by the same global companies. Therefore when you don’t understand the chip technology, you start losing the expertise of today’s innovation as it all starts from the chip itself.

And this is exactly what happened in the US. No banker knows anything about chip technology. And as explained above, again no banker know much about POS technology. As you might guess, a POS device which needs to communicate with a chip, is much more advanced than a POS device which reads the good old mag-stripe.

To sum up , there are two reasons why US Banks are lagging behind payment system
innovation. The first is their negligence of chip technology and the second is how they are separately organized around issuing and acquiring rather then seeing it as a single customer experience.

Now the question is this: Is it already very late for the US banks to re-define and enter the payment systems in an effort to innovate and therefore dominate the point of sale experience?

I believe it is their last chance. In the words of AMEX chairman Ken Chenault, there will be more changes at the point of sale in the next three years then it took place in the last 30! Either US banks will catch the train or totally miss it. Missing it, however will in the medium run, mean losing revenues from issuing cards too. Can they really change the way they work? Can they reeducate their staff? Can they hire young and talented people to push for innovative ideas? Can they build alliances with telcos to provide exciting and convenient solutions which are even more convenient than plastic cards? Yes they can, but will they?

Today already Square, a company established only several years ago to work with small
merchants which are neglected by banks to provide acceptance through smart phones is valued more than 3 billion US dollars. Apple is very busy trying to figure out how it can turn its 500 million card numbers stored on the iTunes accounts into money and as its yet to come to conclusion and its why there was not NFC on the i-Phone 5 but only a wallet. Many are experiencing with QR codes, scanning, SMS messaging and many more. Like in all other cases, as the industries main players, banks, did not come up with anything, others are floating the space.

We all know in todays world of business,  timing is more important than size. Today’s giant banks will not be so giant if they miss this chance. Because once you lose customer touch, you start losing customers. The US banks are already under fire due to financial crisis, bailouts and  bonus issues. If the banks can turn this EMV migration issue into an opportunity to innovate and regain customer touch, both the banks and the US consumers will win.

After all, as Mr. Drucker rightly said many years ago, the purpose of any business is to create customers. And that seems to be long forgotten by the US bankers.