COMMENTARY: How to Cure the ‘Hangover,’ Sell EMV, And Grow More Quickly

In the February, 2017, issue of Digital Transactions, Steve Mott argues that the U.S. EMV migration was a misguided, poorly planned, and poorly executed effort. In his article, “The Great EMV Hangover,” he considers the migration to be a failure, writing, “As 2016 wound to a close, nothing short of a massive business hangover loomed over the U.S. payments system. The reason? EMV—which has been a source of hope for some, but agony for others—is producing far more problems than it’s solving.”

It is hard to argue the contrary. Those who pushed for EMV did so by forcing merchants to accept EMV via a transfer of fraud liability from the banks that issue EMV cards to the merchants who do not accept them. Since the liability transfer occurred in October 2015, the major networks, facing merchant protests, reduced the financial severity of the liability shift and then extended the EMV acceptance deadline for fuel merchants by three years.

The most telling example of EMV’s difficulties is that of VeriFone Systems Inc., which is one of the companies that stands to gain the most from the U.S. EMV migration. Its share price fell more than 50% between its mid-2015 peak, prior to the liability transfer, and its recent lows in late 2016. In the year after the liability transfer went into effect, its North American revenues increased by a mere 1.5%.

Yet, in the face of this EMV-resistant market, there is one clear success story. Square Inc. has deployed more than 1 million EMV readers in the last 18 months. How? By following the classic formula for success in mature markets. It focused on a segment of customers with common needs. It then created new EMV solutions to specifically meet those needs, and it combined its EMV solution with other services to create an easy-to-consume and highly valuable bundle.

In other words, Square created a differentiated EMV offering. It did so by customizing its EMV solutions to meet its merchants’ needs in the following ways:

• Nearly a year before the liability transfer deadline, and in alignment with the needs of its portfolio of extremely small and highly mobile merchants, it launched a proprietary EMV card reader that was among the first EMV solutions available in the United States and was also the most portable and affordable ($29) anywhere;

• It made its reader available for pre-ordering and promised to absorb fraud liability for merchants that bought it;

• It then launched a second reader, this one bundling EMV acceptance with contactless card and near-field-communication (NFC) acceptance. It was one of the first mobile EMV/NFC solutions available and was also highly portable and affordable ($49);

• It continuously re-engineered its transaction-processing flow on EMV card transactions and achieved a processing time of 4 seconds, about 70% faster than the industry average of 13 seconds;

• It mounted an aggressive marketing campaign on the merchant benefits of accepting EMV and contactless and NFC transactions, including increased consumer choice, increased consumer confidence, reduced transaction time, and enhanced security;

• It demonstrated its value with major efforts at popular events such as Coachella and the Bottle Rock festival, in which Square merchants experienced contactless utilization rates of 10%-14%, and by working with Kanye West’s popup shops to achieve and publish contactless transaction rates of 8%-28% in San Francisco, Dallas, Houston, and Miami;

• It incorporated EMV and NFC acceptance into the bundle of benefits that are included with a Square account, such as instant approval, flat-rate pricing, one-day payment (and same-day payment for a fee), complete mobility, chargeback protection, instant access to capital advances, and an analytics dashboard.

Square was successful not by selling EMV but by creating a highly differentiated EMV offering that aligned with the needs of its target market. It then bundled that offering with a variety of other value propositions that also resonated with that target market. After that, selling EMV became easy.

Several other payments companies follow similar strategies with their own products. Fast-growing companies such as Adyen, Braintree, PayPal, and Stripe all come to mind. Any textbook covering the product life cycle will tell you that in growth-stage industries, product differentiation is far less important than distribution scale. But when industries mature, the textbook says, product differentiation becomes the critical factor for success.

The payments industry in the United States has clearly matured, and few companies have adjusted their strategies accordingly. Those that have are experiencing astronomical growth. Those that have not are missing out.