Smart Phones Go Contactless

Software-based options are proliferating for merchants who want to use their own mobile phones for payment card acceptance. Are we entering the era of Square II?

Square Inc. made payments history a decade ago with its iconic dongle that enabled iPhones to accept payment cards (“How the Twitter Guy Changed Payments,” July 2019). Garnering less attention was the ability of Square’s mobile app to accept a payment manually when the seller entered the customer’s card data, no extra hardware needed.

Ten years later, purpose-built payment terminals are facing new competitive challenges. Despite initial trepidations about the security and utility of smart phones as de facto point-of-sale acceptance terminals, the role of phones has only grown (“Your Smart Phone Is Your Terminal,” October). And with the Covid-19 pandemic arousing fears about touching POS terminals supposedly teeming with the coronavirus, the lure of using contactless-enabled chip cards and smart phones for mobile payments is stronger than ever.

Recent developments are cementing the new role of mobile phones as software-only payment terminals—so-called soft POS—for contactless transactions. In August, Visa Inc. invested in MagicCube Inc., a 6-year-old Silicon Valley tech firm that specializes in software-based contactless acceptance for commercially available mobile phones and tablets. The investment came at a time when Visa is ramping up its Tap to Phone initiative, a program aimed at expanding digital and contactless payments.

Earlier that month, Apple Inc. stunned the payments industry with its acquisition of Montreal-based Mobeewave Inc. on undisclosed terms. Mobeewave in October 2019 launched with Samsung Electronics Co. Ltd. a feature that allows mobile phones without dongles or other card-reader attachments to process transactions via a near-field communication link between a contactless card and the device.

And in October, banking behemoth JPMorgan Chase & Co. rolled out a new checking account for small businesses that includes a feature called QuickAccept, which enables a merchant to take contactless or contact payments on smart phones through the Chase mobile app (Trends & Tactics, this issue).

‘A Virtual Chip’

Combined, these developments could be dubbed “Square II.” They’re growing in part because of new contactless specifications for commercial off-the-shelf mobile devices from EMVCo, the standards body of the major payment card networks, and rules for software-based entry of personal identification numbers from the network-sponsored PCI Security Standards Council.

“It is the logical evolution of the dongle plugged into the iPhone to have the payment capability built into the iPhone,” is how payments researcher Thad Peterson, a senior analyst at Boston-based Aite Group LLC, assesses MagicCube’s technology.

MagicCube founder and chief executive Sam Shawki calls his Santa Clara, Calif.-based firm “a device-replacement company,” and its i-Accept products are “the software equivalent of an EMV chip.”

I-Accept uses NFC for contactless communication between the merchant’s phone or tablet and the customer’s EMV chip card or NFC-equipped mobile phone with a payment wallet. The software can prompt for a PIN, to be entered by the customer, when the card or phone is tapped.

Neither MagicCube nor Visa would reveal the size of Visa’s investment in a funding round that included other participants. “But it was a range designed to take us to deployment,” says Shawki, Visa’s former head of global remote payments. He adds that MagicCube has attracted a total of nearly $20 million in investments from Visa and its other backers since its founding, and another funding round is planned for early 2021.

MagicCube, which says its technology works on the Visa, Mastercard, Discover, and American Express networks, in mid-2019 announced a venture with Japanese tech firm NTT Data Corp. to bring its so-called PIN-on-glass technology for entering PINs on off-the-shelf smart phones to merchants in Japan.

The NTT initiative hasn’t rolled out yet, however. But MagicCube already has achieved “live transactions in the field” in the United Kingdom, a project for which Shawki won’t reveal details. Next up are undisclosed countries the Middle East, Spain, and the U.S.

“What MagicCube has done is create a unique security technology that creates a virtual chip,” says Mary Kay Bowman, senior vice president of buyer and seller products at Visa. “It’s not specifically dependent on any hardware components, proprietary hardware, or ancillary devices. It does enable the mobile phone to be turned into a software point of sale.”

Adds Peterson: “MagicCube is essentially a virtual secure element. It frees up the transaction from the device.”

The Payoff

MagicCube thus becomes another component in Visa’s Tap to Phone initiative, which aims to deploy contactless technology on millions of Android devices throughout the world. The program includes investments in tech firms as well as partnerships with merchant acquirers, financial-technology companies, and even some POS terminal makers. Visa announced 35 new ones in late October.

“After many investments, we’re up and live in more than 15 countries globally,” says Bowman, who worked at Square until leaving for Visa in 2019. Visa expects Tap to Phone to arrive in the U.S. next year.

The payoff for Visa: More non-cash payment options that produce more transactions on Visa’s network. “This extends what we’ve talking about for decades—expanding acceptance,” says Bowman.

The payoff iPhone maker Apple expects from Mobeewave wasn’t immediately clear. Neither company responded to requests for comment from Digital Transactions. The quiet acquisition didn’t become publicly known until late August, though it may have closed six months earlier, according to Digital Transactions News. The unconfirmed price Apple reportedly paid was between $120 million and $150 million.

After launching its contactless payment system with Samsung in October 2019, Mobeewave in January followed up with a service that speeds up onboarding for merchants looking to exploit the capability. Now, however, tech observers expect Mobeewave will switch from the Android mobile operating system on which Samsung’s phones rely to Apple’s proprietary iOS operating system.

“Apple has clearly built a wall,” says Peterson. “They’re not letting Android users play in it.”

‘The Optimal Path’

Meanwhile, payments companies that include Square and mega-processor Fiserv Inc. are working on their own smart-phone contactless projects. So where might all these initiatives leave dominant POS terminal makers such as France-based Ingenico and Verifone Inc.?

Mark Bunney, director of go-to market strategy, North America, at Ingenico’s Atlanta headquarters for the U.S. and Canada, sees merchants’ smart phones as a complement, not a mortal threat, to his company’s many hardware and software offerings.

“We want the customer to be able to choose what the optimal path is,” says Bunney, whose company was acquired in October by French payments firm Worldline S.A. He notes, however, that Ingenico in recent years has expanded its roster of processing and software-based products.

“That’s the path Ingenico has been going down, offering more software and services,” Bunney says. “It’s a very logical evolution.”

But payments-accepting hardware, for example in unattended merchant locations, will always be needed, according to Bunney. “You still need those points of interaction. Mobile in particular is really challenging because there isn’t a single solution that meets all the use cases and customer types,” he says.

Brookfield, Wis.-based Fiserv’s Clover unit, which serves small and mid-size merchants, provides a long line of payment software and POS hardware. Ellen Linardi, Clover’s head of product, isn’t worried about displacement. In fact, she admires the level of security leading mobile-payment services provide.

“Oftentimes, phone-based payment options such as Apple Pay, Samsung Pay, and Google Pay offer higher levels of security than card-based payment options,” Linardi says in an email message.

A spokesperson for San Jose, Calif.-based Verifone, the largest U.S.-based POS terminal maker, did not respond to a request for comment.

‘A Rear-Guard Action’

While the use of mobile phones as contactless-payment acceptance terminals is growing, it’s still uncertain how much share merchants’ phones will grab from providers of purpose-built POS hardware.

The providers “can go either way,” says Aite’s Peterson. “If they view it as a threat they’re going to be fighting a rear-guard action for the foreseeable future.”

He notes a conversation he had with an executive of fast-growing payment processor Stripe Inc., who asserted the data from payment transactions has become more important than the machinery. “It’s that value from [the] POS system that really matters,” says Peterson.