COMMENTARY: Chip, Signature, And Square—Perfect Together

Rather than jumping to conclusions about the implications of Square Inc.’s decision last week to implement a Europay-MasterCard-Visa (EMV) chip card solution that forgoes PINs and instead relies on a signature at the point of sale, it’s important to first ask the question: Why would a payments disruptor and tech firm such as Square embrace an antiquated cardholder verification method (CVM) when there are far better and more technologically advanced methods available? The answer to this question is quite simple, it’s what makes the most sense from both business and technology perspectives.

The business rationale is pretty straightforward. Square made a name for itself by nearly eliminating the traditional barriers to entry for small merchants into electronic payment acceptance. Expensive hardware is simply not compatible with this mission, and PIN-entry devices face complex manufacturing specifications and certification requirements, making them more expensive than signature-based readers.

At the same time, using one’s finger to sign a receipt directly on the merchant’s mobile device is an important part of Square’s consumer experience. Not only is it distinctive, but it also provides for consumer interaction that can be leveraged in a variety of value-added ways. Would Square really want to give up this important point of differentiation and consumer interaction in order to comply with the unified experience that is mandated by PIN-entry requirements?

But why would Square’s antiquated CVM be preferable from a technology perspective? Answer: because it’s more flexible. PIN-entry methods rely upon networks and financial institutions to complete consumer verification, and they therefore require that the verification follow the rules of the networks and financial institutions. What’s the penalty for merchants who chose not to comply with these rules? Merchants may have incremental liability for fraud charges if they forgo PIN entry and stick with signature only.

For Square and other firms that already have risk management organizations that are capable of mitigating the incremental liability risks, however, cardholder verification by signature alleviates dependency on and oversight by third parties that would doubtlessly inhibit innovation. By accepting the liability risk rather than transferring it to the financial institutions, Square can make its own rules and is therefore free to innovate its own risk-reduction methods leveraging device printing, software-based PIN methods, biometric methods, and anything else the company can dream up.

Nothing puts the kibosh on innovation like having to follow someone else’s rules, so by eschewing PIN-based methods a payment innovator can maximize its own control and therefore maximize the space in which it can innovate.

Now, with this in mind, what can we conclude about the long-term implications of Square’s decision? Simply that consumer payment experiences in the future will be controlled by the merchant and for the merchant, and that the traditional payments value propositions of convenience, security, and efficiency are just not enough any more.

Rick Oglesby is a senior analyst at Centennial, Colo.-based Double Diamond Payments Research. Reach him at rick@doublediamondgroup.com.