In This High-Stakes Poker Game, Verizon Holds More Cards Than Samsung

By John Stewart

Why won’t Verizon Wireless make nice with Samsung Pay?

With the U.S. debut of Samsung Electronics Co. Ltd.’s mobile-payments service just a few days away—and a national launch of Samsung Pay due Sept. 28—all the major mobile network operators have signed on to support the service with the glaring exception of Verizon.

That’s bad news for the Korean electronics giant’s aspirations in payments, some observers say, since Verizon controls an estimated 30% of the distribution of Samsung’s phones. “They’re the largest distribution channel for Samsung devices,” says Ted Fifelski, a co-founder of Austin, Texas-based SimplyTapp, developer of host card emulation, a variant of near-field communication (NFC) technology for mobile payments. “It’s a huge problem for Samsung.”

The situation could resolve itself soon. Verizon, which did not respond to inquiries for this story, has released a statement in recent days claiming that it is still “evaluating” Samsung Pay. That leaves open the distinct possibility that it might sign on to support the service after all.

For now, though, Verizon enjoys a much stronger negotiating position than Samsung, and the longer the stand-off lasts, the stronger that position grows. “Verizon has a vast distribution capability which gives it negotiating strength. At this point Samsung Pay needs Verizon more than Verizon needs Samsung Pay, so why would Verizon scurry to support it?” asks Rick Oglesby, senior analyst for Double Diamond Payments Research, Centennial, Colo., in an email message.

But Samsung needs Verizon’s blessing for reasons that go beyond the carrier’s ability to mass-distribute the new Galaxy S6, S6 edge, S6 edge plus, and Note 5 devices that can run Samsung Pay. One key negotiating strength Verizon claims is its ability to block Magnetic Secure Transmission, the radio-field technology that lets Samsung Pay interact with ordinary mag-stripe payment terminals. That means it could sell Samsung phones that wouldn’t be able to run MST, which Samsung is counting on to give its payments service access to anywhere from 80% to 90% of existing point-of-sale terminals.

MST relies on an embedded metal coil that ordinarily allows the phone to recharge its battery wirelessly. With a software update, though, the coil can be turned into a transmitter to send payment credentials via the MST connection. The catch is that the mobile network operator must sign off on the update, since it relates to a hardware element running on its network, Fifelski says.

Samsung is counting on MST to give its payments service, which also uses NFC, a huge lift in acceptance locations. Without Verizon’s okay, Samsung Pay is “not going to hit critical mass,” says Fifelski.

Samsung would not comment for this story beyond this statement: “Samsung is in discussions with a number of partners to provide greater access and choice for customers; we will share more information when it becomes available.”

Another possible issue is that Verizon has already agreed to pre-load Android Pay, a competing mobile-payments service from Google Inc., when that service becomes commercially available, presumably later this year. “Verizon already has a deal to support Android Pay,” says Oglesby. “Android Pay will be pre-installed and it has lined up more carriers and more [financial institutions], so it could merely be a question of prioritization.”

Verizon’s partners in the now defunct Softcard mobile-payments venture, AT&T and T-Mobile, also agreed to preload Android Pay when Google bought Softcard’s assets, and that hasn’t stopped them from lining up behind Samsung Pay. But Verizon’s ardor for building a revenue stream in mobile payments, even after the experience with Softcard, burns a little more brightly, Fifelski says. “They’re still looking to exert leverage, to extract dollars,” he observes.

The question is where the dollars are going to come from. Samsung is not likely to find card issuers amenable to terms anything like the 15 basis points of interchange those issuers are paying Apple Inc. to have their credit cards participate in Apple Pay. And even those terms are likely to be radically revised when the Apple Pay contracts come up for renewal. “[Samsung] initially thought it could extract fees from issuers, but they don’t have the clout of Apple,” Fifelski says. “They will have to find another way.”

One possibility some observers mention is pricing to merchants for services such as incorporating gift cards into Samsung Pay. “There’s a play there,” Fifelski says. But the knotty issue of getting Verizon on board will have to be tackled first.