The Changing Face of In-Person Payments

Ask a person today the simplest, safest way to pay for something in person, and the response will most likely be, “with my credit card.” For decades, we have felt that our data and personal information is safest when we pull our credit card out of our wallet and pay for something in person – safer of course than paying for something online. In fact, one of the biggest misconceptions in payments is that online payments are “riskier” and deserve higher processing costs than in-person payments (like a swiped credit card).

When a consumer pays with their smartphone at Starbucks, the card associations (Visa/Mastercard) charge higher fees to the merchant (which may come through as higher prices to the consumer). The world of payments is moving from a “black and white” world (it is either a card-present/swiped transaction or it is not) to a very gray interpretation because technology for the sake of fighting fraud and convenience is changing what is really an in-person payment.

The genesis of these higher fees for online payments has a common thread (pre-Internet):

  1. Unknown controls on payment security with phone and mail as the primary communication methods (the Internet as we know it didn’t exist back then)
  2. Consumer verification was spotty since there was typically no way to know who was actually making the payment (same reason as #1)
  3. Certain industries (like mail-order, timeshares and travel agencies) were wrought with fraud and disputed transactions (chargebacks) with many of these same industries virtually extinct in 2014 (same reason as #1)

The common thread is that the justification for higher fees for “riskier” transactions predates Internet commerce. Meanwhile, the major breaches of cardholder/consumer data (Target and TJX among them) have had a similar characteristic – they have been retailers in a supposedly safe environment where the card is swiped. The irony in short: payment security investments for “riskier” online commerce have been more effective in protecting consumers and businesses than the traditional method of payments where the card is swiped.

The emergence of identity theft has also exposed how the magnetic stripe is not enough to protect consumers from improper use. U.S. companies are racing to catch up with what Europeans have been using for over 10 years, namely the emergence of EMV (integrated chip cards) to fight these fraud battles. This “investment” in EMV will cost U.S. merchants dearly as they begin to swap out card-processing machines (terminals) and re-training staff — all because (of a flawed belief?) swiped/in-person transactions are “safer” than keyed-in payments.

As much as fraud and data security have shaped technology, convenience to consumers is defining the evolution of in-person payments. Startups are envisioning a world where gadgets both mimic the magnetic stripe (like Coin) for multiple cards, and those that completely ignore the magnetic stripe on a card. The examples of the latter include: digital wallets, Near Field Communication (NFC) devices, and more recently Low-Energy Bluetooth devices.  Each was declared to be a “disruptive” technology that would fundamentally change the way people pay when they were introduced (still early in the game for LE Bluetooth), yet none of them have attained real traction with consumers.

In some cases, this is due to the “chicken and the egg” problem – merchants need to implement these solutions before consumers will feel a need to adopt them. In any case, a ton of money (hundreds of millions) has been invested in these technologies in the name of a “superior consumer experience” when most of what has been accomplished is simply processing an in-person payment on a more secure, “keyed-in” method. Technology has also changed who is actually doing the data entry: what was normally the merchant until the past few years has morphed into consumers signing with their finger or clicking through on a tablet or phone.

Startups that address the need to combat payment security and fraud, or attest to having the easiest way for consumers to pay, will continue to evolve this industry. The card companies haven’t yet caught up with these innovators – they are still is trying to figure out if the risks are in-person or not.



About Matt Golis & YapStone:

Matt Golis believed that the way the world pays was going to massively change in the late 1990s, with paper checks becoming a thing of the past. In early 1999, he moved to San Francisco from Cleveland, OH and started RentPayment later that year. In 2001, RentPayment joined forces with YapStone, founded by Tom Villante, who is now Executive Chairman.  Matt focuses on strategic growth opportunities for YapStone, as Co-Founder and Co-Chairman.

YapStone powers payments to large markets such as property management firms, marketplaces (HomeAway/VRBO) and nonprofits (ParishPay). The company facilitated $8 billion in payments in 2013, generating almost $100 million in revenue, and now has 165 employees. It is also one of the fastest growing companies in the SF Bay Area