An attempt to make point-of-sale payment devices obsolete
The fintech MagicCube has developed an equipment-free alternative to expensive card terminals that could give merchant-acquiring banks an entree into a relatively untapped market — the smallest of small businesses.
The Silicon Valley startup has developed a software program called i-Accept that runs on smartphones, tablets and displays and does the work of card terminals sold by the likes of Ingenico or Verifone and dongles used by Square. It uses near-field communication to send transaction data from the chip in a card to the NFC reader in a phone or other smart device.
The technology is seen as a more affordable way for so-called micromerchants and even larger businesses to accept electronic payments. One estimate is that there are 25 million micromerchants in the United States.
“To us," card terminals "are like fax machines, while what we have is like email,” said Sam Shawki, MagicCube's CEO.
On Monday, MagicCube announced the availability of i-Accept to merchant banks and their retailer customers. The software has been through the testing and certification process required by EMVCo, a consortium owned by American Express, Discover, Mastercard and Visa.
This is the support it needs to handle most contactless card transactions in the United States. There is one more standards piece required for this kind of technology to be ubiquitous: The PCI Standards Security Council is updating its security standard for contactless transactions on smartphones and other devices to include PIN transactions and is expected to release that in 12 to 18 months.
Traditional banks and challenger banks have started showing interest in i-Accept, Shawki said. The banks are all under nondisclosure agreements.
“We think hundreds of thousands of new merchants will come into the acceptance ecosystem because of this type of solution,” said Dave Glaser, senior vice president of product and merchant development at Mastercard. “We think we're at the tipping point for a whole new means of acceptance around the world."
Today, there are about 6 billion cards in the world, yet there are only 60 million acceptance devices, according to Shawki.
“Visa, Mastercard, Discover and Amex’s future depends on removing that obstacle,” Shawki said. “It's a serious bottleneck for digitalization in general.”
MagicCube sells to retailers through their banks. This gives banks a way to offer an alternative to hardware payment terminals that are sometimes a costly burden, and a way to reach micromerchants that can’t afford a terminal from Ingenico or Verifone that could cost as much as $10,000 to buy or $1,000 a month to rent.
For some time, merchants will probably need both software and hardware, Shawki acknowledged. Though MagicCube accepts contactless cards and mobile payments like Apple Pay and Samsung Pay, there are still a lot of magnetic stripe cards in the U.S. that require a card-swipe device.
A store might use one traditional payment terminal but download MagicCube to 10 smartphones or tablets used by associates roaming the store. A movie theatre or fast-foot restaurant might download MagicCube onto display screens from its partner Elo Touch that customers can use to buy tickets or a meal.
This helps retailers avoid long lines, by letting employees roam the floor with mobile devices and by offering customers self-serve kiosks.
“With six-foot social-distancing mandates in effect, lines can become overwhelming,” said Mary Kay Bowman, global head of buyer and seller solutions at Visa.
Bowman said the card network is working with technology partners like MagicCube “to make it easier, safer, faster and cheaper for any innovator" — including traditional acquiring banks, fintechs and even traditional terminal manufacturers — to turn a mobile device into a payment terminal.
Mastercard and Visa executives cited MagicCube’s security technology as a reason for their support.
Glaser said MagicCube provides a layer of security that others don't — a “trusted execution environment” that provides a secure in-app container that protects sensitive data, sensitive logic and cryptographic operations on a smartphone or other mobile device.
MagicCube is one of the first, but it’s not the only vendor working on software-only card acceptance. Quest Payment Systems has software that supports Visa payments on Android phones. Some Samsung phones support Visa tap on phone payments. Other vendors are likely to follow.
“We think there's going to be a lot of innovation, and there will be a lot of traditional players as well as new players in this space,” Glaser said. It takes about a year to go through the EMVCo certification process, he said.
Glaser expects to see innovation at the micromerchant level first.
“It is because of the cost of the hardware,” he said. “We believe that micromerchants around the world typically only accept cash because the cost of the traditional point-of-sale devices is expensive. So bringing lower-cost solutions to market is very important to being inclusive for these small merchants.”
After that will come other small businesses like coffee shops, bakeries and farmers markets that today use hardware point-of-sale terminals, Glaser said. They will also be attracted by the lower cost and easier maintenance of a software alternative.
Bowman noted that in a recent Visa survey, 48% of consumers would not shop at a store that only offers payment methods that require contact with a cashier or a shared machine like a card reader because of the risk of exposure to COVID-19.
“The demand for contactless payments will spur the demand for software-based payment terminals,” she said.
Long road to development
Shawki has been working on this concept since 2012, when he was global head of remote payments at Visa.
For software payment terminals to be accepted, details around online tokenization and security requirements had to be worked out.
“I thought it was going to take us three years to get there — it took 10,” Shawki said.
In 2014, Shawki left Visa to start MagicCube with his wife, chief technology officer Nancy Zayed, to build technology that could securely handle the transfer of transaction data from one device to another that would be ready to go when the specification was published.
“When we embarked on building our virtualization technology to create similar and better security than a hardware security or chip security, which these devices rely on heavily, we were told technically it's impossible to get there," Shawki said. "One of the biggest things we did is convince EMVCo to look at our virtual technology as a counterfeit-resistant mechanism, similar to a SIM card. It required the will, it required the technology, and I think COVID gave us the last push.”
MagicCube tested the i-Accept software for a year in a lab run by Brightsight in the Netherlands under the supervision of Visa, Discover, Mastercard and American Express.
“That's when we started getting their support,” Shawki said.
MagicCube is not a household name, nor does it seek to be.
“We think of ourselves as 'Intel inside,' ” Shawki said. “We are empowering the networks and the banks.”