PayPal's UK Card Reader Lowers Hurdles for Chip-and-PIN in U.S.

The chip-and-PIN version of PayPal's Here mobile card reader is set to debut overseas this year, but the splash will be felt in the U.S. as well.

"PayPal has morphed into an entity that is a lot more like Visa and MasterCard than an online payments company," says Philip Philliou, a payments consultant. "If PayPal can convince both consumers and merchants that PayPal transactions are inherently more secure because of EMV (chip-and-PIN cards), that will be a catalyst for growth on both sides of the Atlantic."

PayPal Here, which launched in 2012, allows merchants to use a small card reader that attaches to a mobile phone to accept swiped card payments. It can also read cards with the phone's camera, using tech from Card.io, which PayPal bought last year. The EMV chip-and-PIN version will use a PIN pad that communicates with the merchant's smartphone via a wireless connection. 

The EMV standard improves security over magnetic-stripe cards and is common in the UK and other countries, where it is often called chip-and-PIN because the cards typically require a PIN code for each payment. The card networks have set a timeline for the U.S. to adopt the standard, but few U.S. issuers offer the cards.

While the U.S. migration to EMV is still a work in progress, "if the mobile card vendor wants to be a serious player in Europe, they'll need to come to the table with an EMV-enabled reader," says Julie Conroy, a research director at Aite Group.

"The experience that PayPal gleans from their launch of this service in Europe will stand them in good stead as EMV comes to the U.S.," says Conroy. "They will have the experience under their belt form the product deployment overseas, and that will help with a more effective product launch in the U.S., where the EMV migration will be riddled with challenges for merchants, issuers and consumers alike."

Square, the most prominent provider of smartphone-based card readers in the U.S., did not return a request for comment by mid-day Friday. Square began offering its reader in Canada, which uses the EMV standard, in October, but Square does not offer an EMV-compatible version of its product.

PayPal did not provide an interview or a statement by deadline. It described the new product in a blog post and video.

The terminal maker VeriFone added EMV capabilities to its mobile card reader in November for overseas use.

In the U.S., "VeriFone will certainly make the EMV version available, but the processors who deploy these services need to balance the cost of hardware vs. the additional risk of deciding whether or not to deploy chip-and-PIN readers vs. magstripe—for as long as they are allowed to by the card brands," Paul Rasori, senior vice president of marketing for VeriFone, in an email.  

In the UK and elsewhere in Europe, PayPal will be up against companies such as Elavon, Intuit and iZettle—which is the most recognizable mobile card reader company in Europe, says Dave Kaminsky, a senior analyst for Mercator Advisory Group. "They are the 'Square' of Europe. But PayPal is well known in Europe as well so they should be able to go face to face," he says.

Even in EMV-friendly Europe, chip-and-PIN mobile readers are a work in progress. Elavon offers chip-and-PIN capabilities, and Intuit in November began testing a chip-and-PIN version of its GoPayment mobile credit card processing app and hardware in the UK.

 iZettle, which has faced an uphill climb over its chip-and-signature reader, on February 20 debuted a chip-and-PIN reader that connects wirelessly, via Bluetooth, to a smartphone or tablet. iZettle also recently entered into a partnership with Banco Santander. The vendor has expanded into  Sweden, Denmark, Norway, Finland, UK, Germany and Spain.

"The downside to [chip-and-PIN mobile readers] is EMV readers are larger and more expensive so they don't offer the same convenience and cost efficiently that have contributed to the success of these [mobile card readers] in the U.S. market," says Rick Oglesby, a senior analyst at Aite Group.

"But readers are getting smaller and less pricey so the gap is closing," he adds.