Technologies Changed Course Sharply In Payments

This year saw two of the U.S. payments industry's most stagnant technologies–chip cards and decoupled debit–take divergent paths.

In the U.S., both technologies had been in a holding pattern for years, despite pressures from within the industry and from other countries to improve adoption. This year, one finally took off, whereas the other crashed.

The EMV standard for chip cards is the one that seems to have had success. It is used in many countries to improve security beyond what the magnetic stripe is capable of providing, and in 2011, many large banks began issuing cards with embedded chips.

Decoupled debit is the technology that seems to be failing. It allows issuers to offer debit cards that access accounts at other financial institutions.

Decoupled debit uses the inexpensive automated clearinghouse network to settle payments. Issuers promote the cards to merchants as a cheaper alternative to accepting traditional debit cards.

But the so-called Durbin amendment to the Dodd-Frank Act, which capped how much issuers can receive in interchange when their cards are used to initiate payments, eliminated much of the incentive for merchants to seek other options. Merchant acquirers pay issuers interchange and pass the expense along to their retailer clients as part of the discount rate.

"Our world changed when the Durbin amendment passed," says Michael S. Grossman, the former chief executive of Tempo Payments Inc.

Tempo, which was founded in 2000 as Debitman Card Inc., shut down this year after the Durbin rule made its business model unsustainable (see story).

"We were literally singled out," by this legislation, he says. "That's what killed us."

However, Tempo is an extreme example.

National Payment Card Association is still in business. The Coconut Creek, Fla.-based company has been in pushing decoupled debit since 2004 and remains in business today (see story).

Joe Randazza, the company's founder and chief executive, could not be reached this week.

And First Data Corp., an Atlanta-based unit of Kohlberg Kravis Roberts & Co., is still supporting the Shell Saver Card, a decoupled debit card for customers of Royal Dutch Shell PLC's gas stations (see story). First Data also handles processing for other Shell transactions. A representative for the company's decoupled debit business could not be reached this week.

These companies, or even a new entrant, may find ways to succeed where Tempo failed. The decoupled-debit model "is a super-underutilized model," says Brian Riley, a research director in the bank cards practice at TowerGroup. "There [are] a lot of ways to play with it."

The cards could add fees to make up for the revenue lost under the Durbin rule, he says.

By contrast to decoupled debit, the EMV standard seems to be gaining a long-overdue foothold in the U.S., but its early success might be misleading.

"Outside of the international application, consumers are oblivious to EMV," payments consultant Philip Philliou said in an email.

But demand among international travelers, who want to use their U.S.-issued cards in other countries, will prompt "a steady but slow increase in the issuance of EMV cards throughout 2012," he says.

JPMorgan Chase & Co., U.S. Bancorp, Citigroup Inc. and Bank of America Corp. are all on the bandwagon (see story).  But their efforts focus primarily on offering the cards to travelers to use overseas instead of promoting the technology for domestic use. And some do not support the use of a PIN, which is commonly used with EMV cards in other countries.

Some merchants are concerned that the U.S.' reluctance to embrace EMV will make it an isolated target for fraudsters. Wal-Mart Stores Inc. has enabled EMV acceptance on all its domestic payment terminals.

There has been widespread transaction network and terminal support as well.

Visa Inc. has announced a plan to encourage American merchants to embrace the EMV standard (see story). The dominant ATM makers are also supporting EMV in the U.S., and with good reason: fraudsters typically target ATMs to get cash from stolen card data. Card-skimming crime causes an average loss of $50,000 per affected ATM, according to Aite Group.

The ATM makers NCR Corp. and Diebold Inc. are planning or building EMV-acceptance into their U.S. machines.

As for Grossman, he's now the chief executive of Attributor, a San Mateo, Calif.-based company focused on helping publishers protect copyrighted material.

He said he still thinks of Tempo.

"We were just on a terrific path," he says. "It was so hard to get an entrepreneurial company off the ground like that, and at the exact moment of success, Congress changed the rules."

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