There is a bright light shining on the dark corners of the payment processing industry. Unfortunately for the incumbents, the picture isn't a very pretty one: Processing rates of old are based on the notion that in order to protect the transaction from fraudsters, merchants must give up a portion of their transaction income to their payment processor. As we have seen over the last several years, this 50-year-old card technology is still vulnerable to attacks from hackers and fraudulent criminals despite the increasing amount of scrutiny regarding card transactions.
With the development of digital currency or digital transactions, this security threat hasn't been eliminated. It has simply changed platforms with hackers always one step ahead. There's now a decrease in fraud when compared to the total amount of online transactions. This means that although fraud is still rampant with digital purchases, it is a much smaller percentage overall than it was through the traditional card process. For merchants, this begs the question: Why do rates for an online or mobile transaction carry a higher transaction fee as compared to a card swipe?
If the current trends in tokenization and encryption hold fast for card networks, it will be very hard for processors to justify such high transaction rates. This will lead to government intervention if the incumbents can't regulate themselves, as it has with our friends to the north. The International Organization for Standardization and independent agents will slowly dry up under the mandate to lower rates in order to comply or else they must change business models altogether. But is this shift such a bad thing after all?
First and foremost, EMV chip technology, tokenization and encryption are great things for the entire industry. Enhanced security measures mean nefarious hackers must become extremely savvy in order to gain access to payment information. Better yet, if they are able to gain access to payment credentials, the current technology can render the payment information useless, and hackers won't have much time to do any harm to the customer before they are stopped in the process. Standardization of payment methods means streamlined integrations and development for technology companies looking to introduce solutions for clients.
For consumers, this will equate to less vulnerability to fraud or identity theft, and in general more trust in using digital or mobile devices for payment. Most importantly, better security features mean lower transaction fees for the merchant. The risk in the transaction is reduced, and so is the overhead in processing a transaction with the advent of sophisticated technology.
At my mobile transactions company, our focus has always been on reducing the operational costs for our merchants using technology. Throughout my 10 years of experience working in mobile infrastructure as an attorney and consultant, I saw tremendous opportunities within payments. However, when our team started building Bleu, integrating our technology into the current processing network was difficult. Payments have always been a foreign concept to even the most experienced software developers. One of the several challenges I have faced as CEO has been to continuously lower costs to the end user, while developing on top of an antiquated payments architecture. It took us almost two years to completely understand and innovate within the transaction network, but there is still much more that can be done.
For the payment processor or those involved in processing transactions, the focus should be on delivering lower fees for the merchant and efficient movement of the transaction. This causes the overall cost of business to be lower, thereby increasing profit margins. That's where the value will come. Of course, there will be companies that won't be able to adapt, but those that act now can survive this shift and remain profitable, even as revenues decrease.
Sesie Bonsi is president and CEO of Bleu, a secure and easy-to-use contactless payment solution powered by Bluetooth low-energy beacons.