Given the huge importance of small merchants worldwide, it’s impressive how little attention has been paid to how inappropriate chip and PIN is for those merchants. (Note: There are 29 Million small businesses in the us. There are 55 million small businesses in Indonesia. ‘Nuff said.)
In the wake of the U.S. EMV liability shift that kicked in on October 1, there’s been no shortage of debate about Chip and PIN vs. Chip and Signature. Once again, our old friend, the Durbin Amendment, is having its say. And for all the high-minded security-oriented thoughts being dished out, along with the many biased special interests trying to influence the debate, the small and micro-merchant have been left out, as usual.
Make no mistake. I love EMV – its far better than mag stripe, but EMV is not synonymous with Chip and PIN, which i like far less.
There are very practical reasons why the U.S. EMV powers-that-be have shunned chip-and-PIN for chip-and-signature. It’s primarily about putting the importance of adoption above security, given that security without adoption doesn’t do anyone much good, But small merchants need to avoid chip-and-PIN for a very different practical reason: they simply can’t afford it.
Chip and PIN is not conducive to very small merchants. It’s the chip part that obliterates counterfeit fraud and it’s the PIN part that is so very expensive for these smaller merchants. Mobile payments is not only where all of payments is headed, but it’s a far more cost-effective and immediate option for small merchants. They can use a chip-card reader plugged into a mobile phone or a tablet and it doesn’t need a PIN interface at all.
This gets even worse for restaurants, which on top of everything else have to deal with pay-at-the-table devices. Restaurants have a huge burden to upgrade and mobile is how to reduce cost or, at the very least, increase utility. The PIN in small merchants often amounts to wasted infrastructure and impressively expensive wasted infrastructure at that.
A payment facilitator, ISO or acquirer needs to think more innovatively, rather than just dishing out whatever products their partners are pitching this month. Unless they starting focusing on specific verticals, size categories and custom-built options, they are not going to capitalize on the changes that EMV is forcing. Those are some compelling opportunities they are leaving on the table.
It’s easy to see that large merchants get an excellent business case to accept Chip and PIN. We’ve seen large merchants agitating for a 100 percent PIN market in the U.S.. But there are disadvantages of PIN, especially for small merchants. As it is, in most of the world, the small merchants are the last to accept cards. Although Square has famously helped merchants in the U.S., there are much bigger challenges in markets that have Chip and PIN. Those merchants would have to spend more money for a Chip and PIN reader than would ever make sense. Let’s do some math.
How big is a small business? Well, Square just noted that they have approximately two million sellers that accepted at least five payments. If they are responsible for the vast majority of Square’s volume, that would mean Square’s typical merchant generates no more than $1,000 per month in gross payment volume. A standard chip & PIN terminal might cost $300, but the most inexpensive ones that work with smartphones hover around $100. That means that the reader would add from almost 1-3 percent of their first year of payments costs. Most small merchants just won’t pay that kind of cost, when it’s hard enough for them to justify 2.75 – 3.5 percent of their sales for payment cards in the first place. Some providers have tried to lower the burden by renting the chip and pin device, but that adds at least half a percent forever.
There are new methods of capturing card information, and those are a compelling opportunity to remove the hardware cost from the system. Ubiquitous cameras on mobile devices can capture card data, and card on file options (like Uber) can make for seamless transactions, but for these to go mainstream, it would require some help from the card schemes to give small merchants a measure of protection. Allowing small merchants to capture the chip data and waiving the PIN requirement would dramatically reduce the cost for those small merchants. Companies like iZettle have used this method around the world, but sometimes it’s run afoul of local rules. This caused them to switch to a chip and pin reader in some geographies, which has no doubt hindered growth in very small merchants
If we expect payment facilitators to help bring acceptance to small and micro-merchants worldwide, we need strategic thinking and cannot blindly go all PIN all the time.