Mercator Blog

EMV QR Codes Could Solve the E-commerce Fraud Problem if Merchant Concerns Can Be Overcome
Date: June 18, 2018
Tim Sloane
Vice President, Payments Innovation

The market outlook for EMV and NFC has changed dramatically in four years. In December 2014, my blog titled Why EMV Cards Are Stuck in the POS, Which Makes NFC Look Great! indicated that the EMV solution was so slow that it gave NFC a real opportunity to gain market share. But that was before the new fast EMV solution was released in August 2016; see my blog titled A New Specification Enables a Fast Dip for EMV and Speeds EMV Certification. Here's How. The new standard enables the EMV card to be removed from the reader after just a short dip and then sends the authorization message after the total ticket cost is determined. Add the fact that the networks have eliminated the requirements for signature capture, and the result is a greatly improved user experience combined with technology that is easier for merchants to certify and deploy. So the environment has greatly improved for EMV. NFC has not been so lucky.

NFC suffered a series of setbacks. First was the partial rollout of contactless cards. Merchants were upset when they upgraded their terminals for contactless payments but card issuers failed to convert their portfolios to contactless cards as they had promised. For their part, card issuers had difficulty making the business case for the upgrade and did not promote it effectively, leaving many consumers whose accounts were upgraded unaware that their cards had this capability.

This led merchants to doubt that card issuers would actually convert their cards to EMV. However, the business case for EMV was clear (transfer of risk from issuer to merchant), and issuers did in fact convert their portfolios. Now merchants were in the opposite situation: Having waited too long to upgrade their POS terminals to accept EMV cards, they were stuck in long lines waiting for EMV certification even though their terminals were technically capable of accepting EMV cards.

Apple and the various Android device manufacturers chose this moment to launch their NFC-based mobile wallets and got caught in the EMV backlog. A further setback was a strategic question: When NFC-based mobile wallets were first launched, merchants saw mobile as an opportunity to wrest control of electronic payments from the major card networks, and they deliberately turned off their terminals' NFC capability in order to give preference to their own proprietary wallets, based on the Starbucks model using barcodes or Quick Response Code (QR Code).

Merchants' lack of acceptance of NFC had a negative impact on the consumer experience of the technology. Even consumers who were interested in using their mobile wallets with NFC had difficulty finding merchants that accepted it. In addition, merchants that could accept NFC often didn't communicate that fact to the consumer at the point of sale. Every time these mobile-first users tried to use the NFC mobile wallet and failed, the likelihood they would continue to try was reduced.

Another long-term drag on NFC adoption was Apple's implementation of its Apple Pay mobile wallet. While Apple Pay primed the market for mobile payments, it also created a long-term drag on greater NFC adoption because Apple controls the NFC device and won't enable anyone else to access it. As a result, banks are unable to introduce a payments capability into their own Apple mobile banking applications. While banks could in theory enable a payment application on Android, and some have, doing so without the ability to implement on Apple results in an inconsistent customer experience. There are indications that Apple may be opening up access to the NFC device, but so far that has been limited to specific nonpayments applications such as opening hotel doors.

More recently, in July 2017, EMVCo released a standard for payments that utilizes a QR Code interface. The specification supports two different methods. In the Consumer-Presented Mode, the user displays a QR Code on the smartphone which is read by the POS terminal and the transaction is then sent to the acquirer. In the Merchant-Presented Mode, the POS terminal displays a QR Code which is read by the smartphone, which forwards the transaction to the network. Since many merchants are already equipped to scan QR codes as part of their own wallet initiatives, it might be expected that EMV QR codes would be adopted quickly. However, EMVCo has a long and contentious history with merchants, who see the organization as a way for Mastercard and Visa to extend their control over the payments process. During the original EMV implementation, EFT (Electronic Funds Transfer) debit networks such as NYCE, Star, and Pulse were not given equal status with Mastercard and Visa. This objections from merchant groups of obstruction of their legal right to choose the debit network through which a debit card transaction would be routed under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The EMV QR Code standard will probably meet with similar objections unless it supports the full range of U.S. debit networks. This complicates the decision process for card issuers who might have hoped EMV QR codes would give them an alternative to Apple's locked NFC device. To overcome merchant resistance, these banks should work to ensure that EMV QR Codes support the full range of debit networks

Mercator Advisory Group’s latest research report, EMV Technology Update: EMV Classic, Faster EMV, and Now QR Code EMV, goes into detail on how these technologies work, and what card issuers need to do to ensure that EMV QR codes meet a friendlier reception than other network-backed standards.