Tech Firms Chip Away At Credit Cards' Share Of Transactions

Companies including PayPal and Apple are competing to convince merchants and consumers to use their swipe-and-go mobile payment systems. Credit card breaches may speed up the use of digital wallets.

STEVE INSKEEP, HOST:

On the way in to broadcast this morning from New York, I stopped in a deli, ordered a bagel, paid with a card from my wallet. This year, Visa and MasterCard together will handle transactions worth three and a half trillion dollars in the United States alone. Millions of cards swiped, billions of times. An alternative method is just a fraction of the market right now. It is sometimes possible to make electronic payments with smartphones, but that method has less than half of 1 percent of the market, even though big brands like Apple and PayPal are trying.

NPR's Steve Henn is tracking why that is and what might change.

Hi, Steve.

STEVE HENN, BYLINE: Good morning.

INSKEEP: So I can use my phone as a radio, as a game center, as an airline boarding pass. What's keeping from it being easily being a credit card?

HENN: Really, success in this field has always been all about winning over merchants. And for years, merchants - store owners - have been eager for tech companies to come into this industry and compete with Visa and MasterCard. They were hopeful that tech companies would find a way to drive down transaction fees, the swipe fees. So when you bought that bagel this morning, your bank and the card company probably got around 2 percent of that transaction. And when you're talking about three and a half trillion dollars, that comes at $70 billion in fees each year.

INSKEEP: You would think that tech companies would be doing everything possible to get a larger slice of that, then. What's stopping them?

HENN: Well, it turns out that keeping track of tens of billions of transactions down to the penny is actually really hard; clearing those transactions, advancing that much credit, detecting fraud.

Visa, MasterCard and the banking system are really very efficient at this

so when most tech companies have tried to get into this business, they don't try to reinvent that wheel. Instead, they've built their payment platforms on top of Visa and MasterCard. So for merchants, if there's a new high-tech payment option out there, typically there's another company in the loop in that transaction looking for a slice of your sale.

INSKEEP: So merchants were hoping to get a better deal and instead, now they're paying two companies a percentage of the transactions they're getting.

HENN: Right and so some tech companies have actually been able to gain some ground by focusing on little businesses. But if you're a huge company; a Walmart, or a Home Depot and you have thousands of cash registers, why would you spend millions of dollars to upgrade your equipment so another company could charge you more? Fundamentally that's why this kind of technology didn't go anywhere for years.

INSKEEP: Well what, if anything, would make that change?

HENN: Honestly, credit card fault. Something like half of all card fraud in the world happens in the United States because we still have this antiquated credit card system that relies on magnetic strips, fixed card numbers and signatures. You know, it's not hard to make a fake card if you steal someone's credit card numbers. And most countries have switched to a different system that uses a microchip embedded in the card itself and often requires a pin code. This system is finally about to come to the U.S. card companies have announced that beginning in October 2015, any merchant that's still using the old-fashioned swipe and sign credit card will be liable for transactions at their store. But, if they get new credit card processing machines, they won't be liable and that means millions of businesses are out there shopping for new credit card terminals.

INSKEEP: Terminals that might be compatible with a smartphone and create an opportunity?

HENN: Well, that is what businesses like Apple are hoping and what's interesting about what Apple's doing is they've convinced the banks not to raise merchant fees if they accept their phones as a payment.

INSKEEP: Well, OK. If the credit system is not going to take a larger slice of money from my transaction when I bought that bagel, how is Apple going to make money here?

HENN: They've convinced banks to share their fees and I think the reason banks are willing to do this is they're hoping that Apple's system - which uses a unique credit card number for every transaction - will actually cut down on fraud.

INSKEEP: Well, we'll see where this goes next.

NPR's Steve Henn, thanks very much.

HENN: My pleasure.

INSKEEP: This is NPR News.

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