Exactly how the payments system will evolve remains unclear

The Canadian payment industry has been a clear leader in innovation, standardization, and adoption of new technology. But the future evolution of our payment system is less clear as new technologies proliferate. Let’s look at some of the possible avenues for development and what may or may not succeed.

Mainstream payment technologies have developed through the major payment networks such as Visa, MasterCard, and Interac. The industry for years revolved around the use of plastic cards with magnetic stripes, then gradually migrated to chip technology. In Canada, that move is fairly complete as just about every credit and debit card features the use of chip.

Tap and wave technologies

As well, we’ve seen a move towards contactless cards with features such a PayPass or payWave where you simply tap the card on the payment terminal and complete a transaction for smaller amounts of money without a PIN or a signature. Interac has introduced its own contactless technology called Interac Flash that is being adopted by some banks. Most credit cards in Canada now have a contactless interface.

These cards are gaining in popularity as they are ideal for replacing certain cash transactions. If we compare Canada to other markets, Canadians are very big users of contactless payments. A significant number of merchants are deploying compatible terminals and more consumers are starting to pay this way.

The next step in the evolution of payments is the adoption of NFC (Near Field Communication) technology – a protocol implemented in smart phones. NFC is a contactless, wireless technology that can do many things, including being able to emulate a contactless card.

Essentially, users can download their credit cards onto their smart phones and turn their device into virtual cards. Most major financial institutions in Canada have a live program on NFC capabilities.

Limitation exist

There are a few limitations that still need to be ironed out. NFC is compatible with some smart phones but not all – Apple does not support the technology in any of its iPhones. Users must have the right phones and some phones require an upgrade to the SIM card to make them compatible. So it is not as yet as simple as we would like.

But the system has the virtue of transparency. If a merchant has a PayPass or payWave terminal, NFC will work its magic. Today, NFC has the same limitations as contactless cards when it comes to the amount of money that can be charged but at some point the industry will implement a security code to unlock the card on the phone, allowing for more security and larger purchases.

It’s still early days but the trend towards NFC will become widespread in the next couple of years and Canada is at the forefront of this technology in the world. An emerging trend from the U.S. is the introduction of new mobile payment systems in Canada by Square and other providers that cater to small merchants, enabling them to accept payments anywhere without traditional point-of-sale technology. This has created a new class of merchants that didn’t exist before.

One of the big problems, however, is that providers like Square offer mag-stripe solutions – essentially a return to old technology – and it misses all the security features built into EMV and chip cards. That’s a major tradeoff.

It might be an option for smaller merchants who otherwise wouldn’t have made a sale at all but they’re taking on a little more risk in the process. Fortunately, we are starting to see solutions that involve chip cards, although they are a bit more complex and costly. They usually involve a standalone device communicating with a smart phone by Bluetooth and requiring a PIN.

Payment apps

There are also other payment technologies in the marketplace, for example, bar codes. The most successful example is Starbucks, which has developed a reloadable virtual account for the smart phone that can be scanned at the cash. Tim Horton’s just introduced something similar in Canada. These types of payment methods removes the need to handle cash and speeds up the transaction. For very large merchants with a lot of critical mass, this kind of program makes sense. But smaller merchants would face a number of significant costs, such as developing their own apps, acquiring compatible bar code scanners, and modifying their POS systems. It is not likely a common standard will develop among merchants.

Another step in the evolution of our payment system is development of the so-called electronic wallet. The term is used for many things but the mainstream version would be to implement an NFC system for several cards, creating a virtual wallet that can be accessed seamlessly depending on the customer’s choice of card.

Currently, most people have quite a few cards in their wallets. The concept is to have a virtual container for the cards wants to ‘carry’ that is secure and easily accessible on a smart phone. It could be a couple a credit cards, a debit card, and even a transit card.

Security remains key

One challenge is security – convincing all the different issuers (banks, transit operators, etc.) that it’s safe to put their cards together in the same container. With an electronic wallet, card information can be stored in a secure location with a trusted third party managing it. The electronic wallet could also be a facilitator for the consumer to select the appropriate card more easily.

Payment technology that offers clear benefits to both consumers and merchants can be very difficult to achieve. Consumers want convenience while merchants want to drive business at a reasonable cost and therefore are very sensitive to transaction fees. Meeting both objectives is a challenge.

Looking ahead, as choices increase, the marketplace will have a lot to say about which direction around payment system will go. There are currently more solutions than merchants and that consumers are willing to embrace. To get critical mass, consolidation and standardization will be required.

The market in Canada is small and relatively wealthy, with a payment industry that is quite structured. There aren’t many financial institutions in comparison to other countries so consensus on standards has been easier to achieve. That will guide us in the future.

Nicolas Guay – Payments Business