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The Shift to Electronic Payments - Full of Promise, Fraught with Peril?
The transition from physical forms of payment—such as cash and checks—to electronic alternatives—namely credit and debit cards—has been a hit with consumers, retailers, and credit card issuers alike. After all, shoppers get resources when they need them without the hassle of carrying large sums of cash; merchants from The Home Depot (HD) to McDonald’s (MCD) to Wal-Mart (WMT) gain speed at the checkout line; while banks—including Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM)—and processors generate considerable income for doing little more than acting as middlemen.
It seems, at first glance, like a win-win-win proposition. Look closer, however, and a different picture starts to emerge; the decades-long, secular shift to credit is starting to exact a toll, with little doubt that it played a considerable part in the recent economic downturn. Now, the credit card industry’s latest innovations are drawing the ire of consumer watchdogs. Among their claims: Many of the programs—such as signature-less transactions and contactless payments—were hastily put in place, suffer from serious security deficiencies, and often shift the blame in cases of fraud to the system’s least-powerful stakeholders—consumers.
The recent success of PIN-based debit cards has introduced a new wrinkle: Retailers and credit card companies, typically joined at the hip, are increasingly finding themselves on opposite sides of legal disputes. That was the case during a 1996 lawsuit against the industry’s twin goliaths MasterCard (MA) and Visa (V), brought on by 20 of the country’s largest retailers. Settled in 2003 for $3.1 billion, the class-action suit alleged the nation’s two largest electronic payment processors forced merchants to accept their debit cards, which riled retailers because of the higher transaction fees the cards usually carried.
The movement toward e-payments has suffered other setbacks, such as Best Buy’s (BBY) recent decision to opt out of Visa’s contactless payment program. The platform allows shoppers to pay for items by tapping their card against a specially equipped card reader, but forgoes PINs in favor of `old fashioned’ signatures. The country’s largest electronics retailer decided to drop out due to elevated transaction fees, as well as longer processing times at checkout. Some even question the wisdom of Visa’s contactless program altogether, since it seems to run counter to the company’s push away from signatures, and may even cannibalize Visa’s other programs, such as its fast-growing `No Signature Required’ platform.
Near-term challenges aside, the move toward e-payments continues. Indeed, Visa recently announced that it will cover about 98% of eligible merchants with its signature-less platform by mid-summer, up from roughly 3% today, a move that will no doubt elicit a response from rival MasterCard. And, despite the government’s plan to promote transparency in the credit card arena, electronic payments—for better or worse—are here to stay.