Mobile in-store payments could grow dramatically in the U.S. as the result of a battle brewing among tech giants Google, Samsung and Apple.
In the latest development, Samsung today revealed Samsung Pay, a new mobile payment strategy, combined with its new Galaxy S6 smartphone. Samsung Pay relies on two technologies: a new magnetic transmission capability from startup LoopPay embedded as a copper ring inside the Galaxy S6 and the older Near Field Communications technology used in earlier Galaxy S smartphones.
Having both mobile payment technologies embedded inside the Galaxy S6 will allow its users to make purchases at up to 90% of the estimated 12 million payment locations at U.S. stores. That's because the lion's share of the older point-of-sale terminals in use in the U.S. still have magnetic stripe card readers which support the new Galaxy S6 technology.
By comparison, Apple Pay and Google Wallet rely on newer NFC-ready terminals, which are gradually being rolled out in the U.S. and should reach about 50% of point-of-sale locations by year's end, according to estimates by credit and debit card companies. While NFC grows, magnetic technology could help fill the mobile payment gap.
"Samsung Pay certainly heats up the competition, and that's a good thing for mobile payment adoption," said Gartner analyst Avivah Litan in an interview. "But Samsung still has a lot of work to do to improve the user experience before it can effectively compete with Apple."
Informal field tests by Gartner of the magnetic LoopPay technology showed inconsistent performance when used with some magnetic readers on stores' point-of-sale terminals, Litan said. Gartner used LoopPay's magnetic technology incorporated inside its earlier phone cases and fobs, not the same technology embedded in the Galaxy S6. Embedding the copper ring inside the Galaxy S6 will hopefully reduce the inconsistent performance, she said, but LoopPay "is definitely not going to work at every magnetic-stripe reader."
Samsung and Visa were investors in startup LoopPay last summer, and Samsung on Feb. 18 announced it had acquired LoopPay for an undisclosed sum.
MasterCard confirmed that it will support Samsung Pay by deploying tokenization software for both magnetic and NFC transactions. Other credit and debit card companies, such as Visa and American Express, are expected to follow suit with tokenization and also support Samsung Pay. Major credit card companies and banks have backed Apple Pay with NFC, which rolled out last fall for the iPhone 6 and iPhone 6 Plus, and have already widely marketed the concept.
Google Wallet, which first emerged in 2011, was slow to catch on, but Google on Feb. 23 announced a deal to buy technology and capabilities from SoftCard, another NFC-based mobile payment system. The purchase means that Google Wallet will be pre-installed on new Android phones at Verizon, AT&T and T-Mobile later this year.
MasterCard said it agreed to support Samsung Pay with the LoopPay magnetic payment option only after setting up the tokenization security technology to support it. Tokens are crytographs, a kind of code, that are used instead of a customer's actual credit or debit card number to bolster security, and have been used with NFC payments in Apple Pay and other payment systems.
"Tokenization is how we got comfy with the magnetic secure transmission (MST) technology portion, and we wouldn't have supported [Samsung Pay] without [tokenization]," said Sherri Haymond, group head of MasterCard channel management.
When a MasterCard customer with a Galaxy S6 ready to make a purchase approaches a point-of-sale terminal equipped to handle either magnetic or NFC payments, the system is set up to give preference to NFC payments, Haymond said in an interview.
"We're viewing this MST as a bridge technology to enable consumers to take advantage of digital payments while NFC catches on," she said. "We do believe NFC is the wave of the future."
Mobile payment adoption is based on a complex set of technologies and business relationships. A major stumbling block in the U.S. has been the conversion of millions of payment terminals at U.S. retailers to more secure technology that supports smart cards and, usually, NFC. In addition to Apple Pay, Google Wallet and Samsung Pay, many experts are watching a consortium of large retailers called MCX that includes WalMart and Best Buy to see how MCX will affect mobile payment rollouts. MCX is not relying on NFC, at least initially, and may or may not support the LoopPay magnetic approach.
"How MCX members respond to Samsung Pay will be fascinating to watch," said Tim Sloane, an analyst at Mercator Advisory Group. The mobile payment space "is really getting interesting."
Unlike MCX, Samsung Pay will still rely on credit and debit cards and the banks that extend credit to consumers. Many merchants, including those in MCX, object to paying banks a fee of about 3% per credit-card transaction while also having to update their point-of-sale terminals to support smart cards. Merchants have an Oct. 1 deadline to upgrade their terminals to accept smart cards to avoid financial liability in the event of credit card fraud with older magnetic stripe technologies. Many of the updated terminals, estimated at about 80%, also support NFC payments with smartphones.
The technology changes have been a burden for merchants. "Merchants are really frustrated with all these mobile payments," Litan said. "The systems are opaque and banks are keeping information close to the vest."
What's apparent with Samsung Pay and other mobile payments is that the rate of adoption is not only about new technologies, but also business partnerships. So far, Apple has excelled in creating partnerships with credit card companies and major banks, as well as many large retailers. Apple and its bank, card and retail partners have aired a steady stream of TV ads and other promotions to show the ease of using Apple Pay with NFC for quick in-store payments.
"The path to mobile payments is not only in the technology, but how many partnerships you can form with financial institutions and retailers willing to accept your particular solution," said analyst Jack Gold of J. Gold Associates. "If Samsung can build an ecosystem that provides for its technology, then it can be a player. Apple, almost by default, will have such an ecosystem. Everyone seems to want to support whatever Apple does, because of its weight in the marketplace. We'll have to see if Samsung can bring the same weight with its payment technology."
Various things could happen to help Samsung with Samsung Pay. If, for example, Samsung decides to license the LoopPay magnetic transmission technology to other device makers -- even Apple and Google -- then Samsung could reap benefits. On the other hand, if Samsung Pay turns out to be highly successful, both Apple Pay and Google Wallet could ultimately be "marginalized," Sloan said.
While that scenario may seem far-fetched to many, Samsung Pay has opened a lot of eyes.