Retailers pushed to keep up with technology

Point-of-sale changes increase security, costs

The launch this month of Apple Pay, a technology that allows consumers to use their smartphones to pay at cash registers, could help lead to a doubling of revenue over the next couple of years for companies such as Loveland’s SilverEdge, which provides point of sale, or POS, and other payment technologies to small businesses.

SilverEdge has 12,000 clients across the United States, mostly in Colorado. The 52-employee company does about $6 million in annual revenue now. The company just began pitching Apple Pay upgrades to clients. For retailers with the right type of PIN pad – which accepts and encrypts a customer’s personal identification number, or PIN – adding Apple Pay capabilities is done merely with a software update. But most will have to acquire new PIN pads, said SilverEdge chief executive Ken Salazar.

“So far it’s been very well received,” Salazar said.

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Credit card companies already require merchants to upgrade to POS systems that will accept new super-secure credit and debit cards embedded with chips by October 2015 or face being liable for fraudulent payments made on their systems. Salazar believes that Apple Pay – a technology that allows users to pay with a tap of their iPhones at POS terminals, known as near-field communication, or NFC, payment – will only spur retailers into upgrading their systems with the latest technology sooner.

“They’re setting themselves up today to accept Apple Pay while also preparing themselves for the liability shift in 2015,” Salazar said. “There’s never been this much disruption in the payment space.”

While the shift in technologies is expected to increase security and convenience for consumers, merchants and banks, there are also concerns from retailers about the costs involved in upgrading and from banks as to how their revenues will be affected.

Microchip-equipped EMV (Europay, MasterCard, Visa) cards are expected to replace the magnetic-strip variety predominant now to help thwart hackers trying to steal personal information. EMV companies set the global standard of interoperation for such cards. Rather than swiping credit cards, consumers will insert them into a point-of-sale PIN pad.

Salazar said it costs small retailers about $400 per terminal to buy systems equipped to handle EMV as well as NFC payments, although those costs can vary.

Sean Angelo, general manager of Budget Home Supply in Longmont, said he recently purchased 10 new PIN pads capable of EMV and NFC from Epicor, replacing all but three in his store. The cost of that, including installation, warranty and some other software upgrades he had installed, was more than $10,000. That’s after spending $14,000 just five years ago to upgrade his PIN pads.

“The credit card companies make everything sound like they’re doing the end user a favor,” Angelo said, “but the retail outlet has to eat all of those costs. (The standards) will change again, and they’ll force me to purchase different (terminals) five years from now.”

Apple Pay is not the first form of mobile payment to utilize NFC technology to give consumers the ability to use their credit cards at stores without taking them out of their pockets. Google Wallet has been in the market for a couple of years on Android phones, although adoption has been slow. Given iPhone’s massive share of the smartphone market, though, many believe the release of Apple Pay could provide a significant boost for NFC payments.

“Apple controls 40 percent of the U.S. smartphone market, and they bring a loyal, tech-savvy customer base to the mobile-payments market that has been largely missing up until now,” said Randy Vanderhood, executive director of the Smart Card Alliance, an industry association working to increase understanding and adoption of various smart-card technologies.

According to Smart Card Alliance figures, only about 20 percent to 30 percent of POS terminals have been upgraded to EMV capability, and it’s mostly the large retail and grocery chains, convenience stores and fast-food outlets that have done so.

For banks, the concerns regarding Apple Pay and EMV are a bit more nuanced.

Apple, for instance, worked with the nation’s largest banks such as Bank of America, JP Morgan Chase, Wells Fargo and US Bank to roll out Apple Pay. So while those banks will hit the ground running with the capability this month, it will likely take smaller banks a few months to get set up with the service.

Jim Reuter, executive vice president of FirstBank in Golden, said he expects that FirstBank will be set up to accommodate Apple Pay within two to three months. But he said the head start of the big banks is more “style over substance” given that so many retailers still need to upgrade their POS terminals.

By the time there’s mass adoption at the point of sale, he said, “I think we’ll be in a good place.”

The bigger concern for banks is how revenues will be affected. Apple Pay won’t affect the interchange fee paid by retailers to process credit- and debit-card transactions, but Apple now will start getting a cut of the banks’ portion of those fees.

Add to that that the push toward EMV and Apple Pay is expected to increase the number of PIN-based transactions versus signature-based transactions at the point of sale. For banks such as FirstBank with more than $10 billion in assets, the interchange fee received by banks is no different for either type of transaction. But for smaller banks, if a consumer signs for a debit-card transaction as he would for a credit-card transaction, the bank collects a larger interchange than it would if the consumer typed in his PIN number.

With banks already seeing interest and fee income decrease in recent years, the shift toward PIN-based transactions could be another hit, says Mark Bower, executive vice president of Loveland-based Home State Bank and chairman-elect of the Colorado Bankers Association.

“This debit-card fee income is big, and cutting into that would be painful for us,” Bower said. “We don’t know which way it’s going to go yet.”

Despite the concerns, retailers and banks welcome the security upgrades and understand the marketing aspect of making sure they can accommodate customers with the latest technology. Budget Home Supply’s Angelo said the launch of Apple Pay didn’t influence his decision to upgrade his PIN pads sooner than he would have otherwise, but he knows customers will expect to see it at his checkout counters.

“As the times change,” Angelo said, “you have to be able to modify and adapt your practices.”

Joshua Lindenstein can be reached at 303-630-1943, 970-416-7343 or jlindenstein@bizwestmedia.com. Follow him on Twitter at @joshlindenstein.