PoF 24 – EMV, the Small Business, and New Ways to Pay

George Peabody

August 5, 2015

POF Podcast

Every payment pro in the US is also a shopper and we all know that the largest retailers are poised to support EMV. Nearly all have EMV capable hardware. A few have turned it on. Most are waiting for the October liability shift so the temporary pain and awkwardness of clerk and consumer confusion is spread across everyone.

But what about the small and medium business (SMB) market? Mike English, VP of Product Development, at Heartland Payment Systems has a front line view on the EMV transition of its SMB customers. Take a listen as Mike discusses EMV, the future of contactless and the NFC evolution. Mike also discusses how Heartland is thinking about omnichannel payments and commerce, proving that the definition of “payment processor” is morphing far beyond its traditional remit.

Transcript below the jump.



George: Today we are fortunate to have Mike English, who’s Vice President of product development at Heartland Payment Systems.  I’m George Peabody with Glenbrook, I’m the host of the Payments on Fire podcast.  Welcome, Mike.  Glad to have you here.

Mike: Hey, George.  Nice to be on.

George: Thanks so much.  Look, I called you up because I want to talk about, particularly the SMB merchant and where they are with EMV.  October is going to be here any moment.  We’ve seen some numbers that suggest a little less than half of SMB merchants are going to be ready in terms of EMV capability.  What are you seeing regarding the shift?

Mike: Well, I think that’s maybe correct in terms of SMB in terms of half or maybe even less being ready.  There’s a couple different factors to consider.  One, those small merchants that are using attended terminals, it’s a lot easier to implement an EMV solution when you’re just unplugging one device and putting another one in.  Certainly, there’s training aspects in that, but we’ve actually seen a good response from small to mid-size merchants with EMV that just need attended terminals, and the flow on the transaction set has not necessarily been an issue there.  Now, I will say that there will come a point in time where, with cards now being issued in the US market, that both the training aspect and the speed of the EMV transaction may become an issue, but we haven’t seen that thus far.

George: So, you’ve got these small merchants who are replacing a stand beside terminal, for example, it seems to be pretty seamless.

Mike: It does, but then you also have to consider those small to mid-size merchants with point of sale systems.  That’s where it gets a little interesting, in that many of the point of sale providers are, I wouldn’t say necessarily 100% struggling with EMV, but they understand how intricate and how difficult it is code and the expense that they’re facing in terms of certification with all the different core card brands when that becomes an issue.  So, what they’re doing is, they’re either integrating directly with a select few processors and acquirers, or they’re leveraging a gateway that will be certified with many different providers, and that gateway might have a semi-integrated solution together.  That would make it a lot easier for them to integrate and ploy faster to market.

George: They can integrate into that gateway and they can get the EMV support across all the supported acquirers and processors.  What’s the Heartland strategy there?  I know a bunch of processors put their own SDKs and APIs out there, but that’s all about driving to them.

Mike: Well, what Heartland is doing, is that we have partnerships with several of the different hardware providers to do semi-integrated solutions to our front ends.  We also have work that we’re doing with what we feel are key gateway providers, because we realize that many point of sale providers are not going to necessarily interface to us, even with the semi-integrated solution that we offer.  What they might want to do is integrate once to a gateway, use that gateway semi-integrated solution, where they’ll get multiple processors, and they come to market a lot faster with all the different processors they need.  So, we’re kind of taking a yoga look at this, and being, essentially, flexible and really sensitive to the cost component and time component for these ISVs and VARs.  We’ve done a lot of work in staffing, our Class B certification group, our technology alliances, which deals with third party ISVs and VARs, has really stepped up.  Even our service center in Jeffersonville, Indiana has really taken education on EMV and integration to heart.  So, the whole company has basically aligned itself to helping ISVs and VARs as well as merchants move as seamlessly as possible to EMV.

George: Are there any particularly tough merchant categories that seem challenging?

Mike: Well, certainly restaurant is interesting, because you have a number of different restaurants there, you’ve got counter service and QSR, you’ve got table service and casual dining, and each of those, when you talk chip and pin, has a different need.  I think one of the things we need to consider, is also the card issuance in the US, and correct me if I’m wrong, but I think the majority of cards being issued in the US, credit cards that is, will be basically chip and signature.

George: That’s right.  There’s no doubt about that.

Mike: I think that’s a benefit for a lot of the restaurants, it gives them some flexibility.  One of the things that we have restaurants, and really retailers asking us all the time is – with an EMV card, can we not handle the card for the customer? – and the answer is yes, they can handle the card.  Certainly, in some environments it’s going to make a lot of sense to bring the device, the terminal and pinpad to the customer.  In some devices, and certainly at the outset of the EMV migration, you’re going to see a lot of customer confusion.  So training – by the retailer, the merchant, the business – is going to be absolutely paramount.  If the clerk or associate or the server can help them with the transaction, that is actually going to make the transaction more seamless, more pleasurable and will actually do a lot to promote EMV usage in the US.

George: Process changes for everybody.  Let’s talk specifically about that server, of say fine dining or table service, the EMV rules is that you gotta have all of the transaction amount, you have to know it before you initiate the transaction.  In this world, where the tip always comes after the card swipe, what do you recommend in terms of the best flow for your restaurant customers.

Mike: If a restaurant is doing chip and pin, which we just established that the majority of the cards will be chip and signature, if it’s a pure chip and pin environment, then certainly doing tip at the time of the sale makes 100% sense.  It’s actually a lot cleaner for the restaurant and cleaner for the customer as well, because you know exactly what the total amount is going in.

George: But that means there has to be a point of sale terminal somehow at the table.

Mike: Exactly.  So you’ve got either a terminal that you can bring to the table that is interfaced with the point of sale system, or we’ve even seen interest in stand beside payment terminals.  If you travel over to Europe, very rarely are they integrated within the point of sale.  It’s a typical stand alone environment.  I think we’re going to see a certain percentage of that happening in the US.  There’s also, when you’re talking about pay at the table, there’s also chip and signature.  There’s nothing to say, George, that a restaurant cannot do a tip adjustment on an EMV transaction when it’s a chip and signature transaction.  In fact, our terminal systems allow that today.

George: So in that respect, there’s no change.  The server will take the card, walk it back to the POS, insert it and then bring the paper receipt back to the diner as they always have.

Mike: Or, in a fine dining restaurant, they could bring the terminal to the table and run it through and the receipt prints and the restaurant patron will sign their name and add the tip and the total and it’s adjusted just like it is today.

George: Well that’s a pretty good argument to lower the barrier and friction for the EMV deployment here.  Anything else that I should be asking about EMV in particular?  Any advice that you’ve got or any observations?

Mike: I think one of the observations is that, and this is something that a lot of people are talking about or getting a better understanding, when you compare a magnetic stripe transaction to an EMV transaction, what we’re seeing is the EMV contact transaction taking a bit longer.  Our estimations are anywhere between 2 to 5 seconds longer.  It’s just because you have a brand new payment type.  Secondly, consumers are just beginning to use their cards.  In fact, George, how many times in the US, actually first, do you have an EMV card?

George: I do, I have 3 of them now.

Mike: How many times have you used it?

George: I used 1 of them just once, where it was forced over to EMV.  Obviously, there’s a lot of hardware out there, but the EMV colonel hasn’t been turned on in these devices to force me into a pure EMV transaction.

Mike: Exactly.  That’s one of the things that merchants face in terms of the upgrade process.  So, getting back to the speed of the transaction, I see quite a bit of discussion going on, specifically in the QSR space and the grocery space.  When you look at the transaction time, and if you’re taking a couple seconds longer, and you’re in the your time period, maybe a lunch or an early dinner, and your whole job is to move people through the line, that 2 to 3 seconds can be something that is paramount to solve.  When you look at what’s coming down the pike, when you talk about EMV contactless, which the vast majority of the cards issued in the US are only EMV contact and mag-stripe, there’s such an opportunity for EMV contactless.  I surmise, and this is Mike English’s feelings, that the issuers will see A they’re going to at some point issue dual interface cards, EMV chip and pin and then B that gives a great ‘in’ for mobile commerce and mobile payment, with Wallets and that.

George: You know, Mike, I almost see it the other way around, in that everybody’s had to look at their terminal infrastructure differently now with EMV dates coming up and those devices now, almost all of them have contactless capability, but it was really Apple Pay that brought NFC back from what looked like a near death experience to what now looks like it’s going to be a real method of payment for the long term and for NFC payments in general.

Mike: I would absolutely agree.  I would say that certainly Apple Pay has ignited the interest in mobile commerce, but when you look at the percentage of Apple Pay transactions, and really mobile commerce transactions as a percentage of overall transactions in the US, it’s still very miniscule.  So to prove my point, the majority of devices being implemented today, in retail, restaurant and businesses that accept payment, include both EMV contact and EMV contactless.

George: What are your merchants telling you in terms of their willingness and interest to turn the contactless interface on?

Mike: Our devices all go out with both EMV contact and EMV contactless as well as NFC turned on.  So, we do not want our merchants to be inhibited from accepting transactions in any form, as much as possible.

George: That’s really interesting.  I want to take you back a little bit, Mike, to something that you’ve had a lot of experience, you were there as part of the main team that raised the security bar for Heartland by your deployment of encryption technology at their read head in the terminal.  EMV, while it introduced dynamic data, it doesn’t do anything in terms of encrypting the pan and other data, and all that still flows through as it always has in the clear, so Heartland deployed read head encryption.  What are you seeing in terms of your merchants?  Are they turning that on and are they using tokenization?  Those are the 3 legs for the security stool at the point of sale – EMV, encryption, and tokenization.  How broadly is that being used now?

Mike: I can tell you that we have, I think it’s close to, over 100,000 merchants using our end to end encryption and our tokenization.  We actually put together a program called “Heartland Secure”, that combines, as you say, the 3 legged stool.  Each of those technologies serves a purpose.  When you implement them all together, you’re really combatting counterfeit card usage as well as you’re eliminating that chance that that business is going to be breached and not necessarily breached, but that card data is collected and monetized.  You can’t monetize what you cannot understand, and if the merchant does not have the encryption keys, then for all intents and purposes, this is something for PCI.  That card data is not considered card data, which is a real plus.  We feel really strongly, even in terms of EMV, that the solutions that we’re selling and providing interfaces to, all include not only the EMV, but encryption and tokenization well.

George: What’s been your experience with EMV code tokenization that Apple Pay is using, that’s of course a different kind of tokenization that we’ve been talking about from the merchant acquirer tokens, but these are tokens used to kickoff and initiate a transaction, is that a headache for you?

Mike:   No, actually we are proud to say that we are actually one of the first, if you look back to the World Series, all the concessions at the AT&T ballpark in San Francisco were accepting Apple Pay and that was processed through us.

George:   Cool

Mike:   Yeah, that was really cool.  You don’t mind spending $7 for a hotdog and X dollars for a Coca-Cola when you know you’re doing the processing and it’s going through Apple Pay.  Additionally, all the attended terminals that we’ve been selling, as well as any of our semi-integrated solutions, do accept Apple Pay and we’re very supportive of that.  I think, you have to take your hat off to Apple in terms of the fact that they A used the existing rails of the payments infrastructure and B they’ve made which, for all intents and purposes, is an exceptionally safe transaction, and I know there’s been some things in the news, but overall, the experience is secure and it is fairly seamless as well.  So, my hat is off to them.

George: So let’s wrap up, Mike.  Let’s talk about something that is a big interest to me is the problem of not just omni-channel payments, but omni-channel commerce for the smaller retailer.  Everything I’ve looked at and heard and discussed is that the expectations that consumers and customers have, of even their small retailers are almost as high as they’ve got for a big national merchant, regarding the ability to do an order online and pick-up in store or return in store.  This omni-channel commerce world really raises the bar for the SMBs.  How are you guys working in that area?

Mike: That’s a great question.  You can say it raises the bar; I look at it a little differently, in that is provides that small merchant on the corner or that merchant with maybe 4 to 5 locations the ability to compete effectively.

George: Absolutely!

Mike: We applaud that.  What we’re doing is we’ve not only got point of sale systems, but we’ve got sort of our own in house systems that link all of that together, so you’re running a single view of inventory and single payment batches and there’s the ability to do analytics on the product that’s sold.  We also have a very nice relationship with the company Call to Go.  They got their start on college campuses where you could call ahead and order your pizza or whatever you’re ordering and go and pick it up, and that has been exceptionally well received by both our relationship managers, those who service our merchants, as well as the restaurants that are deploying that.  We’re very much in favor of omni-channel and when you look at our virtual terminals, when you look at our mobile solutions, when you look at the API suites we have for our gateways, it all leads to the ability for a merchant to accept payments, really in any manner that they so choose and want to.  I think that’s the thing, when merchants take that on, they’re actually doing things that enhance their ability to grow their business and grow loyalty within their customer base.

George: Absolutely.  That order ahead application that you talked about, that’s actually been hugely important to the pizza shops of the world, because actually the mom and pop pizza shops have lost market share to the big guys, largely because of that kind of technology, so they’ve got to fight back with tools like order ahead.  I heard you talk about inventory.  Are you providing inventory services to customers now, so that they have a single view of inventory both in the store and orders coming in from an online channel?

Mike: Yeah.  You might remember that we acquired 3 different point of sale systems:  Expient, Dinerware, PC America.  Each of those are moving towards that implementation.  Additionally, we have several partnerships with eCommerce provides that are allowing us to provide a single view of inventory and transaction solutions as well.  It’s a brave new world, George.

George: We’ve moved a long way from stand beside terminals as doing a transaction, haven’t you?

Mike: Yeah, it almost brings back the saying “we’re not in Kansas anymore.”

George: Well, Mike, thanks so much it’s great to catch up with you and what Heartland’s doing and what you’re seeing around EMV and this exciting space.  So much going on, before we turned on the recorder we were both saying how quickly things are changing and how that pace of change is just going to continue to accelerate for the foreseeable future.  Thanks so much for having this conversation with me today.

Mike: You’re welcome, George.  You take care.
George: You too.


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