A Look Into the Future of Retail Payment

future of e-paymentThe last five years have seen the fastest changes in the way we understand currency since the first trader that realized it was easier to make change for coins than it was for chickens.  We’ve seen congressional hearings about credit card security, the invention of a purely digital currency, and the rise of PayPal from nothing, to part of eBay, and then back to being its own standalone company.  It’s all been kind of crazy and hard to keep track of everything.

As odd as it might seem to see the person in front of you make payment with their watch, there’s a really good chance that digital transactions on your phone, watch, or other mobile device are the most secure ways to pay.  In fact, the model used by Apple and Samsung is so secure that the major credit card companies used it to lobby Congress to change the upcoming EMV credit card regulations.  That’s right, Congress assumes that as a nation, we should just skip the modernization of credit cards and jump right into the future.

Chip-and-PIN: The forgotten middle child of point-of-sale security
Recently on NPR’s Planet Money, they traced the history of the signature as a security feature to try to figure out why it’s a standard for credit cards and checks.  They got as far back as a few centuries BCE, when a Talmudic scholar explained that witnesses and signatures were used because people were claiming they had never gotten married, since annulment was the simplest way out of a marriage.

By obtaining signatures, Rabbis of the time could confirm that a couple actually married, thereby making a formal endorsement into law that would stand until today.  What that doesn’t explain is why you still need to sign a credit card slip that will almost never be checked.

Enter chip-and-PIN.  In Europe, chip-and-PIN credit cards are the standard, eliminating the need for signatures.  To make a purchase, a customer slides their card into the machine and enters their PIN, which is confirmed against important information on a chip that is embedded in the credit card.  If someone steals your card, it’s useless without the PIN.  The United States is implementing a similar system, which will be in place by the end of the year. Major credit card issuers will include those EMV chips, but rather than typing in your PIN every time, you will be able to sign in most cases.  It’s odd, because the difference between chip-and-PIN and chip-and-sign is significant:  you still have no protection if someone steals your card, because no one is checking the signature

In fact, it may be worse.  Some security experts argue that RFID scanners are able to pull information off the EMV chip out of the air, allowing scammers to duplicate your card.  Without a PIN as an added layer of protection, a chip-and-sign card is, at best, a net neutral in terms of overall security.
So why didn’t Congress insist on chip-and-PIN?

The major credit card companies made a clear case:  replacing all of those point-of-sale credit card machines would be an undue burden on shop owners, because while European retailers had enough time with the system to recoup the cost of the upgrade, their American counterparts would not.  Chip-and-PIN, they argued, would be obsolete within a few years, thanks to tokenization.

Tokenization:  The future is here, and it involves serious math
With Apple Pay and Samsung Pay, transactions occur through a process called tokenization.  Instead of swiping a card and entering a PIN, which is then sent to an intermediary before being sent to your financial institution, which confirms your funds, then sends it back to the intermediary. That intermediary finally sends it back to the point-of-sale machine. Tokenization uses a process which shows your credit card information to none of them.

Apple or Samsung handle all of the transaction on their end and create a one-time use code that steps in for your credit card info.  Now any security leak at any of the above steps is only a chance for someone to steal a “token,” which won’t be useful on any other transaction and can’t be traced back to your account.

Of course, that token is also protected along the way from server to server by advanced encryption, which can be updated, strengthened, and debugged without issuing a new card or requiring any work on behalf of the consumer.  It’s really just a question of calculus and trigonometry, which (thankfully) you won’t be asked to do yourself.

In addition, Apple and Samsung can control all sorts of security on your handset by requiring PINs and fingerprints.  Because you bought the phone, watch or tablet, the retailer didn’t have to pay for new machines and everyone has better security without incurring extra cost.

Conclusion: Your Options
If you’ve got a new iPhone or Samsung phone, you can use e-payment at around 100,000 locations in North America, with even more around the world, and that number is growing.  That said, be careful with your Samsung; it can be used at far more locations by emulating a traditional credit card, but when it does, it no longer uses tokenization.  It’s also worth noting that not all online or digital transactions are created equal – Google Wallet, PayPal, and a few others are simply replacing the intermediary and still share your credit card info with retailers, possibly opening up more vulnerability.

As long as you choose an e-payment system with tokenization, you can rest easy knowing you’ve got the most advanced security system for your transaction data available to mankind, even if you’re just using it to buy a pack of tube socks.

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