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Samsung Pay and its magnetic appeal

Samsung Pay will launch this summer and will have the potential to be used in 30 million merchant locations worldwide. That’s a pretty stunning launchpad.

Samsung Pay

This high acceptance rate is a huge plus point for Samsung Pay given that its main mobile payments competitor, Apple Pay, is currently estimated to be accepted at some 700,000 U.S. merchant locations since launching in October 2014.

Samsung are looking for an early edge in the mobile payments battle by placing a bet on the old magstripe reader.

The tech behind Samsung Pay

First, let’s establish just how Samsung can claim to enable acceptance at 30 million global merchant locations on launch? Well, this near-ubiquitous acceptance is enabled by Samsung Pay’s use of Near Field Communication (NFC) but also by its use of a new proprietary technology called Magnetic Secure Transmission (MST).

NFC is now a common technology available in millions of devices. From a mobile payments perspective NFC enables a chip in a mobile device to wirelessly communicate with a nearby card reader to initiate the payment process. The Samsung Galaxy S6 uses an embedded Secure Element (eSE) chip supplied by the German semiconductor company Infineon, a chip called the SLE 97. Apple Pay, for comparison, uses a chip created by the Dutch company NXP Semiconductors.

MST is Samsung’s early secret sauce. It is a technology developed by LoopPay, the Boston-based company acquired by Samsung just two weeks before Samsung Pay was revealed.

MST – as defined on LoopPay’s own website – is “technology [that] generates changing magnetic fields over a very short period of time. This is accomplished by putting alternating current through an inductive loop, which can then be received by the magnetic read head of the credit card reader. The signal received from the device emulates the same magnetic field change as a mag stripe card when swiped across the same read head. LoopPay works within a 3-inch distance from the read head. The field dissipates rapidly beyond that point, and only exists during a transmission initiated by the user.”

The magnetic appeal

The use of MST effectively means that Samsung Pay can be accepted at any magstripe POS terminal. This is not such a big deal in Europe, which embraced chip-and-pin many moons ago, but it is in the U.S. where the majority of POS terminals are still magstripe readers.

To accept Apple Pay merchants need to have a contactless-payment-capable POS terminal as the iPhone 6 and iPhone 6 Plus communicate directly with the payment terminal.

So, what’s at play here? Well, Samsung simply wants consumers to experience their mobile payments solution first. As Harold Geenan (what do you mean you don’t know who Harold Geenan is?) once said: “In the business world, everyone is paid in two coins: cash and experience. Take the experience first. The cash will come later.”

This is Samsung’s plan.

Mobile payments landscape

Mobile payments, remember, is still in its embryonic stage. By mid-2014 just 0.5% of the world’s 600m NFC-enabled smartphones had been used at least once a month for payment. However, by the end of 2015 it is estimated that this figure will increase by an order of magnitude to 5%.

NFC readers are being rolled out to merchants in the U.S. as the deadline for an EMV fraud liability shift closes in. This deadline compels merchants to upgrade their POS terminals so as to accept EMV chip cards, thus – in time – eliminating the traditional swipe and sign system. The deadline for this fraud liability shift is October 1.

After this date the weakest link in the credit card payment chain will be deemed liable for any fraud that occurs. Given that it is essentially a mandate from the credit card networks it is highly likely that merchants will bear the brunt of any fraud after October 1. Hence the rush to upgrade their POS terminals. In this respect Apple Pay is looking to the future as merchants grapple with the October EMV deadline. Samsung, on the other hand, is set to enable any consumer to use their device at any POS, magstripe or NFC.

One group of merchants that will be missing from the U.S. launch, however, will be those connected to the Merchant Currency Exchange (MCX) group. MCX – a consortium of some of the largest merchants in the U.S. (such as Walmart, CVS, and Target) – is planning to launch its own mobile wallet, CurrentC. CurrentC will rely on QR codes and MCX members will not accept NFC-enabled mobile devices for payment. MCX have yet to reveal a launch date for CurrentC, however the group was dealt a blow at the start of the week when one of its members, Best Buy, declared that it would accept ApplePay in its 1,500 U.S. store locations.

It uses NFC for contactless payments but also allows payment by leveraging existing magnetic stripe readers via MST. Samsung Pay will sense which option is available and adjust accordingly to enable the payment process.

Users add a card via the Samsung Pay app, once verified the card is available for use at any merchant. As stated in the launch press release Samsung Pay “leverages NFC and a new proprietary technology called Magnetic Secure Transmission (MST) to make mobile payments more accessible to merchants and consumers than ever before.”

Authentication of a payment is via a touchscreen sensor on the Samsung Galaxy S6e with your fingerprint, the user simply places their finger on the sensor and the screen sends out a pulse (see image below) indicating that the payment process is being completed. Here’s CNET with a hands-on with Samsung Pay at the Mobile World Congress (WDC) in Barcelona.

Samsung Pay

On March 2, 2015, Samsung revealed their plans for Samsung Pay. At launch they have partnered with MasterCard and Visa. But given the fact that Apple just this week added Discover it means the Cupertino team are starting with a full deck of card networks in the U.S. while Samsung continues negotiations.

However, MST gives Samsung a crucial edge in that it allows Samsung Pay to be used at any magstripe terminal in the U.S. There’s no barrier to consumer use and, crucially, no merchant system upgrade is required. All the consumers need is a Samsung Galaxy S6 or S6 Edge.

And Samsung need the Galaxy S6 range to be a success.

The smartphone market

Today, the smartphone market is a two-horse race: Android v iOS (Apple).

According to data from the International Data Corporation (IDC) Worldwide Quarterly Mobile Phone Tracker, Android and iOS combined captured 96.3% of this market in 2014.

Android pushed past the 1 billion devices mark in 2014 and dominates the market with a 76.6% share in Q4 2014. Within the Android market Samsung “retained the leadership position by a wide margin, shipping more volume than the next five vendors combined.”

IDC: Smartphone OS Market Share 2013, 2012, and 2011 Chart

Apple managed to ship 74.5 million units in Q4 2014 achieving a year-over-year growth of 46.0%, closing the gap to a near tie with Samsung. Apple’s total market share is 19.6%.

Data from Q1 2015, however, shows Samsung regaining it’s place as the world’s top smartphone seller. Figures that do not include sales figures for Samsung’s new Galaxy S6 and S6 Edge – launched on April 10. The Galaxy S6 smartphones are the launch vehicles for this summer’s Samsung Pay.

The Korea Times report that Samsung expected some 10 million devices to have been sold worldwide in the first two weeks. Samsung have also stated that they received 20 million preorders for the S6 and S6 Edge combined. As of late April 2015 the new S6 models were not available from Samsung’s own website.

Research from Strategy Analytics showed that Samsung shipped 83.2 million smartphones worldwide in Q1 2015, resulting in a 24% share of the entire smartphone market.

Samsung’s market share has dipped from its 31% in 2014, well ahead of Apple’s 17.7%. Apple shipped 61.2 million units during Q4 2014. The iPhone maker’s market share expanded on the 15.3% it commanded a year ago but shrank from the 19.6% it captured in the fourth quarter of 2014.

Recap

When Samsung Pay launches this summer it will attempt to jump the queue of mobile payment options. It will do so by enabling customers – via MST – to use Samsung Pay at the traditional magstripe reader POS terminals.

The bonus for merchants is that they will not have to replace their existing terminals, a major plus. The EMV fraud liability is in full swing with the October 2015 deadline looming but conservative estimates predict that it will be late 2016-early 2017 before contactless terminals are in the majority in the U.S.

That gives Samsung a good two years of a head-start to get new mobile payment consumers using their solution.

Experience first, cash later as Harold Geenan would have said.

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