Starting this week, the State of New York has begun to issue driver’s licenses with RFID chips embedded in them. For the moment, the one “enhancement” that the licenses offer is to allow anyone who has one to cross the border into Canada, Mexico, Bermuda, and some other Caribbean islands without a U.S. passport. The present system apparently does not contain any personal information about you, merely a code that can be read by a border crossing guard that verifies you as a U.S. citizen. We are officially on the slippery slope to RealID now, but I guess we’ll just have to deal with the practical aspects first, namely keeping your RFID-equipped tracking devices “enhanced ID” from being swiped.

This company in Standish, Maine makes and sells a handsome wallet they call the “Rogue Wallet”, and they now offer a model that has built-in RFID shielding. I would expect that within a couple of years, pretty much every wallet maker in the world will be pumping out wallets with RFID shielding, but their wallet has a few other nifty features: it’s designed to go in your front pocket, which is a traditional deterrent from pickpocketers (not a big problem in this country, but travellers should know that pickpocketing is rampant in many other countries). It’s also significantly slimmer than a regular wallet, even when you load it up with a pile of plastic cards. That should help to avoid having to explain the bulge in your front pocket to everyone. Plus, for their non-shielded models they have a wide range of styles, including an animal-free version for the vegan crowd, and an alligator-skin version for the die-hard carnivore crowd. The RFID-shielded model is more expensive than their standard models, but not out of line for a nice wallet.

Washington, Vermont, Arizona, Michigan, Texas ands California all have some sort of program in the works to issue RFID-enabled driver’s licenses. Ironically enough in this context, Maine is one of the states that has refused to go along with RealID, so Mainers don’t need to rush right out and buy these wallets, unless they have other RFID-enhanced cards (several credit card companies are issuing RFID credit cards already). Whether it’s your driver’s license, your credit card, or even just one of those security cards you need to get in and out of an office building, the days of carting around a whole stack of RFID-enabled cards is here, so don’t dally on keeping them safe from would-be sniffers.

A couple of days later, I received a comment on the post from a gentleman named Randall Shake, who is the CEO of ACH Pay, LLC, one of the companies involved in trying to introduce this business. The comment provides some additional background. I subsequently traded a couple of e-mails with him which I’ll share with you because I think he’s made some interesting points.

More after the jump…

I’ve edited slightly for space, but have not altered any content:

I have been in the Merchant Processing Industry since 1997, and have watched the escalating fees impacting Merchants. In February, I was invited to address the Merchants Payment Council in Washington D.C. …I was asked why as an ISO, I wanted to promote a solution that cut the revenue by 80%. I told them that their members were paying much more than they were posting on their web site. Which is www.unfaircreditcardfees.com. And the Interchange Fees were negatively impacting their ability to financially viable. The answer to the problem I believed and still do is to be found in the Free Market. And that with a Loyalty incentive program Merchants could take back their Cash Flow from the Card Associations. Visa and MasterCard needs competition, consumers are paying for these hidden Fees.

My own opinion here — this is why I think their idea is going to get a lot of traction. Not because it’s better for the consumer up front, but because it’s a significant benefit for small independent retailers. I’ve had more than one conversation with store owners in all sorts of retail categories about how the cost of processing credit card transactions has risen so much that it’s a major detriment to doing business. Mr. Shake recognizes the lock that Visa and Mastercard have on payment systems and is arguing that a payment system that bypasses them will naturally attract business and force them to play more fairly. It may be Economics 101, but he’s dead on.

I asked Mr. Shake about security and privacy concerns, particularly since the push toward RFID-enabled payment systems is rife with these problems, and whether or not his company was considering an RFID-enabled system as well. His reply indicates that they are sticking solely to magstrip cards:

We are working on an interface with the 2D Bar coded Driver’s Licenses. And have no relation or association with RIFD technology. The Driver’s License is used as an access device to identify the checking account. A private labeled Loyalty Card with magnetic Stripe could also be utilized as long as the Merchant controls the Card Deck and it is not on a Visa or MasterCard Debit platform.

Sticking with magstrips obviates the problems assoicated with RFID, of course. There are other security and privacy issues related to electronic payment systems in general, even for magstrip cards, but at least they won’t be inviting any additional problems into their system by using RFID tags. Eventually, the increased prevalence of RFID will probably force them to change direction, but the adoption of RFID-enabled cards and fobs remains a little slow and probably gives them enough time to get their system into retail stores and establish their presence before having to go that route.

We are actively working on a program for the Trucking Industry as well. And are in discussions with companies that can provide additional Risk Scoring services for Merchants as an additional option which they can purchase for additional transaction fees. One card can be tied to multiple accounts. With each having a separate Pin #. Our First terminal to market will be from TechTrex which has marketing in Chicago IL…We are seeking both Consumer Groups support, because Interchange Fees impact the costs of goods and services sold to Consumers. And from Merchants who would be interested in a beta test in their market. We are 30-45 days away from having our Terminal application ready for market. Grocery Stores who operate on thin margins could greatly benefit from our service as well.

Any readers from the Chicago area might want to keep an eye out for these terminals beginning to appear toward the middle of the summer. If you see them and use them, I would be very interested to hear about it…as I’m sure Mr. Shake would be.

Lastly, here’s a link to a podcast of a radio interview with the CEO of National Payment Card, Inc., Joe Randazza.

While this sets off all sorts of alarm sounds for me, I can’t deny that they’ve got some strong synergistic thinking going on here. Retailers are going to like it for a couple of reasons: first and foremost, the cards are not tied to credit card companies, who charge high fees to process transactions (side note: whenever a local merchant asks me “debit or credit?” when I use my card, I always choose debit because the merchant pays less for my convenience of using the card). Meanwhile, because the financial transaction is tied to a valid ID, the retailer has personal information that they can use for a variety of purposes (not all of them beneficial to the customer, unfortunately).

I hope you can see where the pitfalls are with this idea so that I don’t have to go through all of them again. But I think they’ve probably come up with an idea that’s going to go over well with everybody except the credit card companies. They’re test-marketing the combo cards now in Texas and have very wisely started out with gas station/convenience stores, which traditionally have very slim profit margins and will see the most benefit from reducing credit card fees. Plus customers have been very receptive to pay-at-the-pump systems — it’s a good introduction of the idea to consumers before it starts to manifest itself in other retail interactions.

At the moment, only 24 states issue driver’s licenses with magnetic strips, which is probably the single biggest hurdle to this concept. Their other concept, though, is to offer this same service through loyalty card programs (you know, the cards you use at the supermarket). While this lacks some of the synergy of sharing a payment system with a legal identification system, not to mention lacking the promise of eliminating plastic cards from your wallet, it’s still likely to catch on AND has a national market.

What’s not mentioned in the BusinessWeek article (or at NPC’s own website) is what the impact of the impending RealID program from the Gestapo will have on their business model. On the face of it, it would seem like a standardized national ID card with magnetic striping would give these guys the green light to go big. But there’s a lot of opposition to RealID, and backlash could limit them, especially in a state like Massachusetts, where our licenses don’t have mag strips and our political sensibilities often determine our consumer behavior.

Comments:
The idea for this came from Joe Randazza of National Paymentcard LLC in Boca Raton. The problem for US Merchants is the egregious increases of Interchange fees impacting the bottom line of US Merchants. Last year there was a 22% increase in Card Association fees to the Convenience Store industry.

Card Association fees are 8.3% of total operating costs for Convenience Store operators. See www.nacsonline.com. Fees are twice as high in the US as in Canada. While fraud rates are decreasing. There is no market competition to speak of and the Card Associations own the cash flow of US Merchants. This solution offers US Merchants the opportunity to direct the savings in Interchange fees into a Loyalty or frequency program and the chance to take back their cash flow.

ACH PAY LLC is developing a credit card terminal interface for the National Paymentcard ACH Service Bureau for US Merchants.

Randall Shake
CEO
ACH PAY LLC
Posted by Randall Shake [URL] on 05/22/07

Thanks for your comment, Randall. I will be watching this with great interest (no pun intended).
Posted by Brian [URL] on 05/23/07