A Microsoft-sized Opportunity: Payment Processing

republished from MobilePaymentsToday.

In March, Microsoft introduced a “tap-to-pay” feature that will be in its forthcoming Windows 10 for phones and small tablets (a.k.a. “Windows Mobile”), which would support Host Card Emulation.

Newer Android phones use HCE to transmit NFC signals to terminals, which means third-party developers can use this process to build NFC functions into their apps. Just as important, the elimination of the Secure Element makes the payment platform carrier independent, and hence carrier agnostic. These advances are sure to be greeted well in the marketplace, but what is more intriguing is where Microsoft is headed with the possible introduction of mobile payments into their ecosystem.

Based on a money transmitter license that was granted in Idaho, it appears as though the Redmond, Washington-based company is looking to go up against Android Pay, Apple Pay and the LoopPay system that helps form the base for Samsung Pay. Some may see this as a proactive approach by Microsoft to keep pace with competitors in the payments space. However, Microsoft may be trying to become a backend processor.

This move may put Microsoft in direct competition with PayPal, Square and Intuit. These companies have built the backend and have transaction engines to process payments, so they know how to send cash. However, unlike these backend processors, the advantage Microsoft would have is it would help establish potentially secure payment solutions not tied to hardware solutions. Creating a competitive product in this space would be advantageous for an enterprise software company like Microsoft.

Opportunity

The longer-term outlook may be that Microsoft is looking to use dongles like PayPal, Square and Intuit to accept payments from any platform (Apple Pay, credit card, chip-and-PIN cards, etc.) that uses a Windows-based backend system. The idea behind this is the payment, and all accompanying data, will integrate with a Windows-based CMS, database, Microsoft Office, etc. Payments have many barriers, so to remove any such barriers similar to what Apple did with Apple ID (paying through stored credit card information) would enable Microsoft to leverage Windows on a much larger scale.

Last year, Microsoft’s revenues were over $86 billion dollars. Mobile payments are growing, but they aren’t even a rounding error for this company. However, with processor rates in the 2-to-4 percent range, fees from mobile payments can generate significant revenue moving forward. For example, on Starbucks’ 2014 Q4 earnings call, Starbucks CEO Howard Schulz claimed to have 90 percent of the market of the $1.3 billion U.S. total of the mobile payments market. While this may generate around $50 million, the same $4.2 trillion generates something like $100 billion dollars each year in processor fees. Processor fees are the Microsoft-sized opportunity.

Payments for Geeks?

If Satya Nadella could integrate all Microsoft-powered devices running Windows 10 into one payment platform, from the Xbox, to Windows phones, to computers running Windows, to the newly (and hugely) popular Surface, then the sky may be the limit.

So for small businesses, they can accept payments from customers using the business’ pre-existing hardware, so long as the hardware has been upgraded to Windows 10 (which Microsoft is giving away as a free upgrade for Windows 7 and 8 users). One of Microsoft’s goals is to see small-and-medium-sized businesses (sole proprietors, retailers and professional services organizations) using a Surface as a laptop replacement for inventory, supply, customer relationship information and accounting, and as a tablet for point-of-sale duties.

Microsoft is already the dominant operating system for enterprise. Much like other markets, when a company creates a dominant position in the market, dethroning the company is quite hard regardless of better technology and more aggressive sales. Using this dominant position, imagine how integrated payment processing could become if a company is not only using MS Office internally but receiving payments from a tap-to-pay feature that is baked into subroutines and modules for credit card processing? In using Office with HCE, it opens up the possibilities for “in-doc purchases” as well as an Office plug-in/add-on marketplace with a Freemium model.

Security Concern for Enterprise

While this sounds rosy, the use of backend processing with MS Office could open up a host of security concerns. The ongoing attacks on payment infrastructures, and the reality that the Windows operating systems are a hot bed for malware, Microsoft must have security at the top of the list while implementing any payment play. There are many variables to juggle, those being third-party software installations, many of these programs introduce their own security holes that could be used to exploit payment systems.

HCE solutions cannot guarantee that the financial transactions are happening in a tamper-proof, private environment. This lack of assurance can leave the door wide open to financial fraud. Without the use of a guaranteed secure hardware element, Microsoft Payments must now address a different security issue because Microsoft Payments will be executing transactions in an uncontrollable and potentially hostile mobile environment. This lack of assurance can leave the door wide open to financial fraud. Hackers may inspect the HCE environment and observe how Microsoft Payments generates and uses cryptographic keys and algorithms throughout the financial transaction lifecycle. Once they gain that understanding, they may be able to steal keys, decrypt sensitive data, and conduct fraud.

A Future with Microsoft

For now, Microsoft is once again slowly progressing to be a dominant player in the enterprise space. Microsoft will create new developments that leverage existing software and infrastructure, while also looking into new forms of payment such as paying by Bitcoin for Xbox games and mobile content. Add to this the position that Xbox enjoys in the video game console market, home computer market, and Microsoft Surface’s growing market share in the tablet space, Microsoft Payments could be a boon for consumers and enterprises alike.

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