By Jonathan Cheng in Barcelona and Alistair Barr in San Francisco
BARCELONA--With its new Galaxy S6 smartphone, Samsung
Electronics Co. isn't just going toe-to-toe with Apple Inc. on
hardware. It is also looking to jump ahead of its Cupertino,
Calif.-based rival in one of the most competitive battlegrounds in
mobile software and services: payments.
Samsung Pay, which made its official debut Sunday alongside the
South Korean company's new flagship smartphone, will allow
consumers to link credit, debit and other loyalty cards to their
Galaxy S6, allowing them to buy a coffee and rack up loyalty points
with the tap of a smartphone. That puts it on a level with
offerings from Apple, Google Inc. and others.
But Samsung Pay differs in one notable way. Using technology
from LoopPay Inc., the Boston-area startup that it acquired last
month, Samsung Pay will be able to accommodate the magnetic-stripe
payment machines that are already stationed at nine out of 10 cash
registers in the U.S. Samsung has joined with card networks such as
MasterCard and Visa, and card issuers including American Express,
Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co.,
and U.S. Bank, the company said in a statement.
Apple Pay is banking on a long-heralded shift by U.S. merchants
to next-generation card readers that use near-field communication,
or NFC, technology. That transition has taken longer than expected,
and Apple said in January that its service was available at roughly
220,000 locations in the U.S.--just a fraction of the country's
estimated 12 million checkout points.
Some analysts say that a switch to "chip-and-PIN" technology
being pushed by the major credit-card networks ahead of a deadline
in October, together with Apple Pay's entry into the NFC payments
category, will persuade many retailers to shift to NFC readers this
year.
But with its ability to work with the legacy magnetic-stripe
readers already in place, Samsung Pay offers a nice hedge against
foot-dragging by merchants, particularly smaller store owners
reluctant to pay for the pricier new equipment.
Still, Samsung Pay isn't betting exclusively on an unwillingness
to upgrade. In addition to LoopPay's magnetic-stripe technology,
Samsung Pay will also work with NFC technology.
If a checkout terminal has an NFC reader, the Samsung smartphone
will work. If not, the user will be prompted to hold the phone next
to the magnetic-card reader and the payment will go through that
way instead, the company says.
To address security concerns around old magnetic-stripe
technology, Samsung Pay will come with one-time-use encryption
capabilities-- known in the industry as "tokenization"--to cut down
on fraud. That means each transaction will generate a unique
electronic token that must first be authenticated by a card network
such as Visa, MasterCard or American Express before it goes
through.
"This is a pretty big step forward," said Jim McCarthy, global
head of innovation and strategic partnerships for Visa Inc., in an
interview. "Samsung Pay's acceptance is very broad because it can
use the old terminals, while also running on the existing
tokenization system that we have set up for Apple Pay. These
devices will work at almost any terminal in the U.S."
Tim Sloane, a payments analyst at Mercator Advisory Group Inc.,
a U.S.-based consultancy, called the technology a "breakthrough"
and a major move toward helping Samsung build its credentials as an
innovator in mobile software and services--never a strong suit for
the handset maker.
"It will make Apple Pay acceptance appear extremely limited,"
Mr. Sloane said in an interview. "It will position Samsung as
having a product that is better than Google's."
Apple and Google weren't immediately available for comment.
Samsung Pay will go live in the second half of the year,
starting in the U.S. and South Korea. Samsung says it will then
roll the service out to Europe and China.
Robin Sidel contributed to this article.
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Alistair
Barr at alistair.barr@wsj.com
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