Visa just invested in a fintech that wants to eliminate checkout hardware, and it's a peek into the future of how we'll pay for things

  • Visa is investing in MagicCube, a payments-security fintech focused on enabling devices like smartphones to accept payments.
  • In lieu of buying checkout hardware, merchants could use devices like smartphones to accept payments in the future. MagicCube built the card industry-backed security needed for widespread adoption.
  • Earlier this year, Apple acquired Mobeewave, another fintech that turns smartphones into payment terminals.
  • MagicCube has raised over $12 million to date from investors including Bold Capital, Epic Ventures, and the Sony Innovation Fund.
  • Visit Business Insider's homepage for more stories.

The race toward hardware-less payments is on, and Visa is investing in MagicCube, a startup that helps turn devices like smartphones and cars into a way to handle transactions.

Inside any point-of-sale device — be it a sleek Square terminal, traditional Verifone keypad, and even a kiosk at a movie theater — there are expensive and bulky security measures built into the hardware. From various security chips and even a gold-mesh layer under the keypad to prevent tampering, there are limitations to the actual hardware required to process payments. 

"The device that you dip or swipe your card in the supermarket, like an Ingenico or a Verifone device, is a complex, 'Mission Impossible' device," Sam Shawki, co-founder and CEO of MagicCube told Business Insider. 

Read more: Retail will need to be reinvented after the pandemic. PayPal cofounder Max Levchin lays out the future of brick-and-mortar, and the 'software fight' that will go on behind the scenes

MagicCube's security tech aims to eliminate the need for such hardware, instead providing the same level of authentication and protection through software.

On Monday, Visa announced it was investing an undisclosed amount in the fintech. Thus far, the startup has raised over $12 million to date from investors including Bold Capital, Epic Ventures, and the Sony Innovation Fund.

Shawki, who was previously head of remote payments at Visa, left the card giant in 2014 to build MagicCube. His co-founder and wife, Nancy Zayed, is the fintech's CTO and was formerly an engineer at Apple.

MagicCube's software secures transactions with new forms of payments, like Visa's Tap to Phone technology, which enables merchants to accept payments on their own smartphone devices.

"[MagicCube] will help transform the small businesses that might not be able to afford fancy purpose-built, static, hardware-based point of sale technology," Mary Kay Bowman, global head of seller solutions at Visa, told Business Insider. 

Flexibility in where and how a business accepts payments has become more important, especially as points-of-sale shift to curbsides and other touch-free options due to the coronavirus.

"We basically built something that can replace a SIM card or a chip or a payment device. These are all physical containers, like a physical safe you have at home," Shawki said.

"The patents that we have are related to the fact that our virtualization, unlike VMware, is for security, not efficiency," Shawki said. "We've created a virtual safe. That's really the core tech."

MagicCube has spent years building trust in its security

MagicCube spent the last five years building and proving out its security tech — crucial groundwork when it comes to processing sensitive information like payments. 

"The hurdle of moving from hardware to software is multi-fold," Shawki said. "First off, it's security. Second is the ability to prove that security."

To that end, Shawki worked with EMVCo, an industry consortium that counts all the major card networks as members, to have MagicCube's security tech recognized as a "trusted execution environment."

And while MagicCube's security tech can apply to many Internet of Things (IoT) devices like connected cars, Shawki found that working with banks would be the path of least resistance to adoption.

"When we started to pitch this as pure security for cars, we had a few projects with the likes of Honda and others, but none of them were ready and eager to use us commercially like Visa and Mastercard were," Shawki said.

"So we decided to go full throttle with a Tap to Phone and pin as leading products," Shawki said.

MagicCube isn't the only one eyeing software-based payments

Earlier this year, Apple acquired a payments software company called Mobeewave, which enables iPhones to become payment-accepting devices.

And while it may seem that Apple is looking to directly compete with the likes of Square, Shawki says that's not the case. Selling payments hardware itself is a small part of Square's revenue. In the second quarter this year, hardware generated $19 million in revenue, about 2% of Square's seller revenue, which totaled $732 million.

For players like Square, the bulk of revenue comes from processing payments, and that revenue doesn't go away with software-based points of sale.

"I think Apple and Square will work together. I think we will work with Apple. This is about getting rid of Ingenico and Verifone, not to choose names, but those entities" Shawki said.

Read more: A Mastercard exec lays out how a surge in contactless payments is giving the company an unexpected boost as people rethink touching cash

But in the meantime, as Apple builds out its software-based payments in the iPhone, MagicCube is now eyeing the massive Samsung and Android market. And earlier this year, Visa announced that Samsung was one of its pilot partners in the Tap to Phone technology.

"We're being pushed harder after the Mobeewave acquisition," Shawki said. "It's going to take Apple time to produce, and it's also leaving the Samsung and Android market open. So I think we are now one of the big bets on the Android side."

Hardware-less payments requires a move toward contactless tap-to-pay tech 

To be sure, a key part of MagicCube's adoption hinges on consumers adopting contactless tech. If a merchant eliminates card-reading hardware and opts to accept payments on a smartphone, customers will need to have contactless-enabled cards or digital wallets to pay.

"When we say hardware free, you still have to read the card," Shawki said. "The only way to read the card is if it is a contactless card. That's why most of my sales currently are in Latin America, Europe, and the Middle East."

The US has traditionally lagged other markets like Europe and Australia in the adoption of contactless payments. But the coronavirus pandemic has accelerated the pre-existing trend toward more tap-to-pay technology, with merchants and consumers alike looking for safer, touch-free ways to pay.

Networks like Amex, Mastercard, and Visa are all pushing for contactless adoption, both through digital wallets and reissuing updated cards to their customers.

"Visa is telling us that next year is our year," Shawki said. 

Tap-to-pay tech has taken off in markets like China, which are more mobile-first than the US when it comes to commerce. Visa's Tap to Phone tech is currently active in 16 countries, and now, with digital payments taking off amid the coronavirus pandemic, Visa is looking to the US.

"Some of the challenges that we're seeing in the US now for small businesses always existed in those other countries where the traditional commerce infrastructure that we've had in North America just hasn't been there," Visa's Bowman said.

"When we think about it in the US, I do think that this move to somewhat mobile commerce and using devices like Tap to Phone is the first place that we're really looking, because there is a demand and a need that is currently unmet from small businesses."

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