The secret sauce for beating interchange is ACH. That, at least, is the plan of the Walmart-led Merchant Customer Exchange (MCX), according to sources familiar with the payment system being developed by the retailer consortium. By using ACH transactions to debit bank accounts or credit lines instead of going through payment-card brands' networks, MCX expects to reduce transaction cost to as little as four cents—and cut Visa and card-issuing banks out of the loop.
MCX still hasn't revealed most of the details of the system, but some things are becoming clear. Others are still up in the air—like whether banks will accept a few pennies per transaction when an ACH withdrawal typically costs them more than that. Also, will banks want to get into such an effort, knowing the toxic politics surrounding any effort to knock out Visa and MasterCard?
The much more fundamental issue for MCX is whether it can come up with—and agree to fund—a compelling reason for shoppers to participate. That, coupled with what some retailers—namely, those who have been pitched—see as an overly aggressive approach, has prompted some to question whether MCX can deliver the interchange relief it promises.
One example of the pitch approach some have cited: MCX demanding $30,000 from retailers just to see the official PowerPoint. (That slide deck must have some amazing images.) Although charter members were asked to kick in $1 million to join, retailers are being asked to give $500,000 or $250,000.Chains are also being asked to commit to three-year mobile payment app exclusivity, meaning they won't support any non-MCX mobile payment other than any mobile payment app they have already deployed. (There's a one-year grace period from the start of membership—where retailers can get out of the deal—and that period is about to expire for most of the initial backers.)
One CIO of a major chain, who sat through the MCX salespitch (he declined to pay for the PowerPoint but the consortium showed it to him anyway—or at least a version of the slides), said he declined to join because of what he perceived as the sketchiness of the plan. "It didn't seem to be that real," the CIO said. "Paying a quarter of a million to get into a club to fight the banks seemed like a fool's errand to us. What percentage of people are ready to pay with their phone?"
The group publicly confirmed at NRF that it planned on using QR codes for its approach but didn't specify how the codes would be used. It's now being described as the QR code identifying the shopper. The shopper would pay by launching the retailer's app—or the MCX app, which would be marketed under a more consumer-friendly name—and the QR code would be scanned by the associate at the POS. The shopper's mobile app and the POS would be connected in the cloud, which would get the shopper to confirm the account and then the associate would be told the purchase has been completed.Some involved have said the initial launch will be a decoupled debit card, but one retailer who is very active in MCX said it would also act as a credit card, albeit one riding over ACH. That approach would be similar to Walmart's current private label card through GE Capital.
The question of whether there will be a credit card option is crucial. Although debit card transactions—especially at Walmart—are soaring percentage-wise, the risks to the consumer are light years less with credit cards and the associated zero-liability programs. In theory, a zero-liability program could be created for debit cards, but it would mean banks agreeing to not bounce any transactions until they had established that no fraud is involved.That's because even if banks ultimately reimburse a shopper all monies stolen by thieves, the damage perpetrated by inappropriately bounced checks can be permanent and extensive. A credit card zero-liability incident grants a temporary credit, and the shopper is not hurt.
Although zero liability is always a nice benefit for consumers, the perception of greater security risks with mobile payments will make it essential. This is true even though mobile payments are actually more secure than today's magstripes and even EMV.When it comes to shopper fears, perception trumps reality every time. Fear is based on the unknown, and there's nothing today more unknown—to shoppers—than mass mobile payment.
Another concern is how quickly MCX could launch with actual deployments, with several saying that meaningful deployment is likely one year away and maybe even two years away. One executive at a participating retailer said the timing is tricky. "We would rather get something to the market sooner rather than later, but we want to do it the right way," he said, adding that anything more than two years would cripple the effort. "Longer than that would start to border on the absurd."
On the backend side, Gemalto—which is behind the ISIS trial—is also providing the technology for MCX. First Data is involved, too.The exclusivity issue is a concern that speaks to the fundamental challenge of all mobile payment wallets. What will get shoppers to move from magstripe to mobile payment? With no talk of major consumer incentives, it's unclear what a likely adoption rate would be. Given that so many retailers will presumably not be part of MCX, are the participating chains really going to refuse to accept PayPal, Google Wallet or ISIS, especially if those approaches have gathered substantial marketshare by the time MCX rolls out?
MCX members have spoken eloquently about how much better it is for retailers to have to support only one mobile platform. That's true, of course. But why would this help shoppers? Shoppers are used to going to Target and Walmart and being able to pay with a wide range of methods—Visa, MasterCard, checks, cash, debit cards, giftcards, etc. Will these same shoppers agree to one mobile payment app as the only one accepted?
One person who has talked extensively with MCX described the most likely payment process: "The user enrolls his normal FI-issued debit card into the cloud upon registration. When presented at POS, seemingly as a pseudo card number of some sort, the transaction authorization request traverses the NYCE network path, which is serving as the backbone for MCX (now that FIS is essentially private labeling it). The authorization itself could well be done by the cloud, eventually, but the important point is that FIS converts the tokenized pseudo number to either the original debit card BIN and/or an ACH number," she said. "Once the authorization is passed back, the debit to the funding account converts to ACH. The net cost to the accepting merchant will be about $0.04; $0.02 will go to the FI to process the ACH payment to the merchant and the other $0.02 will go to technology-providing partners (and a little bit to fund MCX)."
One retail concern that has haunted the group since its launch is the perception—with more than a little justification—that Walmart is playing an ultra-dominant role. Granted, other retailers are certainly involved, but Walmart began the effort and one of its executives—Walmart VP and Assistant Treasurer Mike Cook—is seen as the group's de facto CEO. Some have come to jokingly suggest that MCX stands for the Mike Cook Exchange. The suggestion that many of the chains involved are there to closely watch Walmart ("keep your friends close and your enemies closer") is still alive and well.
Another person who has been actively involved with MCX's formation and rollout questioned whether the long delays—inevitable when so many large retailers are involved—might themselves kill the effort. "It's such a long game to get it going. Did they not read about what is happening with ISIS?" the executive asked, adding that there is a certain amount of "arrogance" in the belief "that retailers will follow along with this to just save interchange dollars."
The best way to make any payment work is by simply making it much more attractive to shoppers than the alternative. The arguably most effective launch of any wireless product happened in the early 1990s when toll payment system E-ZPass launched.
Did it stress that participating would get users their own lanes? Nope, that was mere icing. The benefit was that drivers would pay a significant amount less when using E-ZPass compared to paying the old-fashioned way. Framed that way, the question was never, "Why do it?" It was flipped instantly into: "Why not?"
Walmart, Target and the others are mesmerized by the possibility of undermining interchange and creating a better environment for retailers. Will it be a strong enough motivation to take a good chunk of those savings and offer to charge less for purchases made through the MCX mobile app? We don't think so, either.