RIP Payment Card Industry
Todd Michaud runs Power Thinking Media, which helps retailers and restaurants tackle the convergence of social, mobile and retail technologies. He spent nine years delivering technology platforms to more than 10,000 retail locations as VP of IT for Focus and Director of Retail Technology for Dunkin' Brands.
August 2012 will go down in history as the beginning of the end for the traditional payment card industry. Discover and PayPal just teamed up to offer what could prove to be the ultimate demise of the biggest payment system monopoly: in-store payments. Without involving the POS providers.
PayPal's Discover credit-card network deal will see PayPal integrated with Discover, which it will then push out to all merchants that accept Discover—assuming the acquirers don't stop them. This is big news. Feeling violated by the costs of PCI compliance, merchants are loathe to spend any money on their POS technology, especially when it comes to payment systems. And although there has been a lot of news about the payment industry in the last month, noticeably absent in the media are the major POS players. On the surface, this announcement appears to remove that obstacle.
PayPal's main value proposition is cheaper access to a customer's money (in many cases, having the ability to use ACH transactions instead of the more expensive card processing). If PayPal does offer to reduce the cost of processing to the merchants, it gives itself a great chance of being not only adopted but marketed by merchants as a preferred payment method.
Discover brings the ability to light up more than 7 million locations without having to broker conversations with the major POS and payment device providers. It is also making a significant play to become the future processing platform for mobile transactions. If it will white label for PayPal, why not do the same for other payment platforms?
If I am Visa or MasterCard today, I am really concerned with this news. Years ago, the brands snuck into processing checking-account transactions with the invention of debit cards. They convinced everyone to pay inflated fees for these transactions to use the existing credit-card processing infrastructure. Interchange was already the biggest scam in the book, charging merchants extra fees to cover their "bad debt" while charging consumers the same thing through interest rates.
Merchants, pinching their pennies, made a poor deal. Then, just like a business being protected by the mob, merchants were further squeezed by the introduction of Payment Card Industry (PCI) compliance regulations. Merchants were told they had to pay extra for the protection (meeting PCI regulations), while giving no such assurances that the protection would cover them if they got in trouble. In fact, the entire system was set up to leave merchants holding the bag. The card brands were even brazen enough to get merchants to fund the loyalty programs of their issuing bank partners.
But that is about to change.But that is about to change. This crazy month started with news that retail giant Starbucks had signed with Square for its payment-card processing. Although I personally think that deal is more about processing costs, it started a tidal wave of news. Next, we had an update about the merchant lead payment network and mobile payment approach being built under the MCX banner. Today, we found out that PayPal and Discover have teamed up to allow PayPal payments over the Discover network.
I think the biggest news will come in late September, when I hope that Apple will announce support for NFC in the next version of the iPhone. If Apple does one thing well, it is to simplify processes within an elegant design and bring them to the mass market.
Although Apple might change the mobile wallet landscape, it could also change the payment processing landscape with iTunes. What happens if Apple customers are able to purchase a physical item and have it billed to their iTunes account? Now, the story really gets interesting. Let's not forget that Apple does payment aggregation, too (processing many small transactions as one large transaction), as way to save on its processing costs. Again, I expect the plot will thicken in September.
Although I'm not sure who the winner in this mobile payments battle will be, I am now confident that the there is no turning back. The industry will change, and I'm optimistic it will change for the better.
Wishing out loud, I really hope that, with this new mobile wallet world, PCI compliance standards are thrown out the window. I'm hoping that new standards are developed to protect the consumer banking information, and that these standards aren't built intentionally vague and representing only the political interests of some of the parties involved in the process. I'm secretly hoping the MCX takes a leadership position in creating new mobile payment security standards as part of its initiative. That way, even if MCX's mobile payment solution isn't a winner, standards will be built to protect the merchants (and consumers) that are part of this new mobile payment ecosystem. Although building security standards isn't a fun or glamorous role, we need to start over and build standards that match the realities of this industry.
I remember the first time I was given a presentation about mobile payments. My mind raced with the possibilities that it would afford to a retailer and the power that it could unleash. I dreamed about the possibilities of finally overthrowing an arcane system run by greedy organizations that had so little respect for their own merchants.
As months and years went by, I realized there were just too many hurdles, too many hands in the cookie jar, too much politics for it to happen. I became jaded; frustrated, like most retailers, about the cost and the complexity built into such a seemingly simple transaction and left with no other options.
But today is a new day. Let's face it: Paying for goods and services with a piece of plastic is the modern-day equivalent of watching a movie on a VCR. We just landed a robot on Mars, I think we can make this happen.
What do you think? If you disagree (or even, heaven forbid, agree), please comment below or send me a private message. Or check out the Twitter discussion on @todd_michaud.