And at heart, it's about how much money chains are willing to spend to dislodge the card brands from their lock-in. Short answer: not very much.
When the Merchant Customer Exchange unveiled its name on August 15, it wasn't to announce a clear plan (that's still to come), a CEO (it's looking) or even a mobile app (as much as a year away, participants said). It was to look for new members willing to commit money to MCX.
Having more retailers on board is always good for a payments scheme, but this really is about money. The actual financial commitment by MCX participants was estimated last spring at around $20 million. Let's suppose, with the current members, that's up to $50 million.
Is that enough? Here's a little history: In 1959, the newly hatched BankAmericard caused Bank of America to officially report a loss on the project that, today, would be $70 million. The actual loss, before accounting jiggery-pokery, was probably more than $150 million in 2012 dollars.
That was the loss (not the cost, just the loss) for one year in one state (California) to give away 2 million unsolicited credit cards, at a time when the bank card was only competing against store credit cards. That's how Visa got its start—a single bank swallowing a $150 million loss, then spending even more to go nationwide.
MCX has 14 publicly announced big chains as members (and, presumably, a few more that are still unannounced) and hopes for a nationwide launch within a year, going up against the entrenched Visa/MasterCard. Twenty million dollars, or even $50 million, isn't going to cut it.
That's where the magical thinking comes in. With the right technology, this shouldn't cost as much as it did 50 years ago, right?
Back to history: In BankAmericard's first decade, it and latecomer Master Charge (launched in 1966) mailed out more than 100 million unsolicited cards. That was one card for every two people in the U.S. No applications, no credit checks, no card activation—people just got the cards in the mail, signed them and used them. (The card brands eventually got the delinquency rate down from the initial 22 percent, but they had to stop mailing out unsolicited cards in 1970 after the practice was outlawed.)
The result: BankAmericard and Master Charge spent the money on mailings and advertising, ate the cost of delinquency, got their product out in the market, and won.
By the time the brands changed their respective names to Visa and MasterCard in the 1970s, they were the kings of plastic. Diner's Club and American Express, which were in the card business earlier but charged a fee and didn't spend money on a big push, survived but have been also-rans ever since. Store cards all but vanished, and the cost to retailers of handling them was replaced by that oh-so-annoying interchange fee.
That flip—retailers exchanging cost and control for interchange—is what MCX is trying to reverse using technology. Is that possible?That flip—retailers exchanging cost and control for interchange—is what MCX is trying to reverse, and do it on the cheap through the magic of modern technology.
Let's be realistic: MCX is driven by Finance types. It's not about technology, nor is it particularly about mobile payments. If these guys could issue a single plastic card, complete with magstripe and embossed lettering, that could challenge Visa and MasterCard on interchange, MCX wouldn't bother with mobile payments at all.
But let's not dismiss the idea. Could MCX somehow re-create those massive 1960s card drops today, but using technology to cut the costs? To match the card brands' saturation, MCX would have to get its payment system into the hands of at least one-quarter of the U.S. population. The payment system would have to be free to acquire and free to use. It would have to work as smoothly as the existing Visa/MasterCard system. And there would have to be a compelling reason for customers to switch.
Is it possible? Sure. Imagine a supersized, multi-retailer version of the Starbucks pay-with-phone approach. MCX could send a QR code to every U.S. smartphone, with instructions that the QR code could be scanned at POS to make purchases at select retailers and the total added to the customer's mobile phone bill.
That would shove the cost of a billing system off on mobile operators, which would still want a transaction fee (but it might be a smaller bite than Visa/MasterCard). It would require getting the mobile operators on board, figuring out how to manage transaction security, and adding in-store signage and associate training.
Oh, and also spending millions on advertising to convince consumers that they really should flash their phones instead of pulling out a plastic card, which is the problem Google, ISIS and, in fact, everyone except Starbucks has failed to solve.
Of course, this ignores questions of whether such a mass delivery of QR codes is legal, what it would take to get mobile operators on board (especially after ISIS very pointedly decided not to get into the pay-by-phone billing business), and how to solve all the security, fraud and dispute issues that Visa/MasterCard have a 50-year head start on.
It's possible to work around every one of those problems. All it takes is money.
Unless these retail chains are willing to throw a huge amount of money at this problem, they won't catch Google, ISIS, the rapidly expanding PayPal or even the hesitant Apple in mobile payments. And if the purpose here is to get out from under interchange, they have to compete with Visa/MasterCard, which will involve even more money.
Money isn't a perfect proxy for success in this game, but it's close. And until MCX starts to commit some real money, it's going nowhere.