MasterCard Aims To Take Mobile Wallet Rivals Apart

What Google, PayPal and ISIS are trying to assemble in mobile payments, MasterCard wants to dismember. On Monday (May 7), the number-two payment-card brand unveiled a mobile wallet and an E-Commerce payment system that are designed to cut out any middlemen horning in between customers and retailers and payment networks.

Ironically, while MasterCard's PayPass Wallet for NFC-equipped phones got most of the attention, that's still largely a pipe dream—MasterCard hasn't even talked any mobile operators into giving it access to the NFC chip. But the online payments effort will offer tokenization to reduce PCI scope for E-Commerce. The bad news: You can probably forget about any interchange relief.

According to MasterCard head of PayPass Wallet service Ed Olebe, the big deal isn't the mobile wallet for smartphones, which will use a phone's NFC chip to mimic any contactless payment card that's been installed. That's all it will do (think Google Wallet or ISIS without the coupons, special offers and extra features). But that approach has the benefit of working without any changes to retailers' in-store POS systems, as long as they currently work with PayPass.

And how many today do work with PayPass? About 400,000 locations can handle PayPass worldwide, compared with about 30 million locations that take MasterCard overall. That's 2 percent. The ratio is better in the U.S. and better still among big chains, but the vast majority of customers—and associates—still expect swiping, not tapping.

But MasterCard has just started talking with mobile operators about access to the NFC chip, hasn't finalized how the wallet will work and, according to Olebe, is "waiting to see how this plays out" with in-store mobile payments from Google Wallet, PayPal and ISIS, which so far are barely a blip when it comes to payment volume.

No, what MasterCard is really pushing here is an online payment infrastructure that it will license to banks, merchants and other payment-chain players. The idea is that at checkout time, instead of clicking on a PayPal button, the customer would click on a button that takes him or her directly to a bank site that would authenticate the customer and then send the E-Commerce site either a token or an encrypted card number, depending on what the retailer's system requires.

MasterCard declined to say anything about whether retailers would get a break on interchange if they adopt the new systems. But the card brand is clearly trying to cut out alternative payments schemes that want to get a piece of the payment-card action—and doing it by breaking the process into smaller pieces.

You can do that if you're a card brand. You make your money from interchange, so you don't have to piggyback coupons and ads on top of a payment system, the way Google and ISIS do. And PayPal may be the Bigfoot of online payments, but it still collects most of its money through interchange-laden payment cards, with its profits coming from more fees from sellers.

If MasterCard can break off those added-value pieces to offer a payment service that does nothing but payments, it could be very hard for middlemen to compete, especially at the in-store POS.

Coupons? Catalina machines already crank out paper coupons; there's no reason they couldn't send coupons straight to a phone via an NFC-based app. Special offers? They could be texted to a phone or beamed to an app. Loyalty programs? Chains already collect their own CRM data and aren't enthusiastic about sharing it with third parties (and possibly competitors) anyway.

It's already proving hard for Google Wallet and PayPal to get an in-store foothold—retailers and even payments-company executives admit that customer usage is almost invisible. (Whether ISIS will have any better luck has to wait for its launch this summer.) If the business models for these companies are broken up, getting any traction against traditional plastic may be impossible.Alternative payments were supposed to be the great hope of retailers for either getting rid of interchange entirely or putting pressure on Visa and MasterCard to cut rates. That was true back when lots of small, early alt-payments startups were being launched, but most never got big enough to make a dent. (Square is the exception, but it's still too focused on small businesses to get serious consideration from big chains—well, that and the fact that Square is tightfisted with customer information it collects, too.)

Hopes rose when Google and ISIS sounded like they would handle payments themselves—these were big companies with the weight to hold their own against the card brands. Then those hopes dimmed when Google and ISIS decided that accepting regular payment cards worked fine for them.

If MasterCard (and Visa, too) can cut even those middlemen out of the game, there won't be anything left to push back against interchange except a handful of ever-optimistic startups and that mysterious cabal of retailer CFOs and treasury types who are searching for anything that will loosen the grip of card brands on the payments stream.

That's not going to happen in the form of a simple replacement for plastic rectangles. Even the card brands haven't been able to replace magstripe cards with Chip-and-PIN or contactless cards—that's how firmly entrenched the traditional magstripe card is.

Then is there any hope of interchange relief? Maybe, but no one is going to do it for retailers.

Consider: Big chains have enough CRM data to do a much better job of authenticating their best customers than a signature or PIN provides. (When associates are using that data to spot loyalty customers as they walk in the door, that's a pretty good authenticator.) Some chains are also experimenting with same-day home delivery in an effort to short-circuit showrooming and the convenience of online shopping.

What if a department-store chain tried putting those pieces together with pre-plastic-style charge accounts for top loyalty customers? Never mind the payment card. A loyalty customer could be authenticated from CRM information, including photos, and home delivery would make the transaction even safer for the retailer. The charge could then go on an account that's debited once a month with a bank transfer.

That wouldn't get rid of all (or even most) existing payment-card transactions. But it would certainly feel like special treatment for loyalty customers, and it would give the retailer a foothold in a different, interchange-free way of charging purchases.

Of course, that would also be heresy to exactly the CFOs and treasury people who most want to get rid of interchange. They're the people who outsourced store charge cards to Visa and MasterCard, back when they thought interchange wasn't worth worrying about.

It's clear they're worried about it now. But it's also clear that the card brands are willing to take on challenges to their business—and literally take them apart.