Why It's So Darn Hard To Change Payment Infrastructure

One of the attractions of mobile payments for retailers has been the hope of all-but-eliminating traditional interchange fees. In what might be the perfect illustration of why such a shift is so difficult, the vendor that has most aggressively been pushing an entirely Visa/MasterCard-free infrastructure last week (Oct. 4) announced a deal with card processor Fifth Third—one that in effect means it will be using the very same infrastructure it wanted to replace.

The problem for alternative payments isn't just doing the things that conventional payment cards do at lower cost. It's also breaking through the lack of familiarity that customers, banks and even retailers have with new payment approaches. Visa and MasterCard remain in the POS driver’s seat because of their network, but also because they're a known quantity. And as much as retailers want cheaper alternatives, the Bling Nation/Fifth Third deal illustrates how much of a challenge it is to buck the current infrastructure.

Bling Nation's original idea was a closed-loop system that started with participating retailers, which in turn handed out NFC stickers to customers. Customers then paid for purchases by tapping their mobile phones with the Bling stickers attached to NFC readers, and retailers were paid directly from the customer's bank account.

With Fifth Third, the third-largest U.S. payments processor, it works the same way—except that its NFC stickers are linked to customers' debit cards and payments will go through Fifth Third, not Bling Nation's own processing system. Neither company said how much more Fifth Third will charge above Bling Nation's 1.5 percent transaction fee.

Why the change? Bling Nation Co-CEO Meyer Malka says it's about expanding the business. But in practical terms, it's capitulation. Consider: In its 18 months in operation, Bling Nation was only able to sign up two banks in Colorado and one in New York. One bank at a time proved too hard, so earlier this year the company went wholesale by linking up with Banker's Bank of the West, a "correspondent bank" that provides services to 330 community banks. Even that only spread the Bling to three more states.Few other closed-loop mobile-payments providers have done even that well, although new entrants like Cimbal keep arriving.

On the other hand are startups like MobilePay USA, which uses conventional payment-card accounts and just handles the process of communicating between customer and retailer. Unlike Bling Nation, MobilePay doesn't require NFC stickers for customers or readers for merchants. A smartphone's GPS helps the customer figure out what store he's in; then the customer keys in an amount and a PIN and sends the transaction to MobilePay, which sends payment info to the retailer's POS system.

The technology is clever—but using familiar credit and debit cards already in customers' wallets is crucial because it means MobilePay can focus on getting retailers and customers on board. The payment infrastructure is already in place.

And that may be the biggest reason Visa and MasterCard remain in the POS driver’s seat. Yes, it's a technical challenge to re-create the payment networks that the card brands have built over the past five decades. But more important is familiarity to banks, cardholders and, yes, retailers that don't like interchange fees, but don't like change either.

Part of that familiarity—a part that retailers easily forget when they're unhappy about interchange fees—is the zero-liability feature of credit cards. Closed-loop systems have no equivalent and, without it, a glitch that double- or triple-charges customers could be a major headache for the retailer a customer associates with that glitch.

And a breach that somehow empties out a customer's bank account would be catastrophic for the customer and a nightmare for the retailer. That should not happen, as every alternative payments vendor will tell you. But if it does, it's the retailer the customer will blame.

Then again, zero liability may not be an issue when it comes to retailers and alternative payments. After all, even alternative payment card technologies have trouble gaining traction.

Think about how successful chip-and-PIN, contactless and NFC haven't been in the U.S. Nobody thinks they won't work. But in practice, nobody thinks about them at all. Instead, everyone swipes magnetic stripes—even if a payment card can use chip-and-PIN or contactless.

If retailers can't let go of something that simple, they'll never let go of Visa and MasterCard—interchange fees and all.