Following last week’s ATM, Debit and Pre-Paid Forum in Phoenix, AZ one of the most interesting topics under discussion was the Merchant Customer Exchange (MCX). The number of mobile payment solutions being offered to merchants seems to increase every day. Normally this would be a good thing but often each solution works in a slightly different way, involves a different risk management model and typically requires the merchants to modify their systems/payment acceptance process. There is a lot of talk about technology but very little talk about how mobile payments will make more money or reduce costs for merchants.
As an example, the card scheme preferred approach, based on near field communications (NFC), relies on secure element (SE) technology being implemented as part of the mobile device and the merchant having an NFC/contactless capable payment terminal. The payment processing makes use of the existing four-party model ‘payment rails’ and hence the cost to the merchant of accepting mobile payments is similar to those of cards based on the interchange fee model. Although the merchant is not involved in the complex process of provisioning the secure element on the mobile device, involving one or more trusted service managers (TSMs), the card scheme driven NFC approach is very much leveraging the legacy card production model and the TSMs emerging are the traditional card personalisation bureaus.
In August 2012 the Electronic Transactions Association (the trade association of the payments industry) announced the launch of a new committee, known as the Mobile Payments Committee, with the specific focus of addressing the policy and business issues associated with mobile payments. The membership includes the major mobile network operators, the card schemes, financial institutions, mobile device manufacturers and developers of mobile wallets (such as Google, ISIS and PayPal). Significantly the merchants are not represented.
Coincidentally in August 2012, the leading merchants in the US (including Walmart, Target, Best Buy, 7-Eleven, Publix and Sears) announced the formation of the Merchant Customer Exchange (MCX). Little information is available at launch but it is evident that the merchants are seeking to explore new avenues to drive down costs. Naturally they wish to keep things simple and focus on profitability rather than technology. Selling goods and services is more important to merchants than the precise payment mechanism used by the customer. This is the first time the merchants will potentially be competing with the card schemes and other alternative mobile payment providers (such as Google, PayPal, Apple and Square) in defining and maintaining a part of the payment processing infrastructure.
A major consideration for merchants involved in the MCX initiative is in developing a common set of standards to enable widespread adoption of the technology as quickly as possible across all smart phones. This could have the distinct advantage over solutions reliant on a secure element where a limited number of smartphones currently support NFC technology and most merchants are required to upgrade their payment terminals. Merchants have the best understanding of customer behaviour and are therefore well placed to develop a solution which tightly integrates offers, promotions and loyalty schemes. One stated expectation is to reduce unnecessary costs for all stakeholders in the payments chain, most likely though a cloud-based approach. This contrasts with many of the other wallet providers who are effectively building NFC solutions as a card replacement technology with all the associated interchange and PCI DSS compliance costs still present for merchants. MCX issued another press release in October 2012 announcing more merchants and ongoing development of the solution.
MCX will likely engage with banks rather than card schemes since this would be a good way for a bank to leverage its existing mobile banking experience and for merchants to bypass traditional interchange and significant reduce overall PCI compliance costs. Banks could also provide advice to merchants regarding security and risk – something that will be essential for sensitive information stored in the cloud. It is interesting that Starbucks (currently the largest mobile payment provider in the US) is not a member of MCX. Obviously this could change as more information emerges about the solution and launch plans for the MCX system. What is very clear is that MCX will help drive down costs and enable more electronic transactions to take place inside or outside merchant premises. Strong security is paramount and it will be interesting to see how this can be achieved in a more cost effective way that the traditional proven card scheme approach. Merchants may be looking to replace plastic cards and wired connectivity with a simple cloud-based approach – it will need to be easy to use and secure to change customer behaviour.