About this series
We live in a consumer society, conducting dozens of transactions each week, if not each day. Five years from now, thanks to smartphones, the way those transactions happen may be radically different. Starting yesterday and running through Wednesday, Atlanta-Journal Constitution cyber-security reporter Sean Sposito decodes the dizzying array of emerging technologies and the hidden workings of the banking system to show you what that future may look like. Think: merchant-controlled payment networks, credit and debit cards with computer chips embedded, verification via tokenization, even crypto-currencies. Buckle up, it’s going to be quite a ride.
Sunday: The future of money
Monday: But what about security?
Today: The war for your wallet
Wednesday: Cryptocurrencies, a parallel universe
It’s the closest many of us have ever come to mobile payments: Watching the person ahead of us at Starbucks buy a latte with a smartphone. Or seeing someone at Chipotle skip ahead in line. Or watching over some dude’s shoulder at Rite Aid, as he taps his Android smartphone against the card machine on the counter.
But these aren’t just blips: They signal a concerted campaign by major companies — from some of the biggest big box retailers to the mobile phone carriers — for more control over how our money moves.
Those companies are poaching on turf long claimed by payment networks such as Visa, MasterCard and Amex and the industry of processors that handle credit and debit card transactions.
“The digitalization of money is a great leveler,” said Nick Holland, a senior payments analyst at Javelin Strategy & Research. “The way that CDs have gone to MP3s and photos have gone digital, the payments industry is at an inflection point where there is the potential for the old guard to get cut out of the equation.”
Or not.
“The one thing I have always said is that consumers love their cards,” said Drew Sievers, the former CEO of mFoundry, the company that made Starbucks’ mobile payments possible. After all, Visa and MasterCard basically work everywhere.
The merchants have a huge incentive to bypass the networks and the “interchange fees” they charge by hooking directly into our wallets. The mobile carriers want to insinuate themselves deeper into our pockets.
How eagerly consumers will adopt their new technologies is an open question.
One thing, though: The players are giants. The fight promises to be epic, with plenty of potential for collateral damage.
A plastic primer
If technologists and payments experts are correct, both merchants and mobile carriers will succeed in reshaping how we transact. In itself, that’s nothing new.
Retailers actually invented credit cards at the turn of the 20th century. Long before Visa and MasterCard, there were Macy’s cards, Sears cards and the like. The difference was, they were only good at the store that issued them.
When the payment networks came on the scene, phone carriers (then only landlines, of course) were an integral part of their business model. Card processors used phone lines to verify that you had enough money remaining in your credit limit to make a given purchase.
Things began to change at the beginning of last decade, when Exxon came up with Speedpass, a device that uses a unique radio signature to let you pay at the pump without swiping a card.
Around the same time, cell phone companies in Japan and South Korea introduced successful mobile payments products.
In the U.S., a new era began with the launch of the iPhone in 2007, Sievers said.
First, there was mobile banking, which offered banks the promise of eliminating branches and cutting costs by allowing people to move money through smartphone apps.
Enter Starbucks
Retailers entered the picture in 2009, when Starbucks began working on a pilot that used 2-D QR codes displayed on mobile screens to transact.
The system launched nationwide two years later. Within months, more than 3 million people had paid using the app, according to reports at the time. The payments, of course, are only good at the coffee retailer.
Today, 10 million people have installed Starbucks’ payment app. They use it to make about 5 million transactions each week. That’s 14 percent of the chain’s in-store purchases.
Google jumped in next with Google Wallet, which lets users consolidate all their credit card info and rewards programs in one place on their smartphone. The search engine giant also encouraged cell phone makers to build near-field communication radios into their devices — the technology that lets customers pay for items by tapping their phone against the merchant’s payment terminal.
But it was Starbucks’ success that inspired the formation in 2012 of the Merchant Customer Exchange, the brainchild of retail heavyweights Walmart, Target, 7-Eleven, Best Buy, CVS, Lowe’s, Sears, and Shell.
The merchants’ gambit
Their goal is to bypass the payment networks and work directly with the banks that hold our money. That’s huge.
By 2020, an estimated 20 percent of banks’ revenue could shift to retail-driven players — potentially MCX and associations like it, according to an Accenture report released last year.
The retailers’ push is spurred partly, if not wholly, by their desire to shed interchange, the amount merchants pay in order to accept credit and debit cards. It’s just a few percent on each transaction, but it adds up fast.
However, MCX still hasn’t made any significant announcements about just how folks will be able to pay. The app still doesn’t have a name.
Some things are known. As with Starbucks’ app, MCX customers will use QR codes, according to reports. And the new MCX app will be able to work within its member retailers’ — including Publix and Wendy’s — existing smartphone software.
That doesn’t mean MCX can replicate the record of Starbucks, which was perfectly positioned on several fronts to succeed with mobile payments.
The coffee merchant controlled a loyalty program with more cards in circulation than most banks; it sold a product (coffee) that people buy more than once a day; it owned its own point-of-sale system; it had a product that was inexpensive; and, finally, it had a customer base that used smartphones incessantly.
The carriers’ ploy
Isis, a joint venture of the mobile carriers AT&T, Verizon and T-Mobile, has a different impetus and a different strategy.
After announcing itself in November, 2010, it launched, without much fanfare, last fall after running pilots in Salt Lake City and Austin. Unlike MCX, Isis is working in tandem with traditional players in the payments industry.
It relies on the same tap-to-pay technology as Google Wallet. Issuers — so far only Amex, Chase and Wells Fargo have signed up — pay Isis a per-device fee to provide their card customers with the technology.
“Right now, (card) issuers don’t have an aftermarket in mobile. They don’t have a means to take that card and put it on your phone,” said Jaymee Johnson, Isis’ head of marketing. “There is no framework that they can do that and do that at scale. That’s the service that Isis provides to them.”
But Isis, too, faces substantial hurdles, starting with the fact that iPhones don’t have the required near-field radio technology.
And crucially, consumers, stung by the Target breach, may think twice before entering their credentials into a merchant- or carrier-owned payment app or digital wallet. (Folks can also load a prepaid card linked to their Isis Wallet.)
Shakeout ahead
“Isis has talked a good game. MCX has talked a great game. But I don’t see the world adopting them,”said Brian Riley, a research director of CEB TowerGroup. “The way I transact, I don’t look to spread around my personal information.”
In any case, Visa, MasterCard and their brethren will be part of our lives for some time to come. At the end of the day, everyone, PayPal and Google included, is still using cards to reload their stored-value accounts.
But the merchants are highly motivated, and they’ve got the wherewithal to mount a sustained attack.
“Who hates the payment networks, who has the most to gain from disrupting them? Merchants… because they hate interchange,” Sievers said.
At the end of the day, he said, they’ll only give up the fight if the long-term costs of the rewards necessary to shift consumers to their system is higher than the interchange costs they already bear.
In the meantime, enjoy your ring-side seat.
