If It Ain’t Broke, Don’t MCX It






Groundhog Day At Google Wallet
All Eyes On iZettle

November 27, 2012

I’ve been thinking a lot about MCX these days. I’ve read a bunch of articles and talked to a lot of people. I’ve seen presentations about its strategy and model. I’ve also heard MCX representatives speak at various conferences. Here’s where I come out on MCX based on what I know right now.

MCX says merchants want control of its customers: the experience that the customer has when she enters their storefront; the offers that are served to her before, during and after she gets there; the data that results from her transactions at checkout; the technology that enables her commerce experience, and the cost to process and manage that commerce experience. And, merchants should want that. Merchants, far more than any of the other players in the payments ecosystem, are in the best possible position to create and manage and optimize a relationship with the consumer. Merchants see and serve them regularly – and are on the firing line to manage those moments of truth at the point of transaction that keep customers happy and coming back. It is truly unfortunate that the payments ecosystem forgot, until recently, that merchants are paying the freight and needed to be a more active participant with them in the development and evolution of the ecosystem – to use a holiday family analogy that I am sure we all can relate to — a party at the table rather than the relative who has to be invited to dinner occasionally but who is not always enthusiastically welcomed. 

But, today, if there was no MCX, merchants would still get to decide what happens when the customer walks thru their storefronts, what offers are served to her, what they do with transaction data, what technology changes get deployed at the point of sale and when, and, for the big merchants anyway, how much they pay to enable that commerce experience. The Durbin amendment cut the swipe fee on debit transactions in half and the really big merchants drive hard bargains with the networks for credit and debit card interchange fees based on the volumes that they send their way.

So, as much as I have really tried to keep an open mind about MCX and how it is helping merchants address the set of objectives that it has laid out, I have to admit to being a bit perplexed.

MCX skeptics are quick to point out that, at its core, MCX was founded for one and only one reason: to drive down the cost of acceptance. Some of this country’s largest merchants decided sometime back that they would rather switch than fight. In this case, switching means building something entirely new that is grown, run and managed by them. If merchants want in, they have to pay up.

But to be fair, the MCX talking points push reducing the cost of acceptance down to reason number three for why it has decided to become a payments network. Reason number one, as articulated by its acting CEO, is so that consumers will have a consistent mobile payments experience at MCX members which he says will eventually drive about 40% of the total spend today. Today’s mobile payments landscape, according to MCX officials, is too loosey-goosey for most consumers and MCX will deliver a reassuring and consistent alternative way to pay at the gas station, nail salon, grocery store, department store and everywhere in between. By delivering a consistent mobile payments experience, MCX will also use its coalition of merchants to set the defacto standard for how mobile and retail at the physical point of sale interact.

Reason number two, it is said, for the formation of MCX, is so that transaction data can be kept “where merchants believe it belongs: between the merchant and its customers.” MCX believes that merchants have to control the data so that others don’t use it to direct its customers to competitors, which they assert is happening today. At one of the recent Fall conferences, an MCX spokesperson even suggested that MCX would even be in a position to disintermediate the banks and other third parties since it could erect a moat around itself that would make it hard for others to penetrate. (I can only imagine how much fun Google is having negotiating with some of these merchants since its proposition is completely rooted in having access to consumer data.)

Okay, so why am I so perplexed?  

Well, for MCX to ignite, it will need merchants and it will need consumers. Most of what seems to be driving MCX is what it says is good for the merchants. That’s not entirely unreasonable, because naturally there has to be a value proposition for both merchants and consumers for ignition to happen. But MCX currently seems more like a solution in search of a consumer problem. As currently articulated, the consumer value prop seems, well, a little lame. Of course, having a consistent mobile payments experience is valuable, it just strikes me that it is low on the priority list right now. Consumers already have a consistent experience that works well today (their mag stripe card) and Starbucks, PayPal and other players like LevelUp have shown us that consumers will adopt something new on their mobile devices if it is easy to use and solves a problem for them or presents them with a compelling reason to adopt. I think that, by and large, most consumers outside of those of us living in our little “early adopters mobile payment bubble,” don’t even think about mobile payments, much less whether it is consistent, so that as a starting point of a value prop doesn’t really seem all that motivating.  

The MCX challenge, then, is to persuade consumers to ditch the payment methods that they use today for MCX’s. I don’t know what that is — and not sure they do either — but let’s play a little “what if.” 

What if it the MCX payment method is something entirely new, so sort of like a souped up version of a private label card only mobile to be used across MCX participating merchants. Then MCX will be asking consumers to completely dump, ditch, abandon and otherwise ix-nay their existing method of payment and the benefits that go along with using them for theirs. That’s a pretty big ask, even if it comes along with other goodies, like what’s available today on store cards. It also assumes that enough people will qualify to get that new payment account. With respect to private label products generally, the most recent Survey of Consumer Finance suggests that most consumers who want store cards have them, and if anything, the trends show that consumers are shedding them (declining about 4.5% a year).   

But what if MCX becomes the merchant version of PayPal, so another digital wallet that could be tied to ACH? If that is the case, then consumers will have to be okay with giving merchants their checking account number and using their checking account funds for all of their purchases, even the big ones. Seems implausible. You might say, well, isn’t that what PayPal does? Yes, but PayPal is different in two important ways. One, it started its life as  a solution to a problem that buyers had in transacting online with casual sellers. Two, it allowed consumers the option to attach a credit or debit or prepaid card to their account. Now, it’s no secret that PayPal really, really, really wants consumers to use their checking account as the primary way to pay with their PayPal account, but it isn’t required – and consumers aren’t told that they can’t put card A from issuer A in their PayPal wallet. From what I’ve heard, in order for consumers to be able to put their non-MCX cards into an MCX wallet issuers would have to negotiate terms with MCX.

Wouldn’t you like to be a fly on that wall when those conversations were taking place????

It seems pretty unlikely that MCX would have a ton of negotiating power with issuers and networks, at least not now: as a brand spanking new network, MCX merchants may have store customers but they don’t have customer payment accounts – except for store card accounts that you can be sure that they don’t want consumers flipping to ACH. So, what carrot or stick would they offer to issuers from the get-go? On the “carrot” side, maybe they would say that consumers will be so compelled to use their mobile phones to pay that they will happily make the switch to an MCX decoupled debit product so they should play along. And, maybe on the “stick” front they could say that unless issuers used its technology standard and got in line behind them, they wouldn’t get access to the point of sale.  

Seems a little short sighted.

As much as MCX may hate to acknowledge this, issuers and networks today still have the payment method upper hand and will for a (long) while, even if MCX gets traction. Consumers are carrying around a plastic card in their leather wallets that all of those merchants and then some accept today. As long as consumers are comfortable using those cards, merchants would be crazy not to accept them. It will also be a long time before the bulk of transactions are done at the physical point of sale using mobile so that will likely be the case for a while yet. No merchant, MCX or otherwise, is going to do anything that will drive a wedge in between the customer and the merchant that gets in the way of making a sale, especially in these still fragile economic times.

The same holds true for digital wallets. With just about every digital wallet around today that is getting traction, consumers get to register the card of their choice to that wallet. And, I can’t imagine any merchant turning away a mobile payments provider that brings them the prospect of 130 million (PayPal) or 400 million (Apple) or 10 million (Starbucks and Square) new customers, if only merchants agree to rejigger things slightly at the point of sale in order to have access to those consumers.

Oh, if you need further proof about how the movie ends when new players negotiate with issuers before allowing cards in digital wallets, check out Google and Isis. Need I say more?

There is one other “what if” solution that I’ve heard bandied about too. What if retailers convert consumers to closed loop prepaid products that are funded by using ACH to take funds out of their checking accounts? Well, consumers already have a product that works like that today everywhere they want to shop – it’s called a debit card!! Forcing a decoupled debit concept wrapped around a closed loop prepaid card tied to a mobile payment app may seem like a creative way to solve the acceptance cost problem for merchants and may look great on financial proformas but seems like a stretch for consumers to embrace. I’m back to my “solution in search of a problem set” again, this scenario seems like the poster child for that.

But, regardless of which “what if” scenario is pursued, MCX will also have to take on the risk that comes along with operating a network. Now it will certainly partner with someone to do this for them, but that will cost them something. And, MCX will have to do that better and cheaper for its member merchants to realize the savings they promise without sacrificing service to the consumer (or fraud for themselves).  

The one other sort of related puzzle for me is how MCX gets scale. Payments networks, like all networks, are scale businesses. But if one of the MCX founding principles is that it won’t comingle customers (and customer data), then how does it grow? How does the fly wheel start? Will it try to cross sell its own store cardholders — and will there be enough takers from what is likely a very small base across all of the participating merchants to get the flywheel turning? Does MCX assume that a good fraction of its existing network-branded debit card customers will switch – and behave differently than all of the other times that it has tried to deploy decoupled debit schemes? And if so, will that be enough to ignite MCX since consumers can use the product across all participating retailers? And, if MCX is about flipping existing debit card users, then what is it about how they will operate the network that will allow them to do it 50%  cheaper than the debit networks do it today – since that is their value proposition to their member merchants?  

Maybe now you can begin to see why I am perplexed.

As I am looking at MCX now, for it to deliver value to the merchants it is hoping to attract and consumers that it is hoping to serve, it will need to do the following 4 things.

  1. Convince its merchants that it can and will run a payments network better and less expensively than the big networks can after the latter being in the business for almost five decades. The high margins and high stock prices enjoyed by the existing networks are partly a reflection of the efficiencies and scale that they have created and partly a reflection of the innovation they support, e.g. all of the innovation that rides the existing card rails which is pretty much all of it). Unless MCX is more efficient than the existing networks (how and why?), can scale (how and when?) or they push all of the costs to the consumer (why would consumers accept that?), the network math seems awfully tough.  

  3. Convince its merchants that it really can and will reduce the merchants’ cost of acceptance by 50% in a time frame that is relevant without alienating consumers at the same time. For the merchants to win, they will have to flip a ton of customers to the MCX product, have those customers use the MCX payment product for all of their purchases at those merchants, and do it quickly. Otherwise, they’ll end up supporting a bunch of POS alternatives — well, at least two – theirs and mag stripe at a minimum – and will incur the cost of operating the new network plus the existing one. It also just seems totally unrealistic to think that MCX merchants will want to run the risk of ticking off customers by refusing to honor the method of payment that consumers present to them at checkout, or will turn away a proposition by another party that can bring them incremental customers. It seems to suggest that it will be a long, long time before a sizeable reduction in cost is realized. And, getting traction takes time. Just ask Discover – 25+ years later with a 5% market share that started with a base of 25 million Sears’ cards.

  5. Convince its merchants that consumers will want to adopt its product versus others now in the market. It will come down to the consumer value proposition and how compelling it is for consumers to stop what they are doing now, reject what others are offering and settle on its solution – which at the outset, will realistically only be accepted at a handful of merchants. I don’t think that MCX has to ubiquitous for consumers to adopt it and use it, it just has to be better than what exists today and the alternatives that are available – and available in enough of the places that consumers like to shop to be relevant.

  7. Convince its merchants that the current honeymoon following a marriage where the vows of merchant solidarity in the face of onerous payment acceptance schemes lasts even when merchants who are today fierce competitors sit around the table and negotiate operating rules and business models. The participating MCX merchants today say that they are united behind wanting to serve the customer even though they compete today in the marketplace – and have come together before to help the collective merchant community. They say that their case in point is Durbin. I think that was a little different since it didn’t involve the intimacy of how the consumer/merchant relationship is managed at the individual merchant level around commerce, and the fine points associated with how individual merchants run their business and drive sales, rather just how much was being paid in interchange.  I believe that it all sounds good now, but is likely to become a little more emotionally charged as the scheme matures.

None of what I’ve said is to suggest that MCX won’t continue the track they are on to launch its network. They are reportedly close to coalescing around a short-term technology solution (which I’ve heard is mobile but not NFC) and are looking for a CEO and management team. They seem to have energy and momentum.

So, I guess I’m back to where I started. I really don’t understand why merchants feel that MCX is the only path to a future where they can get what they want – and that is to control the way that their customers are served and to do that at a reasonable cost. As I said at the beginning of this piece, setting MCX to one side, today, there’s nothing stopping merchants from flipping consumers to their own private label products or lower cost debit products, offering them any number of incentives or rewards to do that,  developing  co-op marketing programs with a consortia of merchants, experimenting with mobile commerce trials, having mobile payment apps and doing whatever they want to get consumers into their stores. Maybe this all sounds familiar because it is what’s happening now!

With respect to data, today, merchants own the customer data – customer mailing lists (which networks don’t have access to but issuers of course do but only for their individual card products – merchants have it for all of their customers), the transaction data (at a SKU level which issuers and networks don’t see) and the big ones have massive and sophisticated data bases that help them target consumers in clever and precise ways. There are any number of third party partners that they can work with to design creative and clever mobile commerce incentive schemes for consumers. And, if they don’t want their data shared with others, then they have the ability not to participate in those schemes and create their own promotions, just like many merchants do today via email and social media.  

The merchant also has a lot of power today to decide what happens at the point of sale, we know that – it’s why it is so hard for new things to get a lot of traction. But, the fact is that few if any merchants will turn down a plausible alternative that helps get new customers into their storefronts. It seems like a very circuitous route to go thru the time, trouble and expense and to accept the risk of starting a new network and then impose constraints on what products are accepted at the point of sale that only runs the risk of driving a wedge between consumers and merchants – all to simply reduce acceptance costs.

It is very, very early days with respect to mobile commerce and there are experiments galore. No one really knows what will ultimately click with consumers and when it clicks, how long it will take to get traction and scale. I don’t think that any merchant – MCX or otherwise – will want to be on the wrong side of a decision that is made too early in game that shuts that door. I am not suggesting that things don’t need to change between merchants and issuers and networks, but I am suggesting that merchants may not  have to spend the effort and the next three decades (or more) building a new network to affect that change. Maybe I am getting a little sentimental with the holidays season kicking in and all, but I will bet that there  are enough willing players on all sides who could hunker down and figure something out that would solve a problem that merchants have, that at the same time unleashes opportunities for consumers and the entire ecosystem.  

What are your thoughts?

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