Karen Webster

MCX’s Four Fatal Flaws And What Payments Innovators Can Learn From Them

MCX’s Interim CEO, Brian Mooney, starts his first day on the job today.

And, this seasoned and well respected industry veteran is starting amidst a firestorm of controversy over its future.

Nearly three years after the merchant consortia was announced (August of 2012), there’s no product in market outside of a few beta test sites.

Mooney is its third CEO.

It doesn’t even appear that last week’s news touting the launch of its CurrentC product sometime “mid-year” was able to stem the tide of negativity that’s washing over the venture. We’re just a few weeks from mid-year. Last week saw the ouster of its CEO and news of the acceptance of Apple Pay by one of its largest founding partners, Best Buy (and you gotta believe others very, very soon). Two months earlier, its technology partner, Paydiant, was acquired by PayPal.

All of these things don’t exactly inspire confidence that MCX has a solid foundation upon which to build its future.

Not surprisingly, many have written off that future as pretty bleak.

Me included.

But I never thought it had much of a shot to begin with.

Not long after the announcement of its formation, I wrote a fairy tale portraying MCX’s ambition to become the alternative set of merchant-owned, cheap rails, as just that – a fairy tale - where the notion  of living happily ever after was flawed.

Some thought that a pretty harsh indictment of the merchant-led scheme, portrayed as one whose “time had come” – one that was said to provide a necessary foil to the dominant card brands, would allow merchants to “take back” their customers and their data, and lower the cost of payments acceptance.

Except that it hasn’t and with each passing day, seems likely that it won’t.

At least not in the way in which it was originally envisioned.

Rather than rehash all that I’ve written over the years on MCX, I thought it more useful to focus on a few of the important lessons we can learn from watching it unravel.

Time Is An Important And Valuable Currency
MCX’s founding members were asked to sign exclusive contracts in 2012 barring them from accepting any other mobile payments scheme in their stores. I’d be willing to bet my beloved Border Collie, Annie, that when they agreed to that pact, none of them thought that, nearly 3 years later, they’d still be waiting for MCX to launch.

Multiple mobile payments scheme launches and merchant breaches later over that same time period, MCX has created the ultimate no-win situation for its member merchants.

MCX members aren’t able to accept any other mobile payments schemes – at a time when there are now multiple options in market – yet have nothing to offer consumers as an alternative.  The ramifications of that fatal flaw were exposed back in October 2014 when consumers began using Apple Pay at MCX merchants that also had NFC capabilities. Since allowing consumers to do so violated their MCX contracts, those merchants shut off NFC – opening up the floodgates of consumer backlash that swamped social media.

Today, MCX faces an entirely different ignition scenario – a “coming soon” mobile product that’s now facing some big competitors in or about to be in market: Apple Pay, Google Wallet, SamsungPay, and PayPal with Paydiant, LevelUp, and no doubt a raft of new things being cooked up by innovators looking at the cloud plus mobile as a way to enable mobile payments in store without even using POS terminals on countertops. Capabilities that are, in fact, actually enabled today by many of these same providers and others via order online and pick up in store capabilities.

But now, nearly 3 years in, MCX has another headwind to contend with – the lingering doubts that consumers have about merchants and the security of their payments data. Post-breach, surveys suggest that consumers don’t feel entirely comfortable that merchants are able to keep their payments data safe. Doesn’t exactly bode well for a merchant-led payments scheme.

Who’s to know whether MCX, with a scheme in market the early part of 2013, would have been able to overcome consumer doubts about the safety and security of using it for payments in store, or could have used it as a lever to shift consumers to a secure mobile product. What we know instead is that MCX now must add “convince a skeptical consumer that we can be trusted with their data” to its launch challenges.

As anyone in payments knows, scaling a platform takes time and it’s a slog. The longer it takes for “ignition” to happen – that moment when network effects kick in and enough consumers and merchants come together on the platform to make it click - the less likely it will ever happen in any material way. For any payments player, the absence of ignition – or even signs of ignition - makes it harder to attract additional consumers and merchants - dooming the innovator (and its investors) to a sort of platform purgatory that just chews up capital and the feeling that the venture is just running in place.

That’s the reality that MCX is facing today – getting ignition in an environment that’s vastly different than it was in August of 2012. Ignition that now has to convince enough consumers that it’s worth switching to and enough merchants that it’s worth investing in to build and scale – and prioritizing over other schemes in market. Having let nearly 3 years languish and with no momentum in market today, MCX faces formidable competition for both consumer and merchant mind and wallet share.

And a tough and expensive road out of platform purgatory.

Letting Finance Guys Design Payments Products Creates A Blind Spot
Speaking of expensive, that’s the whole reason that MCX exists today: MCX merchants, and in particular, its creator and the world’s largest merchant, thinks interchange fees are way too high.


Finance guys at merchants look at the interchange line item on their P&L and throw up. Probably the same way they look at how much it costs to heat their stores in the winter and cool them in the summers. And couldn’t we save a few bucks on the toilet paper, too, while we’re at it? That’s what finance guys do – they look at the cost side of the ledger and try to figure out how to reduce it.

The marketing side of the house, on the other hand, just wants to sell products and make it easy for consumers to pay for what they’d like to buy. That’s why merchants still accept cash, begrudgingly take checks, and let consumers use cards. If the cost of interchange trumped giving consumers a choice for  how they paid for things, no merchant would accept anything but cash – and no small merchant would ever take American Express. Marketing and product guys look at the revenue side of the business and try to sort out ways to make it easier for consumers to load up their shopping carts and convert those carts into sales. And the last thing that they want is for payments to get in the way.

MCX was created and dominated by the finance guys – not the marketing guys.

And there are several ironies here.

The finance teams of very large merchants have the volume and the clout to beat down the card networks on how much it costs to accept card products.

And they do. Routinely. (See Costco.)

I don’t know what merchant interchange is at MCX merchants, but I’d be stunned if those with the checkbooks to shell out the millions it takes to pay for MCX scheme development are paying fully loaded interchange rates.  And, I’ll even bet you they are paying less than half of what their small business rivals are paying.

Durbin also reduced the cost of debit acceptance, which for a lot of merchants also reduced their costs of accepting debit products by as much as 40 percent.

So it isn’t as if these big guys, and in particular, those who serve as founding members of MCX, are paying out the wazoo for interchange today. Either through regulation (Durbin) or negotiation (finance guys), they have and do strike competitive deals. If their bottom line on interchange looks steep, it’s because consumers are also walking out of their stores with lots of goodies that they use card products to pay for.

Yet that is the starting point upon which MCX was established – how merchants can make it even cheaper to accept payments via a mobile product – not what can they build that adds value to their customers.

And in perhaps the ultimate irony, it’s not as if building and operating a payments network is free as I am sure MCX merchants are now beginning to internalize. Incentivizing consumers to switch and stick with it costs money. Building a payments network costs money. Maintaining and adding functionality to that network costs money. Making it secure costs money. And if and until consumers ever only use MCX products to buy things in their stores, MCX merchants will have to pay to support and operate their own scheme on top of everything else they are paying to support the payments methods that consumers still use in their stores. MCX will make the cost of payments, more and not less, expensive for merchants – for the long and foreseeable future.

Competitors Rarely Collaborate
Quick question. When’s the last time you saw Target promote buying groceries at Walmart to its customers and Kohl’s promote buying beach chairs at Target to theirs?

That would be never.

Anonymized, tokenized, promises never to share data or not, having bitter competitors throw all of the payments transaction and customer data into an MCX hopper takes a leap of faith, in this competitive retail environment, that seemed pretty unrealistic from the jump. Multiply that by the fact that MCX’s dominant partner is the world’s largest retailer, and you suddenly have a very weird merchant network dynamic at work. It’s hard enough to create something that every single one of its 90 merchant members – some of whom compete directly with each other - feel comfortable protects their flanks at the same time it delivers great benefits. But that task is made that much tougher when the founding/funding partner is bigger than everyone else combined and basically competes with everyone on some level.

Now, that’s not to say that competitors in payments don’t collaborate when there is a higher, common good that can come from it. The card networks joined forces to develop a common standard for payments (EMV) and for Apple Pay (tokenization). Yet sometimes even when it is for the benefit of the “common good,” competitors balk.

And if you look around the world, merchant-run payment schemes are about as rare as a Boston winter without snow.

Now, Amex seems to have read the competitors-never-collaborate playbook when it designed its recently launched Plenti merchant loyalty scheme. Plenti has assured participating merchants that they’re exclusive in their category in their geography. Retailers, of course get access to their own customer data but can also send offers to customers of the retailers who are members of Plenti's network. And that’s not a threat since Rite Aid is Plenti’s exclusive “drug store” – and when it sends offers to other retailers, it’s sending them to customers of Macy’s and Nationwide Insurance and not CVS and Walgreens.

Bottom line: The promise of cheap interchange - someday – seems like a pretty tough sell to Retailer A when the overriding fear is, "yes, but am I setting myself up for Retailer B to steal my customers?" The marketing guys would say that paying $1.00 on a $100 sale is better than paying $.10 on a $0 sale – not just one time, but forever if that customer is lost to Retailer B.

Consumers Rule
MCX was created by finance guys for finance guys to make payments cheaper. Except that doesn’t matter to a consumer who doesn’t care how much it costs merchants to accept card products because they don’t understand how payments works and who pays whom for what in the first place.

They also don’t necessarily see any benefit when acceptance costs are lowered either. Merchants said that they passed some of the reduction in debit interchange back to consumers. Those savings were so small as to be imperceptible to consumers. MCX will have to incentivize consumers to make the switch, which won’t be perceived as a benefit of lower acceptance costs, but as what consumers now come to expect when merchants or any brand wants their business.

What consumers do understand is choice and convenience. They make decisions about which payments products to use on the basis of habit and their own mental “payments enveloping” – debit for groceries, credit for kids clothes. They also understand that using their cards at merchants is “free” and even subsidized when they get points or other rewards when using those cards.

Getting consumers to switch from one way to pay to another is hard. We’ve seen that for as much as consumers like using Apple Pay, research shows that 85 percent of them who can use it forget when they have the chance since they’re not yet in the habit of using it. Target has done a good job with its REDcard, but in the 5 years since it launched, it accounts for just about ~20 percent of sales. Starbucks' mobile app, the most successful in-store mobile payments scheme today, drives about 16 percent of sales.

Both Target and Starbucks accept cash and any kind of credit and debit card a consumer wishes to pull out and use to pay. Because more than wanting to get consumers to use its mobile app or its decoupled debit product, Starbucks and Target just want to make a sale.


When I was interviewed by The Boston Globe about MCX and its future, I told the reporter that I thought that MCX’s chances of success were slim – but not because talented people would fail to deliver or had failed in the past. Rather, the MCX structure, mission and initial proposition was flawed from the start and no one, not even payments' fairy godmother with her magic wand, could deliver a happy ending.

That, however, is different from saying or believing that a merchant-centric mobile payments proposition, that’s also good for the consumer, is doomed or that players in the market today aren’t and can’t work with merchants to deliver that value. And, if that’s what the next generation of MCX leadership is focused on, then it is possible that there can be a happy ending, after all.

Consumers will have choice and merchants will make sales.

And merchants won’t even have to build their own network or form a consortia to pull it off.



About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.