Karen Webster

Will Apple Pay Bring Banks And Merchants Together?

Last week, I was given a copy of the UBS report on Apple Pay. It claims that the launch of Apple Pay has accelerated the efforts of the retailers to join forces with banks to create bank-branded wallets. It says that these bank-branded wallets would be a powerful weapon in the “fight” against Apple Pay’s chances of being successful at merchants, and in particular, MCX merchants. The rationale is that such a mash-up will enable the acceptance of bank-branded mobile wallets at retailers, embed bank-branded open loop credit and debit products inside retailer-branded apps and standalone wallets (aka CurrentC wallets) and embed private-label cards inside bank branded wallets.

On the one hand, it’s not surprising that some merchants are looking at alternative strategies to Apple Pay. The day that Apple Pay was introduced, I wrote that it went to market with a more or less digital/mobile version of the existing payments model — one that was very issuer and network friendly. The existing model, of course, has merchants, in effect, paying issuers fees each time a transaction is done, and extra fees that go to the network for the tokenization services that are part of the Apple Pay scheme. Apple Pay also inserts a layer between merchants and their customers (issuers too, for that matter), and makes loyalty an awkward two-step process (for now, at least) and doubles down on an NFC standard that is very much network-driven.

All of those things, quite naturally, make some merchants nervous. And, according to this report, eager to devise an alternative that doesn’t forever tie them to network control, pricing and rules and standards if Apple Pay were to gain traction. And a better consumer experience – one that is available to a much broader set of consumers – not only those with a particular smartphone model at a particular type of merchant terminal and isn’t only about payment. Thus the merchant/issuer play to issue bank-branded accounts that would be accepted at those merchants.

These are the same banks, of course, that have the ability right now, to be inside any retailer app, and any digital wallet that a consumer wishes to attach them to. And are. So, the big question is why, exactly, do the banks need to team up with MCX to “fight” Apple Pay? That’s same Apple Pay that, at least the large banks, have spent gobs of time and money integrating with and advertising to their customers that they are a part of. In fact, while I was watching the Patriots whomp the Ravens on Saturday in the AFC Divisional matchup, I saw one of those issuer’s commercials.

With that backdrop, it seems that having the banks and merchants team up to “fight back” against Apple Pay (and the networks) so that they can become the Apple Pay foil, is about as likely right now as Israel and Iran teaming up to fight the Islamic State.

I admit there’s a lot to unpack here to back up my assertion.

Starting with the unlikely alliance of merchants and banks.


Who knows whether Apple Pay was always intended as a network/issuer-friendly model, but that’s what it is now. And, that decision has some pretty big implications that Apple has to live with, at least in the short term. It also has some pretty material impacts on the payments ecosystem more broadly and any alternative scheme that posits that banks right now will issue open loop branded debit and credit cards that can be used at MCX merchants.

For the first four decades of their existence, the card networks were owned by the banks. The business model of interchange provided, in part, an incentive for issuers to get network-branded cards in circulation so that consumers would use them at merchants. Those incentive payments, aka interchange fees, were set by the networks and paid to issuers by merchants. It’s not hard to figure out why the issuer’s primary allegiances were – and are – to the networks and vice versa.

In those days, and when cards were new, merchants were happy for a new way to be paid that was easy and less risky for them to accept and for their customers to use. Over time, and as volumes grew, many merchants grew increasingly unhappy over the fees that they paid to the issuers. So unhappy, in fact, that they sued the networks over those fees.

The debate over whether interchange is the best model for running the business, and allocating the costs of running the system between consumers and merchants, is a debate for another day, but the interchange fee model is the one we have right now. Most of the retailers have settled with the networks over interchange fees and various merchant rules but some, including Walmart and Google, are fighting on. And, the case against the Fed over the retailers’ claim that the Fed ignored the letter of the law of the Durbin Amendment and didn’t lower debit interchange fees enough, could be taken by the Supreme Court – we’ll likely know one way or the other today, January 12, and perhaps even by the time you’ve opened this.

So it’s not exactly as if merchants and networks have had a loving relationship over the years. And as for the issuers whose financial fate is in the hands of the networks, well, they aren’t exactly rooting for the networks to lose any of those fights either. So if the banks have to root for one side or the other, it’s not hard to figure out who they will stand with.

Right now.

Knowing this, merchants have made many attempts over the years to launch products that circumvent the traditional network and payments infrastructure, which, of course, includes the banks. Some, like private label cards, have succeeded in carving out small, highly profitable segments of loyal customers. But most have failed.

What these schemes offered merchants – lower costs – they failed to deliver in the more important value side of the equation – consumer adoption. Low cost is meaningless if consumers don’t want to use the product. Even as successful as the Target REDCard has been, it drives only about 20 percent of volume at Target. That means that 80 percent of Target’s volume is being driven by other payment methods, including network-branded cards.

Which, of course, Target is happy to accept since its No. 1 priority is to sell things in its stores To do that, it needs to be able to offer consumers the ability to use their preferred method of payment. And, as long as a critical mass of customers prefers using network-branded cards, cash or even, OMG, a check, Target will be happy to accept them rather than risk losing a sale or a customer.

MCX is the newest and latest attempt by merchants to create a merchant-friendly alternative to network branded issuer cards. It’s been nearly 3 years since it was announced and we’re still waiting for a product to launch. What we know is that there are merchants that reportedly drive $1 trillion in spend that have joined the scheme, a proposition that its product will be a mobile payments alternative, investments made by those merchants into building it, a new consumer brand name (CurrentC) to identify it, a technology (Paydiant) to power it, a requirement to be loyal only to its mobile payments scheme and reportedly a few small trials that have resulted in some pretty dreadful consumer reviews.

As well as a big kerfuffle when Apple Pay launched and a few MCX merchants turned off NFC and therefore, Apple Pay’s capabilities in their stores.

The merchant-friendly part of the MCX value proposition is because its cost of acceptance (per transaction) will be lower, it will give merchants control of their customer and transaction data, and its products will drive loyalty to MCX merchants and not issuers and card networks.

Which is what makes their interest now to recruit banks to issue bank-branded mobile accounts for use at those merchants seem like a very odd sales proposition for the banks.

How can CurrentC both lower the cost of acceptance – which is how much they pay the banks to accept the product – and recruit banks to issue those accounts which will cannibalize an existing revenue stream that’s higher today? A revenue stream that, by the way, may be even richer in a digital world if consumers attach credit and not debit products to their mobile accounts? And to agree to do that and be the exclusive method of mobile payment at those merchants when it’s not at all clear that MCX will have any greater chance of success than anything else that’s been tried over the last decade?

And at the same time that banks are probably also doing their own war room planning with respect to payments.

Banks may be investing in real-time ACH capabilities that could give them an alternative to using the network rails for card-like products. Banks seemingly would have little problem flipping their consumers to a new product that carries their brand that is also linked to their existing checking accounts at that bank. For a consumer, that’s not much of a risk or a leap. Merchants, making that same ask in an environment of merchant breaches, would seem to have little chance of having any consumer turn over checking account credentials to them – ever.

My guess is that MCX has probably also gotten that feedback and now recognizes why it would be enormously helpful for them to partner with banks to make their scheme work. The question is whether – and why – the banks need MCX to survive in a digital world at this point. And how on earth the two of them could ever strike a deal that lowers merchant fees, and didn’t cannibalize bank revenue.


OK, so maybe there are a few other tricks up MCX’s sleeve.

For instance, MCX and its technology partners could be creating their own switch for existing issuers to use to support issuer-branded mobile CurrentC transactions, circumventing the traditional networks. I can almost see the powerpoint slide now – can’t you? A “bold, disruptive and strategic” way to wrest control away from the networks and control their own destiny! You too, can be disruptive!!!! But before you think about creating a similar slide, refer back to my earlier point about issuers/networks and business models. It’s an awfully risky strategy for a bank with a good business model, customers who are quite happy using their existing accounts at their favorite merchants and a revenue stream to chuck it all to be “disruptive” with an unproven player with an uncertain business model that asks consumers to establish a whole new digital account, maybe even with different rules associated with those accounts. And, you’d also have to be a pretty big and powerful issuer to risk ticking off the networks by basically diverting a big chunk of volume away from them. And if you were that big, why would you care about doing MCX any favors or even need it to get merchants on board with something new that could offer them an alternative model anyway? You’d be looking to make more money, not less, and call the shots.

Merchants could also saddle up to a player with both issuer and network assets. There are a few of those out there and some of them could make for interesting merchant partners. A few even have the potential to enable private label capabilities on behalf of merchants. The most intriguing also have consumer assets that could be trotted into merchants, too, and potentially used to ignite a new scheme. When taken together, those assets could be used to seed, create and power a potentially new, merchant-friendly network. Depending on how it all comes together, this option still carries some business risk, depending upon what else those players may have going on with others – including merchants – in the ecosystem.

But again, if all of those capabilities exist, why is MCX needed by anyone to execute?


What this report’s speculation leaves out, of course, is what any of this bank-branded/retailer account scheme offers the consumer. Merchant-friendly sounds nice if you’re a merchant but consumer-friendly will trump that any day of the week. Otherwise merchants wouldn’t accept anything but cash today.

The question, therefore, that MCX and everyone trying to persuade consumers to ditch plastic cards and/or whatever they’re using and move to mobile, is why they should go to the effort of breaking that habit in favor of something different. Since, at the moment, consumers, even Apple Pay consumers, know that they can use their plastic cards in most of the physical stores in which they shop. And as long as the majority of the stores that consumers frequent the most don’t have a digital alternative that most of them can access and want to use instead of those cards, that’s how it will be – and be for a very long time to come.

Talking about and trying to force anything else is just noise and a waste of time.

Especially the notion of bank-issued MCX accounts that cannibalize existing bank revenue streams.


Unlike the UBS report’s conclusion, it’s not at all clear that Apple Pay is the de facto “winner” in the digital world, or that there even will be a single winner. There’s never been a winner-take-all model in the plastic card payments world and there won’t be in the digital payments world either. And it surely can’t be Apple Pay since Apple Pay only works in the Apple ecosystem.

Apple Pay has the same ignition problems as any other new payments scheme and I’ve written a lot about that, too. Its decision to embrace a network model, and a hardware driven strategy –iPhones 6’s plus NFC at the merchant – means that it will be a long, slow slog for ubiquitous acceptance in the physical store. And the consumer experience is still all about payment and that’s not always that slick either. Every time I use Apple Pay at Whole Foods, for example, I still have to sign. (You try getting out of Whole Foods spending less than $50). The slickness of the experience and any time savings associated with using it is sort of lost once I have to put down my cool phone and pick up the stylus and sign. Apple should have insisted that the networks change those rules for their transactions which, with TouchID and tokens, seem pretty darn secure to me. After all, that is one of their major selling propositions to consumers, too.

Merchants, who will at some point, upgrade their terminals to enable NFC, see all this too and will sit on the sidelines and wait until they are convinced that enough consumers want to use it. Then, they’ll make a move.

That gives lots of other schemes, and especially those that are cloud-based and work across all operating systems – a chance to gain traction. Schemes that help merchants and consumers build deeper and richer relationships and make payment part of a broader and even reinvented shopping experience with those merchants.

Measured by incremental sales.

Because at the end of the day, revenue – and the digital payments methods that enable it – is the most merchant-friendly scheme there is.



New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.