Loyalty Truth

The payments processing business has long been dominated by the largest credit card associations, Visa, MasterCard, American Express and Discover. The calling card for these groups that has successfully defended turf for decades and which survived potential setbacks from two recent rounds of Federal legislation impacting the payments card business is something we refer to as “universal acceptance”.

Succinctly put, the current system of swiping a rectangular piece of plastic with a magnetic stripe on the back to complete a purchase works well enough to allow the associations to maintain their pricing structures. Over the past ten years, smart cards and contactless cards have all benefited from tremendous outside investment and each has fallen short of displacing the current system.

Now cloud based digital payment systems are gaining momentum to unseat the established oligopoly. There are several well documented competitors in the virtual wallet space, with Google wallet, ISIS (composed of key partners AT&T Mobility, T-Mobile USA and Verizon Wireless) and the Merchant Customer Exchange (MCX) deserving the most attention. Peer to peer payment systems as well as other schemes are popping up. Groups like Square, LevelUp and Dwolla, which merges a digital wallet with location based marketing and loyalty, are seeking entry into the inner circle of next generation payments systems. Wallaby, another cloud based wallet, also seeks to become the “one” card that consumers need to carry to optimize the way they use the cards in their wallet and maximize reward earnings.

The one thing each of the alternative payment groups has in common is the drive to create a high utility payment system that lowers processing costs for retailers while making life a bit easier for consumers. The difference between them all is the path they are taking to take to achieve this goal.

Recently I attended a workshop given by Robert Mau, Knowledge Expert McKinsey & Company and learned that 37% of consumers surveyed in the McKinsey Mobile Consumer Survey 2013 say they expect to have widespread ability to make mobile payment at retail stores within 3-5 years. About 60% of the respondents said they expected there to be just one principle mobile wallet system in that time frame, meaning the competitors I’ve mentioned are engaged in a zero sum game. Many will play, few (or just one) will survive.

In addition to merchants including Bed Bath & Beyond Inc., Dillard’s, Inc., Dunkin’ Brands, Gap Inc., Sheetz, Inc. and Wakefern Food Corp announcing their alliance with MCX last fall, RaceTrac made a similar announcement last week. The power behind MCX is growing and an announcement today shared that Gemalto has been selected to develop a cloud based mobile wallet using barcodes for reading at the POS. Based on current membership, the wallet is expected to be accepted at 75,000 locations across 35 participating retailers.

In a discussion that followed Mr. Mau’s workshop, it came clear that the eventual winner in the digital wallet competition will have a solution based on one of three backbones:

1. A network that allows retailers to accept payments based on traditional credit and debit cards but process them through a proprietary interface outside of the large associations
2. A payment clearing system based on the ACH Network that ties a payment card to consumer checking accounts, similar to the principal method used by PayPal.
3. A closed loop network built on connections made merchant to merchant and bank to bank.

There are pros and cons to each model, subject of a white paper you’ll see published soon on LoyaltyTruth.com and it is entirely possible that the associations themselves could step in and offer their own solution, in cooperation or “co-opetition” with each other.

Lowering payment processing costs is the easier of two objectives to be addressed. To become the winning solution for a new era of payments processing, a solution needs to be established that actually makes a difference to consumers. That solution must be clearly preferable to consumers at the point-of-sale, creating a gap between the innovation and the current magnetic strip card solution. Creating an elegent solution must also be accompanied by an acceptance network that is “universal” or as close as it can get to engage consumers.

A secondary theme of the conversations around digital wallets is to solve the compound equation of aggregation and disintermediation. Whether there can be “just one card” that consumers are able to carry that creates a better purchase experience in daily life remains to be seen. It remains one of the most interesting aspects of the discussion around the future of payments, and the loyalty programs that fuel card usage.