Next step in moving money a digital leap

It’s likely the closest that many consumers have come so far to mobile payments: Watching the person ahead in the line at Starbucks use a smartphone to pay for a latte.

Or maybe it was watching as some shopper at Rite Aid tapped an Android smartphone against the card machine on the counter.

These acts 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 money moves.

Those companies are starting to poach on turf long claimed by payment networks such as Visa, MasterCard and American Express 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 chief executive of mFoundry, the company that made Starbucks’ mobile payment system 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 consumer wallets. The mobile carriers want to insinuate themselves deeper.

How eagerly consumers will adopt their new technologies is an open question.

If technologists and payments experts are correct, both merchants and mobile carriers will succeed in reshaping how consumers conduct transactions. 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 independent store cards offered by chains such as Macy’s and Sears. 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 a consumer had enough room on their credit limit to make a given purchase.

Things began to change at the beginning of last decade when Exxon came up with the Speedpass, a device that uses a unique radio signature to let users pay at the pump without swiping a card.

Around the same time, cellphone companies in Japan and South Korea introduced successful mobile-payments products.

In the United States, 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.

Retailers entered the picture in 2009, when Starbucks began working on a pilot methodology that used two-dimensional QR codes displayed on mobile screens to conduct transactions.

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. Such payments, of course, could only be done at the coffee retailer.

Today, 10 million people have installed Starbucks’ payment app and 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 information and rewards programs in one place on their smartphones. The search engine giant also encouraged cellphone-makers to build near-field communication radios into their devices - the technology that lets customers pay for items by tapping phones 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 Wal-Mart, Target, Home Depot, 7-Eleven, Best Buy, CVS, Lowe’s, Sears and Shell.

Their goal is to bypass the payment networks and work directly with the banks that hold consumers’ money.

By 2020, an estimated 20 percent of banks’ revenue could shift to retail-driven players - potentially the Merchant Customer Exchange 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 the interchange fee - the amount merchants pay to accept credit and debit cards. While it’s just a few percent on each transaction, it adds up fast.

But the Merchant CustomerExchange 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, Merchant Customer Exchange customers will use QR codes, according to reports. And the new exchange app will be able to work within its member retailers’ - including grocer Publix and fast-food restaurant Wendy’s - existing smartphone software.

That doesn’t mean the exchange 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.

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, Texas. Unlike the Merchant Customer Exchange, 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 also can load a prepaid card linked to their Isis Wallets.)

“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.”

Business, Pages 21 on 04/28/2014

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