MCX – MerChants reduX

mcx-logo-leadMCX – MerChants reduX: Recently, I spent an hour chatting with friends of mine who launched a small business about what worked and what didn’t. When the topic veered off to card acceptance costs, the reaction was visceral – one of absolute loathe and the struggle to understand the myriad ‘Do’s and Don’ts’ of what cards to accept, and how to accept them. In the end, they had swore off Amex cards because the acceptance cost was above their product margins. I told them about Square and how it could allow them to continue taking Amex and pay a lower rate. But that had me thinking about MCX and what it could mean for small businesses. The post that follows is a collection of thoughts around MCX, why it deserves respect, and yet how it is indeed mortal and bleeds like all others.

My friends on the issuer side privately confide that MCX has infact succeeded in throwing a monkey wrench in their mobile payment plans – and merchant acceptance looks to be ambiguous around incumbent initiatives such as Isis and GoogleWallet, as well as for alternative payment initiatives. It had been easy to call it mere posturing and ignore it in the early days, but of late there is a lot of hand wringing behind the scenes and too many furrowed brows, as if the realization finally struck that merchants were indeed once again crucial to mobile payment adoption.

MCX – It’s raison d’etre

Meanwhile, the stakeholders behind MCX have been religious in their affirmation that MCX lives by two core tenets: First, it aims to drastically reduce payment acceptance costs through any and all means and Secondly – keep merchant data firmly within their purview. I can’t seem to think that the latter was any more than an after thought, because merchants individually can choose to decide if they wish to share customer preferences or Level III data with third parties, but they need all the collective clout they can muster to push networks and issuers to agree to reduce card acceptance costs. So if one distils MCX down to its raison d’etre, then it looks that it is aimed squarely at No.1. Which is fair when you consider that the merchants believe card fees are one of their biggest operating expenses. In 2007, 146,000 convenience stores and gas stations nationwide made a total of $3.4B in profits, yet they paid out $7.6B in card acceptance costs(Link). And MCX is smart to talk about the value of merchant data, the need to control it, yada yada yada. But if that were indeed more important, Isis could have been the partner of choice – someone who would treat customer and transaction data as sacrosanct and leave it behind for the merchants to fiddle with(vs. GoogleWallet’s mine..mine..mine.. strategy). But the same way HomeDepot was disappointed when they first saw GoogleWallet – no interchange relief, incremental benefits at the point-of-sale, and swoops all their data in return, Isis also offers little relief to MCX or its merchants, even without requiring any transaction or SKU level data in return.

Does it mean that Carriers have no meaningful role to play in commerce? Au contraire. They do. But its around fraud and authentication. Its around Identity. And creating a platform for merchants to deliver coupons, alerts to opted-in customers. But they seem to be stuck imitating Google in figuring out a play at the front end of the purchase funnel, to become a consumer brand. The last thing they want to do is leave it to Apple to figure out the “Identity management” question, which the latter seems best equipped to answer by way of scale, the control it exerts in the ecosystem, its vertical integration strategy that allows it to fold in biometrics meaningfully in to its lineup, and to start with its own services to offer customer value.

Did we say Apple?

Its a bit early to play fast and loose with Apple predictions, but its Authentec acquisition should rear its head sometime in the near future (2013 – considering Apple’s manufacturing lead times), that a biometric solution packaged neatly with an NFC chip and secure element could address three factors that has held back customer adoption of biometrics: Ubiquity of readers, Issues around secure local storage and retrieval of biometric data, Standardization in accessing and communicating said data. An on-chip secure solution to store biometric data – in the phone’s secure element can address qualms around a central database of biometric data open to all sorts of malicious attacks. Standard methods to store and retrieve credentials stored in the SE will apply here as well. Why NFC? If NFC was originally meant to seamlessly and securely share content, what better way to sign that content, to have it be attributable to its original author, or to enforce one’s rights to said content – than to sign it with one’s digital signature. Identity is key, not just when enforcing digital rights management on shared content, but also to secure commerce and address payment/fraud risk.

Back to MCX. The more I read the more it seems MCX is trying to imitate Isis in competing for the customer mindshare, in attempting to become a consumer brand – than simply trying to be a cheaper platform for payment transactions. As commerce evolved beyond being able to be cleanly classified under “Card Present” and “Card Not Present” – as transactions originate online but get fulfilled in stores, merchants expect rules to evolve alongside reality. For example, when customers are able to order online, but pick up in-store after showing a picture ID, why would merchants have to pay “Card not Present” rates when risk is what we attribute higher CNP rates to, and why is there an expectation of the same amount of risk even in this changed scenario? And beyond, as technology innovation blurs the lines that neatly categorized commerce, where we replace “Card Present” with “Mobile Present”, and mobile carry a significant amount of additional context that could be scored to address or quantify risk, why shouldn’t it be?. It’s a given that networks will have to accommodate for reduced risk in transactions where mobile plays a role, where the merchant or the platform enabling the transaction can meaningfully use that context to validate customer presence at the point-of-sale – and that they will expect appropriate interchange reduction in those scenarios.

MCX – A brand like Isis or a platform?

But when reading portions of the linked NRF blog, and elsewhere – it reflects a misplaced desire on MCX’s part to become a consumer facing solution – an app that all MCX partners will embrace for payment. This is so much like the Isis solution of today – that I have written about – and why it flies in the face of reason. Isis – the nexus between Carriers and FI’s – is a powerful notion, if one considers the role it could play in enabling an open platform – around provisioning, authentication and marketing. But for that future to materialize, Isis has to stop competing with Google, and must accept that it has little role to play by itself at the front end of the funnel, and must recede to its role of an enabler – one that puts its partner FI brands front and center, allows Chase’s customers to pay using Chase’s mobile app instead of Isis, and drives down the fraud risk at the point of sale by meaningfully authenticating the customer via his location and mobile assets Carriers control, and further – the historical data they have on the customer. It’s those three points of data and the scale Isis can bring, that puts them credibly in the payments value chain – not the evaporating control around the Secure Element.

In the same vein, the value MCX brings to merchants – is the collective negotiating power of over 30 national merchants. But is it a new consumer brand, or is it a platform focused on routing the transaction over the least cost routing option. If its the latter, then it has a strong parallel in Paypal. And as we may see Paypal pop-up as legal tender in many a retailer’s mobile apps and checkout aisles going forward, MCX is likely to succeed by emulating that retailer aligned strategy than follow a brand of its own. Further, If MCX wants customers to pay using less costly means – whether they be private label, prepaid or ACH – then it and its partners must do everything they can to shift the customer focus away from preferred payment methods and focus on the customer experience and resulting value around loyalty. MCX must build its value proposition elsewhere, and make their preferred payment methods the bridge to get the customer there.

Another example where the retailer focused too much on the payment, and less so on the customer experience is the Safeway Fast Forward program. The value proposition is clear for the customer – Pay using your Safeway Fast Forward card number and a self assigned PIN for simpler checkout. However to set up your account, the customer must provide a State issued ID (Drivers License) and on top of it – his Social Security Number(Safeway Fast Forward Requirements Here). What customer would, for the incremental convenience of paying via his Fast Forward Card and PIN, be willing to entrust Safeway with his Social Security Number? Clearly Safeway’s Risk team had a say in this and instead of coming up with better ways to answer questions around Risk and Fraud, they introduced a non-starter, which killed any opportunity for meaningful adoption.

MCX & adoption

So where does that leave MCX? Why will I use it? How will it address questions around adoption? It’s a given that it will have to answer the same questions around fraud and authentication during customer on-boarding or at a transactional level. Further, its not enough these days to simply answer questions pertaining to the customer. Further, one must address questions relating to the integrity and reputation of the device the customer use – whether that be a mobile device or a Laptop PC. But beyond fraud and auth, there are difficult questions around what would compel a techno-luddite who has historically paid using a credit instrument to opt for an ACH driven(i am guessing) MCX payment scheme. Well, for one: MCX and its retail partners can control the purchasing power parity of MCX credits. If they so wish, and after aggregating customer profiles across retailers, MCX determines that the Addams family spends a collective $400 on average per month between all the MCX retailers. MCX could propose that if instead, the Addams family were to commit to buy $450 in MCX credits each month, they could increase their purchasing power an additional $45 credits that could be used on specific retail categories (or flat out across all merchandise)? Would Morticia be interested? If she did, what does that mean to MCX? It eliminated having to pay interchange on approx $500, and further it enabled its partners to capture an incremental spend of 10% that did not exist before. Only merchants will be able to pull this off – by leveraging past trends, close relationships with CPG manufacturers and giving Morticia new reasons to spend in the manner they want her to.

But then again, where does MCX stop in providing a level playing field for its partners, and step back – so that merchants can start to compete for their customers and their spend? And finally, can it survive the natural conflicts that will arise, and limit its scope to areas that all can agree – for long enough for it to take root?

Should MCX become the next Isis or the next Paypal? Which makes most sense? What do you think? Please leave your opinions below..


You can connect with me on LinkedIn here.

Board of Advisors at SimplyTapp - creators of Host Card Emulation & a LightSpeed Ventures Co, delivering HCE enabled mobile payment distribution & authorization solutions for enterprises. A strategic adviser w/ over 16 years of international tech & strategy consulting experience, to firms seeking clarity & insight in to the myriad business models around payments & commerce. Founded DROP Labs, a mobile payments/commerce strategy & advisory practice focused on banking & retail. Tweets here. I'm on LinkedIn here.
Cherian Abraham
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  • Bruce Parker

    Cherian,

    As per usual an erudite, insightful and comprehensive scan of the mobile payments landscape. MCX definitely needs to rapidly become crystal clear about its mission. Mission creep can sink organizations, even those as large as armies.

    The reference to the convenience store card costs versus margins is instructive, and underlines the point about today’s interchange model. I continue to wonder if returning to the original cost justification for interchange back in the 70s and 80s (increased basket size) is the right metric for both banks and merchants to agree on value. To the degree that any platform drives basket (or visit frequency for that matter) it’s worth paying for. Plus we could maybe work in some great retro tunes to any associated marketing campaigns.

    Keep up the great work.

  • Bob Ashenbrenner

    Here is my take on MCX, but first let me note that I work in a POS services and hardware company, and the success or failure of MCX does not have a direct effect on my company.

    Based on their talk at NRF, here are the 3 major points that I took away:

    1. It’s about interchange.

    Retailers are seeking ways to reduce the interchange that they pay when accepting card-branded products, whether these are credit cards or NFC in phones. When a retailer buys a new EMV (Chip-and-PIN) device or NFC reader, they are guaranteeing that for the life of that payment terminal the store will pay card-dictated payment fees. Since retailers are at a decision point now in the US about buying Chip-and-PIN and NFC readers, it makes sense that they would think “why would I buy payment terminals that lock me into high interchange fees for the life of the terminal?” To the extent that MCX may present way to accept payment without card-dictated fees, or at least to allow negotiation for better rates, it makes sense that retailers would give it a try.

    2. Customer Data should be owned by the retailers.

    Retailers believe in the value of customer data. There is no reason why they should share this with others, and in fact there is significant downside. With ISIS, Google Wallet, Level Up, or many others, that customer behavior data can be used to drive customers to different retailers.

    3. The Tower of Babel Problem.

    There are so many apps out there that offer mobile payments. It would be a nightmare for a retailer to support all or many of them, even worse if they limit their choices. Checkout is all about speed, convenience and cost to the retailer.
    One industry wide app such as MCX could be the only way that mobile payments take off.

    MCX should win in the market, unless they don’t execute to their plan. They offer everything a retailer wants, which makes sense because they are retailers. The other companies in this space are after either a portion of the transaction fees or customer data. Neither is in the interest of the retailers. Retailers are not looking into locking in the current fee structure, or enabling others to profit off of their customer data. Easy mobile payments, customer data, and a chance at lower fees – these are the reasons why MCX will succeed.

  • http://twitter.com/woodburyadvisor steve kietz

    very objective and thoughtful analysis by Cherian. MCX has a chance if the big boys play well in the sandbox on this opportunity. Egos usually win out.

  • WarumNicht

    Kudos as usual; the Addams Family reference a great touch.

    I don’t wholly agreed that this in only about interchange– I have heard from the mouths of large merchants their anger the the rules-making power of the networks– but MCX did start with in finance shops, where interchange costs come to mind long before marketing and loyalty.

    Which highlights the challenge. If the chances for MCX to success depend on a their developing a ” …focus on the customer experience and resulting value around loyalty”, about which I agree, are the guys angry about interchange the ones to lead it?

  • http://twitter.com/WallyMlynarski Wally Mlynarski

    Great write up Cherian! I agree with the interchange sentiments, but the C-Store data is somewhat misleading to prove a point. Diving into that number deeper you will find that the total sales of a c-store is highly skewed towards gasoline. However, profits are highly skewed towards in store sales. c-stores do not make any profits off of gasoline, yet they still pay interchange. Success in that vertical is getting consumers to come into the store and make a purchase. Mobile can help with that. I think the biggest question for MCX is can they build a single platform that meets the needs of every merchant vertical an if so how soon and who is first?

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  • disqus_1jXNt1mH7N

    Cherian, Did you see what MCX came out with today? Current-C for mobile payments which will be a “cloud vault” system. I’d love it if you’d do a write -up with your opinions

  • Paul Turner

    I wouldn’t like to be the head of security at currentC when the CEO orders me into his office and his first questions is “Are you really sure the customer’s bank account and SS# were not taken as well?” if they haven’t checked the access logs to those files then they deserved to fail.

    err … I hope so, lemme ask Bob in the back there I’ll get back to you boss

    btw. folks I manage a couple of systems that process CC transactions and have ACL’s set up to limit access to them and reports that generate logs of all access to those sensitive files and we check them every day!

    If the CEO fires or replaces the head of security or CTO you can be sure they don’t have those protections in place.

    .