The future of money: Merchants, others want to reshape how we pay

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Posted: Tuesday, April 29, 2014 12:00 am

It's the closest many of us have ever come to mobile payments: Watching the person ahead of us at Starbucks buy a latte with a smartphone. Or seeing someone at Chipotle skip ahead in line. Or watching over someone's shoulder at the drugstore as he taps his Android smartphone against the card machine on the counter.

But these signal a concerted campaign by major companies — from the biggest big-box retailers to the mobile phone carriers — for more control over how our money moves.

Those companies are poaching 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, former CEO of mFoundry, the company that made Starbucks' mobile payments possible. After all, Visa and MasterCard basically work everywhere.

Merchants have a huge incentive to bypass the networks and the “interchange fees” they charge by hooking directly into our wallets. The mobile carriers want to insinuate themselves deeper into our pockets.

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

Retailers invented credit cards at the turn of the 20th century. Long before Visa and MasterCard, there were Macy's cards, Sears cards and the like. But they were good only at the store that issued them.

When the payment networks came on the scene, phone carriers were an integral part of their business model. Card processors used phone lines to verify that you had enough money remaining in your credit limit to make a given purchase.

Things began to change at the beginning of last decade, when Exxon came up with Speedpass, a device that uses a unique radio signature to let you pay at the pump without swiping a card. And cellphone companies in Japan and South Korea introduced successful mobile payments products.

In the U.S., 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 that used 2-D QR codes displayed on mobile screens to transact. The system launched nationwide two years later. Today, 10 million people have installed Starbucks' payment app and they use it to make 14 percent of the chain's in-store purchases.

Google jumped in next with Google Wallet, which lets users consolidate all their credit card info and rewards programs in one place on their smartphone. 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 their phone against the merchant's payment terminal.

It was Starbucks that inspired the formation in 2012 of the Merchant Customer Exchange, the brainchild of retail chains Walmart, 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 banks. By 2020, an estimated 20 percent of banks' revenue could shift to retail-driven players, according to an Accenture report.

The retailers' push is spurred by their desire to shed interchange, the amount merchants pay in order to accept credit and debit cards.

MCX hasn't made shed much light on how folks will be able to pay, but as with Starbucks' app, MCX customers will use QR codes, according to reports. The MCX app will be able to work within the existing smartphone software of its member retailers, including grocers and fast-food restaurants.

Isis, a joint venture of AT&T, Verizon and T-Mobile, has a different strategy. It launched last fall after running pilots in Salt Lake City and Austin, Texas. Unlike MCX, 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 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. “That's the service that Isis provides to them.”

But Isis, too, faces 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.

“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.”

But the highly motivated merchants have the wherewithal to mount a sustained attack.

“Who hates the payment networks; who has the most to gain from disrupting them? Merchants, because they hate interchange,” Sievers said.

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