What Price Honor?

Merchants say a policy from the card networks short-circuits their choice in the digital wallets they accept and stifles innovation. Honor-all-cards, meet honor-all-wallets.

Mention the card companies’ honor-all-wallets (sometimes also referred to as honor-all-devices) policy to a merchant and his blood pressure is sure to spike.

Honor-all-wallets rules require card-accepting merchants to accept any digital wallet loaded with a card issued on the card companies’ respective networks. The policy is an outgrowth of the card companies’ decades-old honor-all-cards requirement, which states that if a merchant accepts any card issued on a card network, it must accept all card products on that network.

Merchants have never been happy, to say the least, about honor-all-cards. Now, as digital wallets gradually become more common online and in stores, honor-all-wallets has become a growing sore spot as well.

The chief complaint merchants have with the policy is the potential for non-bank wallet providers, which could include competing merchants, to see the transaction data flowing through the wallet and use that information to steal customers. Sellers also argue that, by restricting their choice of which wallets to accept, the policy will stymie competition and innovation by putting the major card companies in a position to corner the digital-wallet market.

But merchants’ objections to the rule are somewhat blunted by the fact that, so far as anyone can tell, honor-all-wallets has not been declared official policy by Visa Inc., Mastercard Inc., American Express Co., or Discover Financial Services. Nevertheless, the merchant community claims the card companies are verbally enforcing the rule by setting expectations that merchants will adhere to it.

Ruffling Feathers

At first glance, including digital wallets under the honor-all-cards policy makes sense for the card networks, especially Visa and Master­card, because the all-cards rule was key in creating ubiquitous merchant acceptance for all their branded card products.

For Visa and Mastercard, in particular, the rule prevented merchants from refusing to accept cards from financial institutions with which they were unfamiliar.

Now, in theory at least, applying a similar rule to digital wallets could ensure their ubiquity. Merchants, however, see extending the all-cards argument to digital wallets and devices as overreach by the card companies in a segment of the payments industry still in its infancy.

“Digital wallets are an emerging payments technology, and with honor-all-wallets, the card companies are saying to merchants they are expected to support and invest in their wallet technology, which if it happens, will make it harder for alternative wallet providers to break into the market,” says Doug Kantor, a partner at the law firm Steptoe & Johnson LLP, Washington, D.C., and counsel to the Merchants Payments Coalition, a D.C.-based merchant trade group advocating for fairer interchange rates. “There are also concerns about what providers may do with the transaction data flowing through the wallet.”

Indeed, how non-bank wallet providers will use any transaction data they gather tops merchants’ list of concerns. Under the policy, critics say, a non-bank wallet provider—such as Microsoft Corp. or a competing merchant such as Amazon.com Inc.—could be privy to transaction data from purchases made with network-branded cards loaded in the wallet. The wallet provider could then use the information to tailor advertising and loyalty programs.

Also ruffling merchants’ feathers is that, because cards loaded into a digital wallet are tokenized, accepting sellers are prevented from seeing a wallet user’s primary account number (PAN) in the transaction data for each purchase. Visibility into PANs enables merchants to track customers’ purchase histories and craft targeted marketing programs based on the products the cardholder buys in their store.

Many large merchants, such as Target Corp., use PANs to identify consumers’ transaction histories and send shoppers coupons based on their purchases.

The thought of a large retailer using its wallet to gain access to transaction data that is, by contrast, shielded from the accepting merchant chills critics of honor-all-wallets policies.

‘Mind-Numbing’

Such fears within the merchant community are not unfounded, critics say. AliPay, the mobile and online payment platform established by Alibaba Group, one of the world’s largest retailers, has switched how it uses transaction data gathered through its wallet. Instead of offering promotions to merchants to help them attract customers, AliPay now offers coupons, which it funds, on specific items, says Mark Horwedel, chief executive for the Merchant Advisory Group, an advocacy group for retailers on payments matters.

As consumers redeem the coupons, AliPay can track their purchasing habits. Knowing what brands customers are buying enables AliPay to send targeted offers on frequently purchased products to AliPay users. Those coupons can be used on Alibaba.com, which, like Amazon.com, sells a wide range of products, from consumer electronics and health and beauty products to jewelry and toys.

Enabling any merchant with a digital wallet to see consumer-transaction data could potentially result in a similar scenario in the United States, Horwedel warns.

“It’s not the business of the card networks to push acceptance of wallets driven by a merchant’s competitors,” says Horwedel. “With the information wallet providers can see, the possibilities of what a competitor can do with that information is mind-numbing.”

What the MAG would like to see, says Horwedel, is for the card networks to include a piece of code in each wallet that identifies the wallet provider at the point of sale. Such an identifier will allow merchants to determine which wallets they accept and which wallets they don’t.

“Right now, there is no way for a merchant to distinguish one wallet from another,” says Horwedel. “We believe that merchants should have the right to reject wallets they don’t want to accept.”

Horwedel says he has discussed this issue with representatives of the card companies on behalf of MAG members, but has not received any commitment on what position they will take. Visa, Mastercard, and Discover did not respond to requests for interviews for this story.

In an email statement AmEx says it does not have an honor-all-wallets rule. However, if a merchant accepts a wallet, it cannot treat AmEx cards less favorably than other brands in that wallet, AmEx says.

Lack of transparency with respect to transaction data flowing through digital wallets has other implications for merchants. It also prevents them from routing the transaction through the lowest-cost network, such as a PIN-debit network, says Tim Sloane, vice president, payments innovation, for Mercator Advisory Group, a Maynard, Mass.-based consultancy.

“Not being able to see the transaction data on a tokenized card is a real rub for merchants,” he adds.

‘Data Is the New Oil’

Choosing which wallets they accept would free merchants to do business only with wallet providers they feel deliver value to their business by sharing transaction data they can use to engender loyalty, argues Gray Taylor, executive director for Conexxus, a technology and standards body for the convenience-store and petroleum industries.

“Data is the new oil,” Taylor says. “Merchants understand its value and want to hold on to it. No merchant really wants a competitor to see its transaction data. There has to be value to the merchant to accept a wallet, because data has a price.”

Another benefit to merchants for choosing the wallets they accept is that they can opt to favor wallets with lower-cost payment options, such as a checking account connected to the automated clearing house.

Gasbuddy.com, a mobile app that directs consumers to the nearest gas station and charts local gas prices, recently launched a payment option for its app. After linking their checking account to the app, users receive a card with a unique identification code to secure the transaction.

Users can pay for purchases by swiping the card at the pump and entering their security code. Cardholders receive 15 cents per gallon off their first fill up, and 5 cents on every gallon after that. More than 60 million apps have been downloaded, Gasbuddy.com says.

“Open-loop wallets like Gas Buddy that offer lower-cost payment options have value to merchants too,” Taylor says.

Payments experts contacted for this story agree that merchant concerns over competitors using wallets to harvest valuable customer data are valid. But some contend that merchants’ fears about non-bank wallet providers driving up acceptance costs are overblown.

They point to concerns about wallet providers driving up interchange rates and say these stem from the case of Apple Inc. and its Apple Pay wallet. When Apple introduced Apple Pay in 2014, card-issuing banks lined up to participate, even though Apple demanded a cut of issuers’ interchange for each transaction. Merchants worry that if more tech companies begin offering wallets and follow Apple’s lead on this issue, interchange rates will rise to compensate for card issuers’ loss of revenue.

But Rick Oglesby, founder and president of Mesa, Ariz.-based AZ Payments Group, counters tech companies have more lucrative ways available to them to monetize their wallets. Apple, he says, can work with merchants to extend its wallet ecosystem by including Apple Pay in their apps and then have merchants make their apps available through Apple’s App Store.

“Merchants pay a fee to be in app stores. If Apple offers merchants the opportunity of reaching more Apple Pay users by placing their app in the App Store, what’s that worth to merchants?” says Olgesby. “The money this revenue stream can generate is potentially greater than what Apple generates from charging issuers.”

Plus, by getting their app into the hands of Apple Pay users, who can then load the app into their Apple Pay wallet, merchants will see the transaction data for purchases made using the app, which they can use for loyalty and marketing, Olgesby adds.

Nothing More Than a Shell

In any case, some retail experts argue it is too soon for the card companies to take a hard stand on enforcing honor-all-wallets policies, whether they’re official or not. After all, merchants aren’t seeing strong demand from consumers to accept wallets.

A survey by the National Retail Federation in 2016 revealed that just 17% of respondents considered it a priority to install technology to support emerging payments, such as digital wallets, says J. Craig Shearman, vice president of public affairs and public relations for the NRF. By contrast, a whopping 76% of respondents cited EMV implementation as their top priority. In addition, the survey revealed 24% of respondents accept multiple wallets and 68% accept one to a few.

“Retailers will support the payment options their customers want, but demand to accept wallets is not that strong, which is why supporting it ranks down on retailers’ list of priorities,” Shearman says. “Extending the honor-all-cards policy to digital wallets extends the card networks’ dominance over payments to a burgeoning technology.”

Merchants are also concerned that enforcing honor-all-wallets before the technology becomes mainstream will stifle competition and technological innovation. What merchants fear is that the card companies’ wallets will ultimately be nothing more than a shell into which their card products can be loaded.

“The most successful wallet to date is Starbucks, because as the issuer Starbucks delivers value to the user, which increases customer loyalty,” says attorney Kantor. “The card companies’ wallets don’t do anything to change the value equation for the merchant from an acceptance standpoint.”

Until the card companies publicly state their position on honor-all-wallets, the dustup with merchants over the issue is certain to continue. Indeed, if the battle rages on, the issue could eventually wind up in litigation, just as honor-all-cards did, payments experts say. In the meantime, expect the merchant community to continue lobbying the card companies to allow them to accept wallets of their choosing.

That’s because much is at stake, merchant advocates say. “Innovation needs an open platform to thrive,” says Kantor. “If the card companies require merchants to invest in supporting their wallet technology, they will immediately get a big leg up in the market, which could stifle the economic rationale for competitors to innovate in this space.”