Merchant Pay

Banks and Silicon Valley tech companies aren’t the only players crowding into mobile payments. So are retailers and restaurants. Now, with its Chase deal, MCX has thrown the spotlight on the potential for merchant-controlled wallets.

As American cities go, you can’t get much more typical, demographically speaking, than Columbus, Ohio. Its environs include 836,000 citizens who break down into a wide mix of races, incomes, and urban, suburban, and rural dwellers. For this reason, the town has long been a favorite test market for retail chains and restaurants.

But the latest market test in Columbus isn’t for a new store layout or eatery concept. It’s for the CurrentC mobile wallet controlled by a consortium of 40 of some of the biggest retailers in the country, including merchandising behemoth Wal-Mart Stores Inc.

Merchant Customer Exchange LLC, the Boston-based company the founding merchants formed in 2012 to midwife what would become CurrentC, is on a roll.

‘A Powerful Concept’

On Sept. 15, MCX finally got its Columbus pilot under way after weeks of delay, and consumers are finally ringing up sales enabled by CurrentC’s barcodes. Now MCX is talking about a commercial launch next year just as in-store mobile payments is showing signs of taking off. Per-user spending is expected to nearly double next year and increase eight-fold by 2019 as consumers trust the technology to buy higher-value goods, researcher eMarketer forecasts.

But an even bigger development than Columbus is in the offing. In October, MCX announced a deal with JPMorgan Chase & Co. that will, at a stroke. bring the money-center bank’s 94 million credit and debit cards into the CurrentC wallet through a new wallet service Chase unveiled called Chase Pay, which is set to start rolling out by mid-2016.

These card accounts, which generate 12 billion transactions annually, will be automatically loaded into Chase Pay—no waiting on cardholders or coaxing them to take action.

The deal will also offer merchants that accept Chase Pay a special, fixed fee, without interchange or network-processing costs. Neither Chase nor MCX has explained how that will work, but the arrangement will likely rely on ChaseNet, a closed-loop network Chase formed two years ago after licensing Visa Inc.’s backbone network software, VisaNet.

This multifaceted agreement with Chase not only links the country’s biggest card issuer by volume to CurrentC, it also sets up the potential for spiraling volume through the wallet. “With MCX, network effects have been arranged. It’s quite a powerful concept,” says Maarten Bron, director of innovations at UL Transaction Security, a vendor of test tools for mobile and EMV chip transactions.

Indeed, the Chase agreement casts MCX’s merchant-controlled wallet initiative, which has had its share of growing pains in its three years of existence, in a new light. “The initiative has grown up,” says Bron.

Of course, the vast sales potential represented by MCX’s 40 big merchant companies serves Chase’s interest, as well. “We felt a proprietary way to pay is the best approach not only for the merchant but for the customer,” says Manning Field, head of marketing and innovations for Chase corporate development. “In the simplification of the merchant ecosystem, MCX helps us tremendously.”

Expensive Investment

But not all of the action is centered on the MCX merchants. Coffee giant Starbucks Corp. operates the most successful mobile-payments service in the country, and it has gained even more luster with a new order-and-pay feature.

With other specialty and fast-food chains, like Dunkin’ Donuts and Taco Bell, also operating their own wallets, the idea of proprietary, or merchant-controlled, mobile payments is gaining a higher profile just as general-purpose wallets like Apple Pay, Android Pay, and Samsung Pay claim the headlines.

Things are at a point where some observers say merchants that don’t offer a wallet—or get into a network wallet like MCX—may put themselves at a competitive disadvantage.

“You run the risk of just missing your opportunity,” says Jon Squire, chief executive and founder of CardFree Inc., a 3-year-old developer of merchant payments and loyalty apps. “That’s what merchants who haven’t joined a [mobile] network are wondering about.”

Squire probably has more experience in this arena than most. San Francisco-based CardFree has developed apps for the Checkers and Sonic burger chains as well as for Taco Bell, with what Squire calls a “top five” quick-service chain in the deal queue. But before CardFree, Squire helped create the Dunkin’ Donuts and Starbucks apps while at software firms CorFire and mFoundry Inc., respectively.

All of this mobile development doesn’t come cheap. MCX won’t discuss its members’ investment (indeed, MCX officials were not available to comment for this story), but some outside observers peg the total at more than $100 million so far.

Granted, the MCX merchants are big chains like Wal-Mart and Best Buy Co Inc., and the total is divided among two score companies. But still, “that’s a lot of money to take out of your cash flow” to take a flier on what is still a relatively unproven idea, says Steve Mott, principal at BetterBuyDesign, a Stamford, Conn.-based consultancy. Mott advised MCX in its early days.

Rocky Road

The member merchants must be hoping it’s all worth it. The Columbus pilot, coupled with the Chase deal, are good news. But the road for CurrentC has been a rocky one. The app has been long in gestation just to get to the point of a pilot in a single, mid-size city.

The venture itself took nearly two years to find its first chief executive, former Barclaycard executive Dekkers Davidson, only to replace him earlier this year with Brian Mooney, a one-time university comptroller who has worked for processing stalwarts First Data Corp. and Bank of America Merchant Services.

A low point came in October 2014, when the company disclosed a database of customer email addresses had been hacked. The news raised questions about MCX’s security before it could even launch its product, and forced a clearly defensive Davidson to hold a press conference to contain the public-relations damage.

On top of that, MCX labored with the image that it had been created simply to give its merchants a low-cost acceptance method to compete against credit cards. That image was reinforced when it became apparent the fledgling network was requiring members to agree to accept no other wallet, shutting out products like Apple Inc.’s Apple Pay, which hosts a slew of bank-issued credit cards.

Moves like that spawned a legion of skeptics. “MCX is trying to solve Wal-Mart’s interchange problem,” says Drew Sievers, principal at Operative Capital, a venture-capital firm. Sievers was chief executive of mFoundry before selling the mobile-app company to Fidelity National Information Services Inc. in 2013.

‘A New World of Negotiation’

Today, MCX no longer requires exclusivity from its members, and the email breach is mostly forgotten. It’s true, though, that the venture is very much focused on card-interchange costs. Some members like Wal-Mart have been vocal critics of interchange for years and clearly want to move as much volume as possible from bank cards to CurrentC.

Interchange was at the heart of a series of antitrust suits merchants began filing 10 years ago against Visa Inc., MasterCard Inc., and a handful of big banks. Once consolidated, these suits turned into a massive case that was settled in 2012. But many of the big plaintiffs opted out because of a proviso that prevented any future suits, leaving what became a $5.7 billion settlement.

Now those merchants may get a second chance in court as a scandal involving improper communications between opposing lawyers in the case could scuttle the settlement.

Such is the long history of merchant frustration with card-acceptance costs that when CurrentC came along, some industry wags said it was born of a “temper tantrum” over interchange. Clearly, the app is designed to control acceptance costs. Before the Chase Pay arrangement, the only payment methods in the wallet were automated clearing house transfers and the proprietary RedCard credit and debit card from member Target Corp.

But the Chase deal could be something altogether new in retailer-bank relations. “Imagine these merchants pitching credit and debit cards from Chase,” says Mott. “Six months ago, nobody would have thought of doing that. I think MCX has revealed we’re in a new world of negotiation between banks and merchants. It’s a lot more creative and has a lot less friction.”

Certainly, Chase hands MCX advantages beyond lower acceptance costs. Its cards are not only open loop, they’re carried by a huge fraction of the U.S. public, which matches up nicely with the MCX merchants’ national clientele. “The same people who carry a Chase card are the same people who walk into our merchants every day,” Mooney told the audience at the Money20/20 fintech conference in October.

‘Anchored Around Loyalty’

Still, MCX is after more than cheaper transactions. As its name implies, it also wants a tighter relationship with customers, who may also be carrying mobile wallets from Apple, Google Inc., or Samsung Electronics Co. Ltd. Already, retailers like Kohl’s Corp., which is not part of MCX, are starting to join the bank issuers on Apple Pay.

That means loyalty and rewards, which carry a cost of their own but which, if deployed cleverly, can make customers for life. “Merchants have told us solving for loyalty is critical to the payment itself,” says Chase’s Field.

Here, the model is Starbucks. The coffee chain pioneered proprietary mobile payments in September 2009 on the back of its prepaid card, and rolled it out nationally in January 2011. Now, the iconic coffee chain says 21% of all transactions in its 7,500 U.S. stores in October were done with the mobile app.

No other merchant-sponsored mobile wallet—let alone any third-party app—comes close to that. Kevin Johnson, president and chief operating officer at the chain, says other apps are “struggling” to do what Starbucks has done.

“Where others are attempting to build a mobile app, Starbucks has built an end-to-end consumer digital platform anchored around loyalty,” Johnson explained in an earnings call late in October. Any Starbucks Card holder can also enroll in the company’s My Starbucks Rewards program, which now claims more than 20 million members globally (Starbucks doesn’t break out a U.S. number).

‘The Starbucks Experience’

But now Starbucks is going beyond loyalty. The latest driver for the program is Mobile Order & Pay, which Starbucks piloted this year and began rolling out in September to let customers place orders and pay ahead on their mobile phones.

This program is enjoying what Adam B. Brotman, the chain’s chief digital officer, called a “flywheel effect” from the established mobile program. In the same earnings call, he said, “Customers are responding incredibly well. We’re seeing conversion rates from trial like we’ve never seen before.”

Here, Starbucks may have cracked the code. Apps for mobile ordering and paying ahead for pickup later have proven to be devilishly hard for merchants and third parties. Square Inc. tried it with a new version of its mobile wallet, only to shut it down in March after just 10 months.

CardFree will develop mobile order-ahead programs, but only with buy-in from the top. Without such support, the effort to get app and store synchronized can become a “nightmare,” Squire says. “There’s a lot of complexity that comes to order ahead,” he adds.

Nonetheless, in the face of results like those reported by Starbucks, the feature has risen to the top of the mobile agenda for potential clients. “It has become phenomenally important,” Squire says.

Back in Columbus, the lesson for MCX couldn’t be clearer: the merchant app has to do more than take care of payment. It may even have to do more than deliver rewards or offers. It has to spin a web of experiences customers can’t find by any other means.

Time will tell whether CurrentC, or any of the third-party mobile wallets, for that matter, can do that. During that Starbucks earnings call, chief executive Howard Schultz had a few words of warning for his rivals:

“I think all those players that are now trying to get into this business, what I notice is that it’s really—they’re in a utility business. They’re in a commodity digital experience. That is not who we have been as a retailer, and that’s not who we’re going to be as a digital purveyor of the Starbucks Experience.”