Mobile Money

What Is The Impact of MasterCard's New Digital Wallet Fee? ... and discussion on LinkedIn

Digital Wallets Move Offline - Can They Save Brick-And-Mortar Retailers?

As shoppers increasingly blend the offline and online worlds, how can brick-and-mortar retailers leverage digital wallets to stay in the game?

PayPal vs. MasterCard: Can Digital Wallets Save Retail? mondato.com online agent location telephone (land line / fixed) other mobile phone mobile wallet bank transfer cash check credit card debit card PayPal other agent location other online ATM location POS (point of sale) purchases personal...

Making the 'transaction' easier is a laudable objective, but the bigger issue is having the means to pay for something in the first place. The business model that prevails is one where everything is made easier and easier, but at the end of the day, with the prevailing socio-economic model formerly well-off prosumers will no longer have much money to pay for anything.

However, the future of mobile payments is, in my view, also linked to the deployment of complementary currencies (community currencies, alternative currencies, time dollars, LETS, etc.). A complementary currency regime brings back the real economy in a local region, and in its modern form with efficient IT for administration becomes a powerful means of changing the prevailing dysfunction of the modern fractional reserve money based economy.

Some people point at Bitcoin as an example of such a new money system, but I would argue that Bitcoin has deep flaws, primarily it is backed by nothing, and is subject to speculation. What I would like to see is a local complementary currency that is backed by the economic potential of the local community. This requires an understanding of not only the price of goods and services but also their value.

With regard to POS systems, I like the idea that the 'cash register' can take a photo of my face, and automatically make the transaction ... no card, no thumb swipe, no numbers and password to remember. My face is my identification ... but does not work for 'anonymous'.

What Is The Impact of MasterCard's New Digital Wallet Fee? As digital wallets quietly enter the brick-and-mortar retail space, expanding beyond their online roots, their relationship with traditional card networks is evolving. This shift manifested last month in MasterCard unveiling a new registration process for “staged” digital wallets that accept MasterCard payments. We take a look at how this fee will impact key stakeholders in the emerging digital wallet ecosystem, and which players might be the hardest hit. A Closer Look at the “Staged Wallet Fee” Fighting back against the rise of digital wallets in the brick-and-mortar space, MasterCard has recently introduced a new fee for staged digital wallets, requiring some wallet operators to pay a premium for accepting MasterCard payments through their platform. Alternatively, wallet operators have the option to take part in a new registration process, which would require them to abide by revised data sharing and transparency rules.[1] According to a MasterCard statement, the fees will be assessed to the wallet provider on an annual basis, based on the prior year’s MasterCard transaction volume. The fee, which will officially take effect in June 2013, will apply only to digital wallet operators in the US, and only to “staged” wallets in which the wallet provider (such as Square or PayPal) shows up as the merchant, obscuring specific merchant and transactional data. These are distinct from “pass-through” digital wallets, in which purchase details are transparent and accessible to the card network. According to the MasterCard statement, the purpose of the registration process is to improve the transparency of staged wallets, which can help MasterCard better understand who the actual merchant is, support consumers’ ability to earn reward points, and support both merchants and issuers in the chargeback process. Beyond data transparency, the registration process and associated fee is also likely a reaction to the increasing encroachment of digital wallets amid card networks traditional niche – brick and mortar retailers. Last month, the president of MasterCard’s US markets, Chris McWilton asserted that PayPal “rides for free” on the back of other company’s business models.[2] Using digital wallets rather than credit cards at the point-of-sale may also reduce the amount reaped from interchange fees, as consumers opt to fill their wallet with a large sum at one time, rather than paying for each transaction individually. Further, MasterCard announced at this year’s Mobile World Congress plans to launch a re-vamped PayPass mobile payments system, which we covered in this Mondato newsletter. Last week, MasterCard officially launched its MasterPass wallet product in Canada, which consumers can use to make payments at the POS, online or on their phone. The platform further allows banks and merchants the ability to offer customized wallets tied into the MasterPass system.[3] Given these MasterCard developments on the digital wallet front, perhaps the new fee is an attempt to drive merchants and consumers towards their platform, rather than to PayPal or other digital wallets. Who Will Be The Hardest Hit, If Anyone? Among industry analysts, much of the focus on the MasterCard announcement has surrounded its impact on PayPal, which operates one of the largest digital wallets currently on the market. According to a recent ComScore study, about 72 percent of consumers are aware of the PayPal digital wallet, in contrast to only 51 percent who are aware of all other digital wallets (including Google Wallet, MasterCard PayPass and Square Wallet).[4] As PayPal increasingly migrates into the brick-and-mortar space, the company has become a key competitor to traditional card networks. Reflecting concerns that the MasterCard fee will negatively impact PayPal, stock in its parent company eBay has dropped over recent weeks, despite steadily rising throughout the past year.[5] But while the fee may put some pressure on PayPal, the impact is more likely to be felt by less ubiquitous names in the digital wallet space – whose already low margins may be cut further by an additional fee. While PayPal has multiple high-margin funding sources, with a diversified portfolio of e-commerce activities beyond the POS, emergent mobile point-of-sale players such as Square and Isis are highly dependent upon their POS offerings. Although Google’s Wallet is more likely to emerge unscathed, given the amount of revenue it makes through web advertising and other sources, smaller players such as LevelUp, GoPago, Isisand others may be hit harder – with this new policy coming just as they look to ramp up consumer adoption and expand their reach. If these additional fees trickle down to the end users, or prevent the rise of competition in the industry, the impact may be felt most by consumers and merchants. There may be less room for innovation from disruptive players such as Square and Lemon Wallet, who endeavor to drive down fees for both consumers and small-scale merchants. Beyond MasterCard – Industry Impact While the fee is certainly newsworthy, it is hardly surprising. As digital wallets increasingly become players in brick-and-mortar stores, the relationship between m-payment providers and card networks is evolving, and certain changes are inevitable. Both credit card companies and digital wallet operators will need to renegotiate their unique roles in the retail ecosystem, which may manifest in network access fees or other strategies. There has not of yet been any indication that other card networks will follow suit, though Visa CEO Charlie Scharf called the wallet fee 'appropriate.' According to Visa’s global head of product, Jim McCarthy, the company has no plans to implement a digital wallet fee at this point, and emphasized that Scharf’s statement was 'more about the changing relationship with payment industry participants, rather than the potential for a specific fee.'[6] So, although the fee may not take off as an industry-wide phenomenon (Discover and American Express have also asserted that they have no plans to implement a fee), it will certainly spur a dialogue on how traditional card networks and emergent digital players can co-exist in the physical retail space without stepping on each other’s’ toes. Further, these players will need to figure out how they can do this in a way that doesn’t drive up costs for end users, whether they are merchants or consumers. Can Digital Wallets Save Brick-And-Mortar Retail? As shoppers increasingly migrate online, whether via their computers, smartphones or tablets, brick-and-mortar retailers must find ways to keep consumers visiting their stores – or they risk having to shut their doors. This pressure facing offline retailers has opened a new opportunity for digital wallet providers, which are increasingly offering tools designed to keep smartphone-toting consumers buying at brick-and-mortar stores. The Grim Future of the “High Street” The future of brick-and-mortar retailers has become hazier over recent years, as “High Street” stores are increasingly edged out by online and mobile commerce giants – which have brought enhanced convenience and consumer engagement to the retail space. E-commerce sales have also been bolstered by the trend of “showrooming,” where customers try out products in stores, and then purchase them cheaper online. According to a recent Forrester Research report, US online retail sales topped US $200 billion in 2011, and are expected to reach US $327 billion by 2016.[1] Purchases via tablets and smartphones are expected to comprise a large portion of e-commerce purchases, with eMarketer predicting that m-commerce sales will reach US $87 billion by 2016.[2] In some cases, encumbered by the cost of rent, in-store employee payroll and long leases, physical retailers have found it difficult to compete with digital retail giants such as Amazon. In the UK, for instance, the rise of digital retailers was followed by a string of “High Street” collapses, from media and entertainment powerhouse HMV to photography specialist Jessops.[3] In the US, bookstore chain Borders filed for bankruptcy in 2011 and was forced to liquidate its 399 remaining stores, likely due to competition from digital competitors.[4] And Borders is not the only US retailer suffering this fate; as others such as Barnes & Noble, J.C. Penney and BestBuy have reported plans to close many of their stores in 2013.[5] Facing this new reality, physical retailers will need to adapt, leveraging emergent digital avenues to enhance the consumer experience and draw customers back into their stores. Digital Wallets Move Into Offline World Integrating digital wallet acceptance into the point-of-sale may be a key way to keep stores filled with a steady stream of customers – bringing the convenience & interactivity of online commerce into the offline world. In contrast to other mobile POS options, which may require cards to be present (such as dongles that can be attached to a smartphone or tablet), using digital wallets can remove cards from the equation completely – streamlining the customer experience. App-based digital wallets also enable the integration of value-added offerings geared towards consumers, such as virtual loyalty cards or coupons. Some digital wallet operators have also begun to offer permission-based, geo-location services, enabling retailers to better target consumers who are nearby their physical location through push notifications of specialized deals based on their mobile shopping list or browsing history, among other factors. These value-added offerings serve to combat “showrooming” – incentivizing consumers to purchase goods within the store, rather than searching online for the best price. PayPal, and the Others Tapping into this opportunity, digital wallet operators such as PayPal and Google have recently moved to strengthen their presence at the POS – unveiling a range of new offerings targeting brick-and-mortar retailers. PayPal, for instance, has partnered with at least 23 large national retailers, where shoppers can purchase items from their PayPal digital wallet simply by entering their mobile phone number and PIN code.[6] On April 19, the PayPal partnership with Discover Financial Services will commence, enabling PayPal acceptance at the roughly 2 million retail stores that already accept Discover credit cards.[7] While PayPal is already a household name in the e-commerce space, supporting 125 million digital wallets globally, these partnerships signal the company’s increasing shift into the physical retail space. The transition toward offline retailers was born out of a desire to “work with retailers, not against them, in a world where people’s shopping habits increasingly blend the online and offline worlds,” according to a recent Financial Times article. Further, establishing a solid footing in the physical payment space will enable the company to tap into the US $10 trillion retail payment market, which is about 10 times the amount of online transactions.[8] Beyond PayPal, other digital wallet providers are similarly targeting brick-and-mortar retailers, though awareness, adoption and interoperability remain a challenge. Google Wallet, for example, has forged partnerships with prominent retailers such as CVS, Macy’s and OfficeMax – offering customers the ability to pay, redeem offers and earn loyalty credit by tapping their mobile phone to Google Wallet-enabled POS terminals.[9] Digital Wallet Adoption Barriers At The POS While integrating digital wallet acceptance offers a number of advantages for physical retailers in the age of smartphones, there are several barriers that have (as of yet) prevented this trend from taking off on a grand scale. One key challenge, as detailed in the previous article, is that introducing digital wallets at the POS puts them in direct competition to the industry heavyweights that currently dominate the offline retail space, such as the “duopoly” of Visa and MasterCard. Further, unlike dongle-based or other “card present” mobile POS transactions, digital wallets fall into the “card-not-present” category, which adds a bit of complexity. Namely, these transactions carry with them an increased risk of fraud, as merchants must resort to other means to authenticate the purchaser’s identity. Given increased risk, card-not-present transactions also sometimes carry an additional fee for the retailer, which may de-incentivize their use in favor of other mPOS solutions. For digital wallets to gain adoption by both consumers and merchants, they need to be interoperable across multiple mobile devices and operators, and merchants need the proper hardware or software to accept digital wallet payments. Of yet, digital wallet operators have struggled to find the technology which does not require investment from either merchants or consumers – limiting adoption. Near-field communications, for instance, the technology that powers both Google Wallet and Isis, requires both consumers and merchants to invest in compatible technology, as we covered in this Mondato newsletter. A Changing Retail Landscape With digital wallets struggling to gain widespread traction, some operators have attempted to spur more immediate interest in their offering by introducing plastic cards. Last year, for instance, reports surfaced that Google was planning to add a physical credit card connected to its Wallet platform – enabling users to make purchases at retailers that do not support NFC.[10] Though the card has yet to materialize, the reports suggest that the company was exploring ways to win over customers reluctant to dive straight into digital wallets. PayPal, similarly, has integrated plastic card capabilities through their PayPal Anywhere platform, and their 2012 partnership with Discover Card.[11] Unimpressed by existing third-party digital wallet solutions, some retailers have taken the shift to digital into their own hands. Last year, a group of US merchants announced the development of their own mobile commerce solution – deemed the Merchant Customer Exchange. In contrast to many other digital wallet solutions, the MCX mobile application aims to be available via nearly any smartphone, and plans to integrate special offers, promotions and loyalty programs.[12] But even as brick-and-mortar retailers integrate digital wallet acceptance into their POS, they are likely to still face competition from digital retailers, who are gradually edging their way further into the physical retail space. In a seemingly counterintuitive trend, a number of online merchants have established an offline presence, tapping into the benefits of the in-store shopping experience, while maintaining a nimble and interactive online experience – the best of both worlds. According to a recent Economist article, this trend suggests that both online and traditional retailers are “migrating to a middle ground,” with boundaries between the two worlds slowly blurring.[13] The Future of Digital Wallets? Of yet, digital wallets have yet to catch on, or even make a dent, at the point of sale. A recent report from Javelin Strategy & Research showed that mobile POS proximity payments made up just 0.01 percent of total retail volume in 2012. The recent network access fee introduced by MasterCard signals that emerging digital wallet players may face an uphill battle moving forward. However, change towards increased digital wallet activity is inevitable, as brick-and-mortar retailers look to mobile payments as a way to stay competitive amid rising competition from digital retailers. The Javelin report predicts that mobile POS payments will total 13 percent of retail transactions by 2018. We agree with this forecast, but anticipate that the road to 2018 is likely to be bumpy.