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ApplePay and the MCX

by Tim Spenny , 03.12.2014

The announcement of Apple Pay was on everyone’s mind at this year’s Money20/20 event held in Las Vegas, but no other key note speaker was more anticipated or widely attended than Dekkers Davidson, the CEO of the Merchant Customer Exchange or MCX. If you weren’t aware, there is a battle playing out between the two largest players in mobile payments and the fight has just begun.

In one corner we have Apple Pay, with its brand cache, fiercely loyal and affluent following and in the other corner, the MCX. The MCX was founded in 2012 with a membership of over 80 retailers including; clothing and drug stores, quick service and sit down restaurants, gas stations and convenience stores. Members of MCX are the who’s who of retail; Wal-Mart, Best Buy, Lowes, Shell Oil, Target, Darden Restaurants and many others representing over a trillion dollars in purchases annually in the US. Needless to say, the MCX has tremendous influence at the point of sale which makes them a serious contender in the mobile payments knife fight.

Until this year’s Money20/20 event, it has been widely assumed that the MCX was created to reduce the fees that the retailers pay to the card operators by creating a proprietary payments network created and operated by the members of the MCX. Their proprietary payments system would exclude the major payments processors, Visa, MasterCard, American Express and Discover, and allow the retailers to won the payments relationship with the customers, which is an enormous shift of power away from the operators. It was also widely assumed that the MCX would fine any retail members that accepted Apple Pay and the recent announcement that Rite-Aid and CVS would stop accepting Apple Pay transactions only added to the rumors and threw fuel on the fire.

The above was complete conjecture, because the MCX had never spoken publicly before. No one had ever heard what the MCX’s mission is or what it is that they have been up to since 2012.

Mr. Davidson, for the first time, addressed the standing room only crowd in the Ironwood Ballroom at the Aria Hotel and discussed the benefits of the MCX’s mobile payments application, CurrentC and how they see the future of mobile payments evolving toward the customer and not the platform.

He compared MCX’s mission to that of Apple in the early years, Dunkin Doughnuts as a small startup, Southwest Airlines with their lost cost value proposition and Starbucks with their successful mobile payments app. He explained that the CurrentC application would be designed for the customer and for the customer. He also noted that CurrentC would be compatible with currently available mobile banking apps and that CurrentC would likely evolve as it comes out of testing and is offered to the public.

One thing is clear from Mr. Davidson’s 20 minute presentation; the mobile payment offerings of Apple and the MCX are very different. I’ll start with the more technical aspects and then move into the value proposition for retailers and consumers.

Apple Pay uses near field communication or NFC along with tokenization to process consumers’ transactions. Apple’s payments are then cleared by one of the major card operators; Visa MasterCard, etc. MCX’s mobile app however, runs on a QR code, which can be scanned much like anything you buy at a retailer and their purchases are cleared through ACH or Automated Clearing House. This allows CurrentC to withdraw the funds needed for the purchase directly from the bank account and bypass the card operators. The security of CurrentC lies within the QR code which contains no customer or banking information and is unique to the transaction. One downside of paying through ACH is that consumers will be foregoing their purchase protection benefits offered through debit and credit cards. That’s not to say that the system is not secure it’s simply that credit cards offer a layer of protection if you are unhappy with your purchase.

The MCX’s CurrentC application will offer several value propositions to MCX’s customer base that focus on saving both time and money for the consumer. The CurrentC app allows for consumers to receive digital receipts and to redeem digital coupons using their phones through the scanning of QR code. Consumers can opt-in to share their shopping information through CurrentC and receive personalized coupons and discounts based on their individual purchase behavior, these offers will appear in the CurrentC app and will be automatically applied at checkout.

In addition, the integrated rewards or loyalty program that is built into the CurrentC app allows a single scan to update loyalty programs across MCX member retailers. If you are a loyal target user you will receive points and coupons. But due to the wide array of retailers included in the membership of the MCX network, the consumer has the potential to earn reward across a much larger base of retailers. If you’ve read my other article, offering rewards, coupons and discounts is the primary driver for increasing adoption and usage of mobile payments apps.

The other primary benefit to consumers that using CurrentC, means that you will spend less time checking out. For example; paying the bill at a restaurant will be easier because you don’t have to wait for the check you simply use the CurrentC app to pay your check and be on your way. Imagine driving into a gas station and the pump recognizes who you are before you get out of the car and offers you the ability to pay for your fuel in the safety and comfort of your car as you earn rewards and redeem discounts. This strong value proposition would be a significant driver of choice between gas stations when price isn’t a differentiator. Currently Apple Pay has not announced any such loyalty program or integrated discounts.

Lastly, CurrentC would be able to accept broad forms of payments; bank accounts, prepaid cards and etc. and it is compatible for use on all cell phones. In other words, the underbanked and underserved could use CurrentC and there isn’t a need to upgrade to a newer phone to use the QR functionality. This makes the CurrentC app much more widely available to consumers than Apple Pay even despite the large number of credit cards that Apple has on file. Every one of Apple’s credit cards that are included in passbook must purchase an iPhone 6 or 6+ in order to use Apple Pay. This is a significant barrier to adoption. Especially for those unable to afford an iPhone or those who are loyal Android users.

The benefit for the retailer to accept MCX is obvious; they would bypass the need to pay the operators for the right to use their system and to settle their customers’ payments. This has been a point of contention for retailers for years with the example of Mal-Mart suing Visa for $5Billion over ‘swipe fees’.

In addition to the saving of interchange income, the CurrentC application is an enormous opportunity for the retailers to build loyalty with their customers through rewards and loyalty programs. Starbucks is a prime example of how a successful mobile payments app can drive loyalty and increase sales. This is especially true with the younger more elusive Gen X and Gen Z customers as they are much more likely to adopt new technology.

The MCX’s final benefit to the retailers is the capability to scan QR codes is already in place at nearly every checkout counter in every retailer. NFC technology, although it has been around a long time, is not widely adopted within point of sale terminals and has even been removed from some retailers including Best Buy. The requirement to update POS terminals with NFC is an additional cost for the retailer and a significant barrier to adoption of Apple Pay for retailers.

The Apple Pay announcement has created a significant buzz in the market concerning mobile payments and will surely move mobile payments into the mainstream but is the excitement enough to drive consumers to use Apple Pay?

The primary struggle that Apple Pay will inevitably need to face is their lack of value proposition to the consumer. And without a clear benefit of use, what will compel consumers to change the behavior of pulling out their card and swiping versus pulling out their phone to pay?

For the retailers, the value proposition for Apple Pay is also unclear. There have been rumors of additional fees for retailers to accept Apple Pay and there is also the need for some retailers to upgrade their point of sale equipment to accept NFC purchases.

Despite the congenial presentation style of Mr. Davidson, and the denial of fines for MCX’s retail members for accepting Apple Pay, make no mistake, this is a battle between the retailers and the card operates. This is a battle over, not simply interchange income, but also the right for the retailers to own the relationship with their customers and increase loyalty, both of which translate into profits.

Although it is likely that there will be more than one dominant player in the payments space, the battle at the point of sale will ultimately be settled by the consumer with the consumer choosing the winner.

Tim Spenny is Vice President on GfK’s Financial Services team in North America. He can be reached at tim.spenny@gfk.com.