Quick Thoughts – PYPL, FIS and Chase Pay/MCX Partnership
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October 26, 2015
Quick Thoughts – PYPL, FIS and Chase Pay/MCX Partnership
On Monday, Chase and MCX announced a partnership where MCX will open up the CurrentC acceptance network to the newly-announced Chase Pay mobile wallet and Chase will waive network and acquiring fees on related transactions. The Chase Pay wallet, launching mid-2016, will transport card credentials to point-of-sale using QR-codes rather than NFC (in part because Chase does not have direct access to the NFC controller for iPhones but also because QR-codes can be implemented cheaply using barcode scanners that are already in place at checkout) and, for some MCX members, will have to be presented through CurrentC rather than as a standalone app (so that the retailer can directly access the identity of the shopper). In both cases, we assume PYPL will act as token service provider under the existing tokenization contract between Paydiant and MCX and note that Chase, and not the merchant, will bear the fraud risk on Chase Pay which is therefore being treated for fraud purposes as a card-present format. The context for this partnership is three related forces reshaping the payments landscape:
- First: The shift in storage medium for card credentials from magnetic stripe to chip (whether on a card, in a phone, or on a household appliance) and related emergence of token service providers or TSPs who use the processing power of a chip to dynamically encrypt the card credential (a.k.a. primary account number or PAN) with a “token”, typically unique for each transaction, which cannot be used broadly, or at all, if fraudulently intercepted or otherwise hacked. Through their digital services, Visa Digital Enablement Service (VDES) and MasterCard Digital Enablement Program (MDEP) respectively, Visa and MasterCard have established themselves as early TSP leaders, but PYPL’s Paydiant is the contracted TSP for MCX.
- Second: An insistence among large merchants that they want to work with the issuing banks on mobile payments but not under the existing Visa and MasterCard rule-sets. In particular, both networks enforce “honor-all-cards” rules (so that if a merchant accepts a Visa-branded debit card from one issuer it must accept Visa-branded debit cards from all issuers and similarly, but independently, for Visa-branded credit cards) and thereby, in effect, aggregate the market power of banks in support of network pricing; a critical element of both VDES and MDEP, and one of the strategic objectives of the TSP role to the networks, is that they preserve this pricing power in a digital context by recasting the honor-all-cards rules as honor-all-tokens rules. This is anathema to WMT which is accustomed to suppliers bidding against each other in brutal visits to Bentonville rather than bargaining collectively. The CurrentC acceptance network (which we distinguish from the CurrentC wallet since some MCX retailers will accept Chase Pay as a standalone app rather embedded in the CurrentC wallet) is not subject to the honor-all-tokens rules of the branded-networks (since PYPL/Paydiant is the TSP) so that MCX can agree to accept the wallet of one bank while refusing that of another; as a result, the merchants can pit against each other banks seeking access to the CurrentC wallet and acceptance network. In the case of Chase Pay, transactions will be processed over ChaseNet; in the case of other banks, if and when they come to terms with MCX, debit transactions can be processed over FIS and credit transactions direct- or “BIN”-routed (based on the bank identification number) as is currently the case for private-label credit cards and for “on-us” network-branded transactions (where a bank is both the issuing bank for the cardholder and the acquiring bank for the merchant).
- Third: To compete with Amazon by combining the immediacy of a store experience with the convenience of a digital experience, and to improve the efficiency of shopper rewards from trade-spend (which, at $200bn/year in the US is meaningfully higher than US$60bn of bank interchange) retailers are looking to obtain the identity of shoppers either through “app-and-mortar” strategies (where shoppers use a retailer-branded app while in-store) or through partnership with the provider of the payment account (whether PYPL or a bank) that, after authenticating the customer, authorizes the transaction; combining this personally identifying information or PII with item-level (a.k.a. SKU-level) transaction data is key to direct marketing and personalization. The former approach is being adopted by retailers who insist that Chase Pay be presented through CurrentC; the latter approach is likely for MCX retailers accepting Chase Pay as a standalone app. We increasingly expect large banks and retailers to partner by combining PII with item-level information and, as a result, for the economics of the card business to shift from interchange (where the branded networks leverage the honor-all-cards rules to appropriate value from merchants) to value-exchange (where banks, within the constraints of privacy considerations and possibly subject to customer opt-in, pool data with merchants on their shared customers so as to add value by generating incremental demand).
We view the MCX-Chase Pay partnership as an important validation of the CurrentC network as an acceptance brand and of PYPL as a token-service provider, and reiterate our view that payments-winners will be companies able to support merchants in general, and the MCX consortium in particular, in developing merchant-friendly strategies for mobile payments; these include FIS (for debit processing), SYF (for credit processing), and PYPL (as token service and gateway provider).