The Force Is Strong With This One

The payments value chain might be more vulnerable to a judge than to disruptive technology.

January 2, 2014

Branching Out Dec 2013

In October, I attended the Money2020 conference, which explores trends in payments and financial services innovation. The scores of startups represented there are vying for the title of “chief disruptor”—a catalyst for a momentous shift in payments. They want to become the next Apple, which disrupted the music industry by eliminating entities in that industry’s value chain.

The primary target of all these startups? Us. Or, as one hipster from a San Francisco startup said, “You banks.” (He apologized profusely after discovering I was from a credit union. That made me feel warm and fuzzy. Or not.)

Is this a worry? Almost every consultant says it is.

The payments process represents a value chain, which is tethered, or “anchored,” at the ends. In this value chain, financial institutions reside at one end and customers/ merchants at the other. The most vulnerable entities exist in the middle—networks like NYCE, STAR, and Visa/MasterCard, and large processors like FIS.

Many major players and a huge number of smaller ones want to collapse this chain. But they’re all limited by one thing—the networks.

In general, these major networks allow funds transfers to be posted: ACH and Visa/MasterCard. ACH is inexpensive but has a two- to five-day lag and exposes merchants to considerable risk of insufficient funds. Visa and MasterCard, on the other hand, are expensive but instant.

These restrictions hamper two of the bigger names in the market—Google Wallet and ISIS (the mobile payments joint venture of AT&T, Verizon, and T-Mobile). Both also suffer from an early adoption of near field communication. Both use Visa/MasterCard networks, and sometimes ACH.

Dwolla circumvented this issue by developing FiSync, a competing network. Adoption has been slow because many institutions are reluctant to give up interchange revenue.

But a big player is emerging.

MCX (Merchant Customer Exchange), owned by some of the world’s largest retailers—such as Walmart and Target—is creating its own mobile wallet technology and mobile payment app. It received a lot of attention at Money2020; attendees referred to it as “The Empire” in hallway conversations.

The goal of MCX is threefold:

1. Reduce the per-transaction cost by cutting through the Visa/MasterCard networks.

2. Stop third parties from bundling purchase information to sell to competitors.

3. Take back the Galaxy from the rebels.

MCX has been a tough sell thus far because most financial institutions are wary of a retailer-controlled company owning so much of the value chain (and dictating prices). To get around this, MCX is working on a secret plan. Let’s just call it the “Death Star.”

It goes like this: A consumer tries to buy something from a merchant that uses MCX. Using a smartphone as the payment device, the consumer scans the phone at the merchant’s store, which sends a signal to MCX deep inside Empire-controlled space. MCX then dispatches a stormtrooper to put a code on the consumer’s phone, which a merchant scans again for something called “The Force.”

For the privilege of doing all this, a financial institution gets two cents—which is better than a lightsaber through the heart, but not by much.

But all this work by MCX might be for nothing. In U.S. District Court, a judge found that the current 21-cent fee for debit interchange was far too high and invalidated the Federal Reserve’s mandated pricing. Most expect that, once determined, the actual price will be far, far lower. Perhaps even lower than what MCX is proposing.

This ruling could be more disruptive than MCX, ISIS, and Google Wallet combined. What happens if a Jedi judge, with the stroke of an 18th century quill, does what tech companies have been trying in vain to do for the past three years?

Did you see the part where the Death Star blows up?

JAMES COLLINS is president/CEO at O Bee CU, Tumwater, Wash., and Credit Union Magazine's humor columnist