Quick Thoughts – Apple Pay Highlights the Business Case for MCX as Retailers Look to Respond to Digital Brands through App-and-Mortar Strategies
A number of merchants, including MCX members such as BBY, have said they have no plans to accept Apple Pay. TGT has announced that it will enable Apple Pay for online purchases through its mobile app but has not indicated it will provide NFC-enablement for in-store purchases.
This is not surprising. From its announcement in August 2012, MCX has insisted that it will not support mobile wallets other than its own product, which will be branded CurrentC (a play on the word “currency”), with BBY commenting “it is hard to support all of those different technologies and MCX’s view it that one standard is the way to do it”. Furthermore, while MCX members are upgrading point-of-sale technology for chip-based EMV standards (so as to avoid an increase in fraud costs beginning October 2015 under network rules), WMT is urging them not to switch on NFC capabilities but rather wait for the MCX mobile payment solution which, like that at SBUX, will use quick response or “QR” barcodes for transport of card credentials.
A key concern of retailers with NFC-based solutions, including Apple Pay, is that banks are using the mobile channel to promote credit cards over debit cards. Indeed, the promotion of credit cards (with a fee of ~2% of transaction value) has characterized the bank response to the Durbin Amendment which capped debit card fees at just under 25 cents/transaction; one measure of this is that the ratio of annual spending on credit cards to outstanding borrowing has increased to 3.3x from 2.3x in 2009 (see Exhibit). Given iTunes accounts are disproportionately credit, Apple Pay exacerbates rather than relieves the problem and stands in contrast to MCX which, at least initially, will restrict payment options to ACH and merchant-branded (a.k.a. private label) credit.
Exhibit: Banks Have Shifted Consumer Spending to Credit Cards from Debit Cards
We believe this highlights the business case for MCX whose members account for ~$1.5tn of purchase volume. MCX will use a cloud-based architecture for storing card credentials and so will not need access to the secure element of a ‘phone (or SIM card) and will use QR codes for transport and so will not need access to an NFC radio. MCX confirmed in a press release on September 3rd that it is running pilots, will expand these through the rest of the year, and roll-out nationally in 2015; we expect marketing to ramp in the second half and for individual stores to support an umbrella awareness campaign for the CurrentC brand with store-specific loyalty programs and e-couponing.
More specifically, we expect a single MCX app (customized using geo-location to present the logo and coupons relevant to a specific store) along with API’s to allow retailers to include “pay with CurrentC” buttons in store-branded apps. These API’s will be a key driver for adoption of the MCX solution since consumers are already increasingly using retailer apps for in-store shopping (e.g. for product discovery and price comparison), and it is natural extension to keep the app open at checkout for payment particularly if that enables conveniences such as receipt- and coupon-tracking. WMT expects industry-wide, mobile-influenced sales to reach $700bn in 2016 versus an estimated $365bn for e-commerce sales, and sees app-and-mortar strategies as a key weapon to push back against digital brands such as AMZN. In particular, as discussed in our August 25th note, “Payments and the Convergence of Physical and Digital Commerce”, WMT notes “the possibility of bringing the web to the store is incredibly disruptive; we have 140mm shoppers in the US and that is internet scale in the offline world”.
In short, MCX will not so much be replacing a card-swipe with a tap ‘n’ pay as allowing a consumer to complete at checkout shopping experiences that will increasingly begin and evolve on a mobile app. Ahead of the MCX launch, we continue to be cautious on V and MA, and constructive on FIS as the network partner for MCX as well as on COF as a likely private-label credit partner for individual MCX merchants.