This week we’ve seen what looks a lot like the death of Merchant Consumer Exchange (MCX). It’s arguable that it never really lived – in the four years since the announcement of a dozen plucky retailers banding together to take on the evil card networks, MCX sat on the back burner of payment innovation with the gas turned to simmer. So what went wrong?
From the outset, the band of MCX brothers were not a happy family. I can clearly remember the panel discussion at the first Money2020 in 2012 where Mike Cook, WalMart’s representative for MCX made this statement…
“Think about how easy it will be to disintermediate financial institutions. I do not think they even see this coming…”
While this brought audible gasps from an audience that skewed old, white and very much retail banker, what was also noticeable was the obvious discomfort of fellow MCX representatives sat on stage with him. A clear public indicator of internal conflicting agendas and a lack of coherent vision. There were two MCX’s – one a happy collective of retailers that were looking to launch their own payment system with some nice networking benefits like loyalty and rewards and the other a rabid badger that was going to bite the payments status quo in the ass. If Mike Cook could have kicked the Money2020 amps over and stagedived into a terrified crowd of suits, I think he would have.
There’s an interesting ‘tortoise and hare’ observation to make about the current state of payments. Core payment systems change very, very slowly – which is why we still have magnetic stripe card acceptance, checks and cash. They are trusted, they are ubiquitous and most of all, they work. But, on the periphery, the connective tissue between technologies and other technologies is in a rapid state of flux – QR, NFC, MST, BLE… all are contenders in the consumer/merchant interface of the present (and future). However, Metcalfe’s Law is in play – that the value of a network is proportional to the square of the number of connected users of the system. In essence, the winning technology will be the one that scales and is adopted the fastest.
Following the audacious gatecrashing of the incumbent payments party, MCX should have been king of the world. Instead, what occurred was an extended period of retrenchment while MCX worked out the plans for world domination. In 2013, QR codes were everywhere – on buses, on cereal packets, on T shirts. Unattractive as they are (described by a friend as digital vomit), they were certainly prolific, far more than that NFC thing that would never catch on. “Not For Commerce”, PayPal said. People nodded. Besides, Starbucks was doing just fine with barcodes.
Two things changed the m-payments dynamic from QR to NFC – one seismic and one organic…
The seismic event was the launch of Apple Pay in October 2014. Until this date, NFC was restricted to non iOS handsets and subject to interoperability squabbles between Google Wallet and the unfortunately named MNO consortium of Isis (later Softcard). Apple throwing their hat into the ring tipped the balance in favor of NFC as the preferred consumer / merchant interface of the future, with issuing banks and retailers salivating over their dusty brands reaping the halo effect of association with the consumer electronics paragon of cool. MCX, by contrast, now had all the cache of a bunch of retail coupon flyers in a Sunday newspaper.
The organic event is still going on – it’s the glacial transition of the US POS infrastructure to EMV cards. Several years ago, the major POS vendors went for a Henry T Ford model of manufacturing terminals – make one terminal for all markets which will fit both present and future technologies – EMV, NFC, whatever. These Swiss Army Knife POS devices from the likes of Ingenico and VeriFone are slowly permeating US retailers as they upgrade to accept EMV chip cards. And upgrading to EMV means that by proxy, NFC enablement comes along for the ride.
With Apple Pay taking the wind out of their sails and the creeping inevitability of an NFC future, MCX resorted to some drastic and rather myopic measures to prevent defections from consortium members to Apple, Android or Anyone. In September 2014, news broke that MCX members were not to accept Apple Pay in their stores under a punitive exclusivity agreement. Cracks in MCX member allegiance became fissures by 2015, with key members such as Best Buy and Rite Aid rejecting exclusivity to a conceptual mobile payment network in favor of publicly live and payment accepting ones.
MCX limped on with a public beta test in Columbus, OH in September 2015, but by this time the writing was pretty much on the wall for their impending demise. Fast forward to this week and their CEO’s Monty Pythonesque statement that they’re not dead yet, despite many signs to the contrary.
So, lessons to learn here?…
- Payments are very, very hard. I’m quoting my friend James Wester here and thoroughly agree. Yes they are, but there are a lot harder when compounded by the next points.
- Too Many Cooks (or just one too many)? MCX, in a more designed form, could have potentially worked. However, the yardsale of retailers under the umbrella overlapped competitively which undoubtedly caused friction. In particular, WalMart as a retailer that competes in every segment of the rest of the members was notably feisty. It’s no great surprise that they have recently launched their own mobile payment network.
- What do you want to be when you grow up? From the outset, MCX seemed to have little clarity as to what they wanted to achieve. Lower interchange? Provide inter-retailer digital loyalty? Invade a sovereign nation? I’m not saying Apple Pay, Android Pay, etc., have clear visions of the end game either. BUT – they have at least the advantage of unilateral decision making and therefore adaptability to changing market forces and technologies.
- Don’t procrastinate. When MCX was announced in 2012, it was seen as being at the vanguard of payments innovation. Since then we’ve had blockchain, Uber, selfie pay, commercial drones, Alexa and driverless cars. MCX should have committed while they had the momentum and could have iteratively innovated to stay abreast of technological and cultural trends. To be standing still is effectively to be moving backwards.
Yesterday Square (finally) went public on the NYSE, with shares initially trading at $9 and ending the day at around $13.07, a nice rise of around 45%. Looks good on the surface – shareholders like charts that go up.
The $9 trading price could be seen as sandbagging by the company, given that the original trading price was to be around $11 to $13 and the IPO valuation is 52% lower than the $6 billion valuation in the funding round of just over a year ago. The modest increase seen in the last day is at least an increase that looks positive to would be investors and certainly to Square themselves. Today is another day and who knows, maybe it will sustain it’s 45% daily rise. Maybe.
So what’s happened in the last year and why this tepid response to what should be one of the hottest IPOs since Facebook? The plain and simple reason is that, as SOME GUY was quoted as saying in Forbes a few months back, Square “looks a bit long in the tooth.”
Square launched its first reader in 2010, the same year as the iPad debuted. Arguably, not a long time ago, but the consumer electronics world ages in dog years. Square’s NKOTB status five years ago was refreshing and audacious – offering a simple and eloquent solution to enable small merchants to accept card payments without having to put down hundreds of dollars for one of the design abominations from traditional POS vendors. There was a collective industry *facepalm* moment as we got that the audio port was the one universal interface for smartphones across all permutations – Apple, Android and Blackberry – a stroke of genius. This was a smart company that offered simple and elegant hardware along with a pricing structure for transaction fees that were transparent. And the cost of entry to accepting card payments – zero. The readers were given away.
Problems began to set in when other, more established payments players decided to get into the game. Discovering that the card readers could be easily replicated companies including PayPal, Verifone, Intuit and Amazon replicated Square’s initiative of giving away readers and it became a race to the bottom for transaction fees.
Further trouble arose when the collective card networks announced that the US would actually move to EMV in 2012. While the timeline was hardly aggressive (we are still VERY far from being EMV ready), this must have been quite a WTF moment at Square HQ. Mag stripe readers are simple and cheap to make. EMV card readers are not and the bill of materials would necessitate actually charging customers for the hardware.
And now there is the spectre of NFC mobile payments contrasting Square’s archaic card acceptance business. As I mentioned in my last post, I don’t think the payments landscape will switch as fast as some anticipate, but certainly Apple Pay has taken some of the sheen off Square’s innovation crown. Paying with plastic – that’s medieval.
Square has continued to push into other areas – there was a $25 million investment from Starbucks in 2012 which provided Starbucks with preferential processing rates and Square the opportunity to promote Square Wallet – a forward thinking service that allowed both ordering ahead and for the barista to see a photo and name of the customer who they were serving – a stroke of CRM genius. For Square, this could have been the spearhead they needed to gain traction with other larger merchants and to push their hardware products such as Square Register. However, this failed to displace Starbucks immensely successful mobile app. Two years in, the relationship went sour and today, Starbucks has all but abandoned the venture.
There have been other Square initiatives designed to spread the load from the cash cow of card acceptance, but these can be largely categorized as following rather than leading. Square Cash offers P2P money transfer (like Venmo, PayPal), Square Capital (like Kabbage, On Deck, PayPal) and Caviar (like Foodler, Eat24). But fundamentally, Square’s success will probably continue to rely on their ability to adapt and survive in the new EMV environment. Square has an EMV reader available which retails at $29. Not free, but not extortionate for sure. They have also developed a contactless EMV reader which retails at $49. Again, not free but not outrageous. The price point may be something of a deterrent for some small merchants, but actually Square is probably overdue for thinning the herd of yard sale vendors to those that actually put through enough transaction volume to be worthwhile. But, this will place Square in a more competitive environment where more dedicated sellers may opt for a more industrial grade product from a Verifone or Ingenico if card transactions are that critical to their business. And what if the US pivots to Chip and PIN?..
Square’s certainly in a tough environment and I would like them to surprise me again with something that takes me offguard. Dorsey thinks there’s still legs in Square Wallet, and actually, so do I. It’s a move closer to the utopian “Uberized” payments that folks such as myself talk about probably too often. They’ll however need to sell a bazillion card readers to get investors to trust them in such initiatives, particularly post Starbucks.
(A day’s worth of trading data doesn’t make for a solid growth forecast. Currently Square’s trading at $13.60. Upwards is good, right?)
If I had a penny for every time I heard the phrases “the death of cash” or “wallet replacement”, I’d have $1.78. Adding another penny to the jar is Tim Cook, who recently stated to a bunch of Trinity College students in Dublin…
“Your kids will not know what money is”
That’s a pretty audacious claim and one that reflects a mindset I have come across on many times – the arrogance of technologists. It results from being so immersed in your own vision of a utopian future delivered by your technology that you block out the past and present.
Let’s break down Tim’s assumption here that the next generation of kids will not know what money is. Assuming the Class of 2015 are going to pair off and breed within the next 10 years, we’ll have their progeny entering school around 2030 and probably getting an allowance at around 2035. We can assume that EMV will have reached a pretty ubiquitous level of penetration by then on the merchant side and that the US will echo other regions where contactless has become the de facto means of paying by card. So, arguably, the landscape for Apple Pay NFC payments will be there.
Tim’s fallen into the trap that so many technologists do when it comes to payments. They forget what the problem is that they are trying to solve and put simply, for most people payments such as cards, cash and even checks work just fine. Payments are judged by and ultimately succeed due to a handful of attributes – speed, security, convenience, cost and value addition. Apple may have some legs in trumping alternatives on speed and convenience given the rather unpleasant and time consuming UX for EMV. It may also play up the security of biometrics and tokenization, but consumers really don’t care much about that. Cost is not a consideration for consumers, but for merchants the cost of acceptance both in terms of fees and hardware is there. In this, there is no differentiation from credit or debit cards, so no merchant end push towards Apple products. Apple is beginning to associate loyalty cards with Apple Pay, which is interesting but again, probably not enough of a driver from a consumer standpoint. And the last one is ubiquity and this is the most critical because payments require bipartite buy in of merchants AND consumers to work. Apple is doing a fairly decent job in getting issuers onboard with Apple Pay since banks love the halo effect of their stodgy old brands being associated with the pinnacle of consumer technology. But, the merchant side is lagging and Apple is somewhat beholden to the vegetable speed that the US transitions to EMV.
Let’s take a second to look at data from the 2013 Fed Payment Study…
Okay, so it’s a couple of years out of date, but the payments industry hasn’t changed much. The above chart doesn’t include cash data, but it does include checks – the other paper payment mechanism. Unsurprisingly the trajectory for checks is downwards compared to electronic equivalents and with good reason – they’re cumbersome and slow. Even carrying a checkbook is a hassle. But, according to the chart, that’s still 18.3 billion transactions. Have another look at the chart and you can see the meteoric rise of mobile payments. No? Can’t see it? That’s because the line would barely appear.
What Tim fails to get is just how slowly the payments industry changes. Unlike the massacre that digital has been seen to commit in other fields (photography, music, printed media, etc.), payments are a different beast entirely, built on lifetimes of trust and a not insignificant amount of habit and muscle memory. If you consider how the cellphone has changed over the last ten years, when the pinnacle of innovation was the Motorola RAZR (which had such features as “flat” and “shiny”) to today’s iPhone or Galaxy (which has features such as “all the information ever available to man”), the rate of innovation is incredible. If you compare a credit or debit card from a decade ago, to one today, you MIGHT see a small gold colored chip as we move from a fifty year old payment technology to an thirty year old one.
Tim’s not so hidden agenda here is the alleged launch of an Apple P2P Venmo killer which broke this week. Some see P2P as a trojan horse for building critical mass and then pivoting to C2B. I don’t see this happening due to again the ubiquity piece of the puzzle necessitating buy in on both sides as well as the what-problem-does-this-solve conundrum. Again, ye olde payment options work fine.
I stand to be proven wrong on this, of course. Apple may actually be catalytic in the demise of cash. They are also very good at simplifying and beautifying everyday tasks, which may be enough.
I am, by the way, typing this on my wife’s MacBook Pro. It’s an exquisite piece of technology, both in terms of hardware and software. Bastards.