Merchants' Mobile-Payments Play to Work Directly with Banks

In a play to develop a mobile wallet of their own, a joint venture of retailers is working with banks to provide a merchant-friendly alternative to Isis, PayPal and Google Wallet.

The Merchant Customer Exchange — which includes 7-Eleven, Best Buy, CVS, Lowe's, Sears, Shell, Target and Wal-Mart — has already begun building its own mobile payment applications.

"In our view, the legacy payments system has numerous inefficiencies, whether it's fraud losses" or otherwise, Mike Cook, Wal-Mart's vice president of finance and assistant treasurer, said in an interview. "We have a more highly secure technology with mobile handsets than we do with a magnetic stripe card, where someone scribbles something down on a signature capture device and sometimes doesn't even do that clearly."

He added that MCX isn't limited to the retailers announced today; eventually he envisions the company encompassing many retailers and being available wherever consumers shop.

The organization is also working in concert with banks and talking with them.

"There will be issuing institutions and we hope all issuing institutions — some will be more eager and some will be more resistant — are included in the [MCX] at some point in time," Cook says.

Rick Oglesby, senior analyst at Aite Group, says the retailers do not want to replace the existing payment infrastructure.

"Payments is a component of it, but it's about creating customer engagement solutions," he says. "Merchants are only interested in marketing. Payments are only in it because it's the end game of marketing."

Reports first surfaced in March that Wal-Mart was working with Target, as well as other retailers, to develop a mobile wallet.

Merchants have a natural role in mobile payments. They already track transaction data for customer loyalty, and they control offers that can potentially drive transactions over a digital wallet. Today, merchants fund rewards through card associations, credit card companies, such as American Express (AXP), as well as internally and through marketing companies.

Some experts wonder if these retailers — each individually worried about their own bottom lines — can work together effectively.

"Both merchants and banks will naturally follow incentives to improve their own bottom line, yet consumer research shows that it takes a tangible benefit … to get the consumer to choose new alternatives," says Jim Van Dyke, president of Javelin Strategy and Research. "MCX will face the same limitation that has limited bank-sector consortiums: getting an aggregate of individual business entities to act as one in a way that provides more tangible benefit to the consumer. It can be done, yet the challenges are steep."

The biggest uncertainty, however, is what an MCX wallet will look like.

Yes, it will be some sort of mobile application, but will this joint venture of retailers act as a merchant of record in a similar way to how PayPal, American Express' Serve and, now, Google process transactions in its digital wallet? Will the application be based on near-field communication and allow people to make purchases at the tap of a phone?

The answers to these questions are not yet available.

But in the end, "it's all about consumer adoption. If you can start getting consumers to get used to using their phones for payments you can evolve into something more sophisticated," says Mahesh Makhija, head of financial services in the Americas for Infosys.

That could mean starting off with the type of barcodes Starbucks uses at its retail stores point of sale to allow people to make purchases.

Makhija says he expects to see the market become flush with players before it eventually consolidates.

"I think Apple will set the standard, with their closed mobile ecosystem" Passbook, he says. "They will define how a mobile wallet should look, and they are going to try to monetize it."

Cook at Wal-Mart says details about MCX will be released when the time is right and the technology is mature.

"It's more important that we get it right than it is speed to market," he says, Today's announcement is "more about the formation of this entity ... rather than when we will have something in the market or what the tech will look like."