Cheapness Could Kill Walmart/Target Payments Effort

Written by Frank Hayes
August 23rd, 2012

It’s easy to forget that the Walmart- and Target-led mobile payments initiative dubbed MCX isn’t really about mobile payments. It’s about interchange—specifically, forcing Visa and MasterCard to cut interchange rates by threatening to cut them out of a big chunk of chains’ transactions. Trouble is, it’s also about some magical thinking: the idea that somehow mobile technology will make the plastic payment card disappear.

And at heart, it’s about how much money chains are willing to spend to dislodge the card brands from their lock-in. Short answer: not very much.

When the Merchant Customer Exchange unveiled its name on August 15, it wasn’t to announce a clear plan (that’s still to come), a CEO (it’s looking) or even a mobile app (as much as a year away, participants said). It was to look for new members willing to commit money to MCX.

Having more retailers on board is always good for a payments scheme, but this really is about money. The actual financial commitment by MCX participants was estimated last spring at around $20 million. Let’s suppose, with the current members, that’s up to $50 million.

Is that enough? Here’s a little history: In 1959, the newly hatched BankAmericard caused Bank of America to officially report a loss on the project that, today, would be $70 million. The actual loss, before accounting jiggery-pokery, was probably more than $150 million in 2012 dollars.

That was the loss (not the cost, just the loss) for one year in one state (California) to give away 2 million unsolicited credit cards, at a time when the bank card was only competing against store credit cards. That’s how Visa got its start—a single bank swallowing a $150 million loss, then spending even more to go nationwide.

MCX has 14 publicly announced big chains as members (and, presumably, a few more that are still unannounced) and hopes for a nationwide launch within a year, going up against the entrenched Visa/MasterCard. Twenty million dollars, or even $50 million, isn’t going to cut it.

That’s where the magical thinking comes in. With the right technology, this shouldn’t cost as much as it did 50 years ago, right?

Back to history: In BankAmericard’s first decade, it and latecomer Master Charge (launched in 1966) mailed out more than 100 million unsolicited cards. That was one card for every two people in the U.S. No applications, no credit checks, no card activation—people just got the cards in the mail, signed them and used them. (The card brands eventually got the delinquency rate down from the initial 22 percent, but they had to stop mailing out unsolicited cards in 1970 after the practice was outlawed.)

The result: BankAmericard and Master Charge spent the money on mailings and advertising, ate the cost of delinquency, got their product out in the market, and won.

By the time the brands changed their respective names to Visa and MasterCard in the 1970s, they were the kings of plastic. Diner’s Club and American Express, which were in the card business earlier but charged a fee and didn’t spend money on a big push, survived but have been also-rans ever since. Store cards all but vanished, and the cost to retailers of handling them was replaced by that oh-so-annoying interchange fee.

That flip—retailers exchanging cost and control for interchange—is what MCX is trying to reverse using technology. Is that possible?


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