Retail Tech: The Mobile Pay-and-Save Strategies of Retailers

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Rob Campagnino/Howard Mason

203.901.1624/203.901.1635

May 26, 2015

Retail Tech: The Mobile Pay-and-Save Strategies of Retailers

  • While card-swipe works well enough, checkout at point-of-sale is broken. To pay and save, a consumer needs to present a payment card, a loyalty card, coupons, and (if there is a return), a receipt from a prior transaction. The contrast with a browser-transaction, where the earning and redemption of loyalty rewards is integrated seamlessly into the payments stream, is striking. Furthermore, in an online transaction, customers typically self-identify (through log-on) while at point-of-sale they remain anonymous making it difficult for a retailer to accumulate the transaction history for a customer and hence personalize the shopping experience. This is a key reason that ads and offers from physical retailers, even via the Plenti coalition-loyalty program by AXP, remain generic and risk annoying the customer as much as building brand affinity.
  • These checkout (as opposed to merely payment) frictions and genericity of rewards are reflected in consumer ambivalence to current loyalty programs. Membership in loyalty programs is growing double-digits but “engagement” in these programs, in the sense of the ratio of active to total participants, is declining. The significance of mobile phones to retailing is that they can revitalize loyalty programs. Indeed, as consultant Richard Crone has commented, “the mobile wallet is a marketing platform, not just a wallet”. As discussed in our note of May 21st titled “Mobile Strategies and Payments at QSRs”, the evidence from QSRs and particularly from the national pizza chains is that mobile technology (enabling convenience such as order-ahead as well as loyalty programs) can be a defining source of competitive advantage.
  • More broadly, retailers report that consumers who use the mobile channel, in addition to the store and browser channels, visit stores more frequently and spend more when they do. Obviously, there is self-selection but we believe the mobile channel afford the opportunity to shape consumer behavior through increasing engagement and providing a channel for immediate feedback. My Starbucks Rewards is not successful because of the intrinsic value of a Starbucks STAR but because of the psychological gratification of seeing STARS accumulate in real time with each purchase. It follows that a strategic priority for retailers is to drive consumers to their own-brand mobile apps.
  • At this point, retailer apps have been shaped by the digitization of existing business processes. So, for example, the key feature of most QSR apps is order-ahead (with digital access increasing demand and order-ahead improving checkout capacity); SBUX is an exception (although it is now rolling out order-ahead in the Pacific Northwest) because the priority was to virtualize the companies prepaid loyalty card. Ahold has focused on self-checkout through its Scan-It app and WMT (characteristically) on reducing basket-cost through its Savings Catcher app. However, as retailers look to simplify checkout (again not merely payment) and engage consumers more continuously through personalized messaging that leverage that time- and location-contexts provided by a smartphone, we believe mobile apps will converge around:
  1. Stream-lining the customer point-of-sale experience so that a single checkout action can handle payment, the application and updating of loyalty balances, the earning and redemption of coupons, and the provision of a digital receipt. Scott Rankin, COO of MCX, is unequivocal that “it is the integration of payments with value-added services [such as loyalty] that is the secret source that makes this work” adding correctly that “payments-only application have met with limited success”.
  2. Using mobile as a platform to engage customers more deeply and, in particular, authenticating customers (through the log-on to the retailer app for payment) so that, rather than being anonymous, they can be personally-identified and their transactions can be aggregated over time by customer name to enable improved personalization of ads, offers, and the shopping experience more generally. Again, Scott Rankin notes that “mobile provides merchants with the opportunity to convert consumers from being anonymous to being named.
  3. Controlling and protecting transaction data because of the concern among retailers that third-party wallets will use these data to steer customers to competitors. Indeed, as one of the founding members of MCX, Loews has expressed this concern directly: “what would those wallets be doing with that [transaction] data? Would they use it to steer consumers to competing stores? The control and ownership of the data is really important to all of us as retailers?”
  4. Moving the industry towards bilateral negotiation of card acceptance fees levied on large retailers accepting card-tender by the large banks issuing it as opposed to the current setup where these fees (referred to as interchange in the case of the branded networks such as V and MA) are set by the networks thereby (because of honor-all-cards rules) forestalling any price-competition between banks to provide payment services.
  • Retailers that build their own infrastructure, rather than outsourcing to third-parties, will be advantaged through lower variable costs (no per-transaction license fees) and, as SBUX has demonstrated, there are important first-mover advantages. Among retailers, we see Panera (PNRA) as having moved closest to achieving the convergence goal of mobile apps and having made the much of the initial investment in technology.  Late-movers such as McDonald’s (MCD) aren’t precluded from success, but likely face incremental spending requirements.
  • It will be important to integrate payments into retailer-brand mobile apps not because of payments friction with a card-swipe but to create an integrated checkout experience across both loyalty and payments. CEO Howard Schultz is unambiguous that this lies at the root of the success of the SBUX app: “we’ve accomplished this by integrating the convenience of mobile payment to a compelling and enjoyable program that gives our customers rewards”. Learning from the precedent, the MCX retailer payments consortium is focused on providing the same integration (and prefers QR transport over NFC precisely because NFC cannot yet handle as adeptly multiple data streams) and we expect its CurrentC-branded wallet (which rolls out to the public in late summer) to achieve the same 20% tender-share by 2020 that the SBUX app currently enjoys. The winners are FIS that will process debit transactions for CurrentC and private-label credit card companies, particularly SYF, that will likely process credit transactions.

Overview

The key enablers of a consumer transaction are the retailers providing the goods or service, and the bank providing the payment account. Catalyzed by consumer adoption of smartphones, both retailers and banks are evolving mobile strategies to provide digital access to their customers, to facilitate transactions (through order-ahead for pizza or remote deposit capture for banks, for example), and, more broadly, to combine the convenience of a digital shopping experience with the immediacy of an in-store experience.

Citing pizza as an example is not happenstance. The national chains (Papa John’s, Domino’s, and Pizza Hut) see “pizza tech” as a source of advantage against local family-owned stores and have been at the forefront among QSRs of replacing phone-in orders with mobile order-ahead to generate demand and reduce order-entry costs. The approach is extending to other QSRs with PNRA, SBUX, and MCD all investing in order-ahead capabilities. QSR apps have diverse capabilities having been initiated through digitizing a key business process (phone-in orders for PNRA and the My-Starbucks-Rewards prepaid loyalty card for SBUX); however, as discussed in our note of May 21st titled “Retail Tech: The Christmas Tree Effect – Mobile Strategies and Payments at QSRs”, we expect them to converge around three anchor capabilities: order-ahead, loyalty, and payments. We note, for example, that SBUX (whose app is focused on loyalty/payments and accounted for over 90% of US mobile payments of $1.3bn in 2013) is rolling out order-ahead in the Pacific Northwest with plans to go national, while DNKN (whose app is focused on order-ahead) will further integrate with payments as MCX rolls out its CurrentC mobile payments service beginning in the late summer. This note builds on our earlier note around QSRs by looking at retailing more generally.

The Mobile Strategies of Retailers: App-and-Mortar

It is hard to overstate the important of mobile strategy to retailers. Gibu Thomas, SVP of digital and mobile at WMT, articulates the opportunity when he remarks “by 2016, e-commerce sales are projected to get to about $345bn in the US; ‘m-commerce’ sales – online sales through a mobile device – are projected to get to about 10% of that number. But if you look at mobile-influenced offline sales in that same time frame, they are projected to reach more than $700bn”. The business case for retailer investment in own-brand apps arises because digital access can drive demand-generation (by allowing consumers to be engaged earlier in the shopping journey, for example) and can lower order-input costs. PNRA CEO Ronald Shaich comments vividly on the opportunity for demand-generation: “I encourage all of you to sit in one of our digitally-enabled cafes with me at noon and watch the kitchen display system light up like a Christmas tree with orders all within 5 minutes”.

What is Loyalty and Why Does it Matter?

Running a business is much like a presidential election – attracting new customers (voters) is the key to winning the election, but if you don’t energize your core customer (voter), you won’t make it out of the primaries. While the 80:20 rule may not technically be correct for all businesses, it is very likely true for virtually all that some subset of the customer base is generating an outsized portion of the revenue. In fact, the Center for Retail Management at Northwestern University has provided some support for that aphorism, suggesting that only 12-15% of consumers are loyal to a single retailer and that those loyal consumers generate between 55-70% of company sales. Additionally, it is oftentimes more expensive to acquire a new customer than it is keep an existing customer – every advertisement or promotional activity has some waste associated with it, either in terms of time or resources. The dynamic then becomes attract, communicate and convert vs. reward and retain. It is therefore imperative that the very best customers be compelled to stay with the company, particularly in a world of persistent consumer frugality, channel fragmentation and new engagement technologies. One could make a compelling argument that, for many businesses, the pendulum has swung too far toward acquisition, to the detriment of retention. That is where the rubber meets the road, or why loyalty matters.

Retailer programs to enhance loyalty have been around for a very long time – over 100 years, in fact, but only recently have these programs begun to fill in the knowledge gap that retailers faced when compared to businesses such as banks – a customer database that grew out of its everyday business. While we suggested that the overarching goal of a loyalty programs was to reward and retain a business’s best customers, there is no way to efficiently accomplish that goal if a business can’t:

  1. Identify individual customers
  2. Measure behavior
  3. Understand why that behavior takes place

The effective delivery of a reward opportunity is simply a means toward preserving and maintaining the integrity of the data collected by keeping the consumer engaged in the program. It also allows the retailer to extend the customer’s relationship from the specific purchased product to the brand more generally (and by extension, the other products marketed under the brand) to the potential benefit of overall transaction values (see our work on “immersive brand experience”).

The Death of the Loyalty Card

The checkout line is where positive customer retail experiences go to die – further complicating that point of interaction between the brand and the customer by asking for a phone number (or trying to recall which phone number was linked to the program) or an oft-forgotten loyalty card only worsens the experience, particularly if some obstacle precludes the customer from getting the points associated with that purchase. Add to that fumbling in line with receipt in order to check progress toward a reward, and the loyalty program has failed before the customer has had the chance to collect a single reward. The synergy among mobile, payments and loyalty represents the key to a seamless and effortless customer experience at checkout, but successfully beginning the process of engaging the consumer in a loyalty program and efficiently awarding points isn’t enough.

In a 2015 survey, Colloquy found that there were over three billion loyalty program memberships in the United States, or nearly 30 for each of the 116 million households in the country. The survey found that nearly 60% of those programs were inactive over the prior 12 months, leaving 12 active loyalty programs per household – clearly some loyalty programs are dying on the vine.

Aside from ease of use at checkout, most loyalty programs fail due to:

  1. Lack of transparency/immediacy – where does the customer stand in relation to their next reward?
  2. Lack of accessibility – how easy is the redemption process?
  3. Lack of relevance – is the reward something the customer actually wants?

For example, the value of a single Starbucks “Star” is minimal – a star is earned with each transaction, regardless of size or number of items. However, progress is displayed after each transaction or can be checked quickly and easily via the Starbucks app (or online), heightening consumer engagement into the program – after all, who wants to run a race where you can’t see the finish line?

Importantly, Starbucks Stars can be redeemed immediately and easily and the same can be said for Panera rewards (though the specific reward at Panera is more random in nature). Starwood’s Preferred Guest Program offers immediate rewards such as room upgrades, late checkout and club services, in addition to a broader suite of more experiential rewards (sporting events, etc.).

Finally, the reward must have value. This may seem obvious, but the value delivered must not only be monetary (in fact, it can be a relatively small dollar amount), it must also be relevant to the individual consumer. While many retailers give lip service to personalized rewards, the actual offering is more often generic. Going back to the Panera example mentioned above, the reward can be a $0.99 pastry, a free beverage, or some amount off a specified menu item, as examples. The rewards obviously have “value”, but to the extent that Panera has significant information about each customer’s order history, the rewards are disappointingly generic. Food retailers tend to offer the same generic coupons, which often seem to reflect a supply “push” on the part of the manufacturer offering the coupon rather than a demand “pull” based on the consumer’s purchasing history, or even items that may be complementary to those currently in the shopping cart.

In some cases, the rewards can be non-monetary in nature, just so long as they are anchored around what is important to the customer. For example, Patagonia is an outdoor apparel company that positions itself as eco-friendly. Presumably, some customers share the company’s values, and to that end, the company has partnered with eBay, providing a way for consumers to resell clothing online. The company has successfully married its core principles to those of its consumers, at the same time reinforcing the durability and quality of its products.

A loyalty program should yield data for a retailer, and that data should be used in a way that creates value for both the retailer and the consumer. Data, well analyzed, should allow for relevant and timely offers to the consumer – eventually timely may mean to the point where a consumer’s position within a store can be monitored and an offer targeted to that consumer based on current location.

Exhibit 1: Minority Report – Beacons on Steroids

http://www.wired.com/wp-content/uploads/images_blogs/business/2013/12/Minority-Report-Advertising.jpg

The bottom line is that if the data you collect through your loyalty program isn’t used to create a virtuous cycle of more and frequent users of the program (and therefore more data), as well as a brand experience that resonates with consumer, your loyalty program isn’t creating loyal customers.

Improving Retailer Marketing Effectiveness: The Integration of Payments with Loyalty

The card swipe (or slot or tap ‘n’ pay for a contact or contactless EMV transaction respectively) is not broken; indeed, it is typically faster than credential-transport from ‘phone to point-of-sale system via QR code as used by the SBUX mobile wallet. So, why then, is the SBUX wallet so phenomenally successful accounting for ~20% of tender at SBUX stores in the US? CEO Howard Schultz is unambiguous in his explanation: “we’ve accomplished this by integrating the convenience of mobile payment to a compelling and enjoyable program that gives our customers rewards”. While the card swipe is not broken, the broader interaction between a customer and checkout station is an analogue mess: the customer may need to dig into a wallet or pocket to find a plastic payment card to pay, a gift card for a mixed-tender transaction, a loyalty card to earn or redeem rewards, a coupon to benefit from many promotions, and a store receipt from an earlier transaction if there is a return.

One result is that, while consumer adoption and use of loyalty programs is increasing meaningfully so that the average adult consumer is member of more than 15 programs (see Exhibit 2), loyalty specialist Colloquy reports a 4% decline in consumer engagement and notes that “loyalty programs are obviously the best way to build and encourage customer loyalty but once the program is in place it can be tough to keep customers motivated and engaged if you do not know how to properly incentivize their actions”. The explanation for this shortcoming is a matter of everyday experience. Even programs (such as the Plenti loyalty program from AXP) that purport to use data to personalize offers are chock-full of generic ads (to switch to directTV, for example) raising the risk that the programs may engender more customer-annoyance than brand affinity. A key reason that a shadow falls between the idea of personalized engagement and the reality of generic messaging is the absence of any personally-identifying information for a customer in a transaction. Scott Rankin, COO of MCX, articulates the problem and the potential of mobile to solve it when he says “mobile provides the merchant with an opportunity to convert customers from being anonymous to being named”.

Exhibit 2: Retail Loyalty Program Memberships

Source: http://bigdoor.com/blog/2014/03/13/the-growth-of-retail-loyalty-programs/

Access to personally-identifying information (“PII”) is one of the key distinctions between online and in-store shopping. While “guest” purchases are possible, customers typically log-in when shopping online in order to avoid the need to re-enter payment credentials and shipping information and in order to earn and redeem loyalty rewards. As a result, an online retailer can aggregate transaction records by customer-identity and hence personalize the shopping experience and configure the presentation of a web-site to reflect the needs and preference expressed by a customer through his or her purchase behavior and to reflect the broader demographic and psychosocial characteristics of the customer than can be inferred from publicly-available data-sources. The same is manifestly not true of the typical in-store experience where even the ability to track customer identity through credit card number (incomplete as it is to the extent the customer uses different tender for different transactions) will become impracticable as the card-industry adopts tokenization (so that, effectively, each transaction has its own card number).

The promise of a mobile wallet, then, is not that it improves narrowly on the payment interaction at point-of-sale but that it integrates payment with value-added services from the retailer and, in particular, integrates the earning and redemption of loyalty points and coupons into the payments stream. These value-added services include convenience services (such as order-ahead and, in the case of WMT, in-store navigation), marketing services (such as loyalty programs and couponing), and authentication services (to capture the personally-identifying information of the customer for each transaction). WMT is already moving in this direction, even though its app does not yet support payments, through the “Savings Catcher” program under which, if a consumer can earn a local price-match guarantee by entering receipt information into the WMT app (either through using the phone camera or through manual entry from a web-site); WMT then uses these data to customer the presentation of Walmart.com to that consumer. More broadly, payment consultant Richard Crone comments that “the mobile wallet is a marketing platform, not just a wallet”.

The Strategic Importance of MCX to Retailers

The merchant loyalty-and-payments consortium, Merchant Customer Exchange or MCX, which will its CurrentC mobile-wallet solution to the public in late summer and counts among its members retailers controlling $1.2tn of retail spending (so approximately one-quarter of the in-store total) is motivated by four core objectives:

  1. Stream-lining the customer point-of-sale experience so that a single checkout action can handle payment, the application and updating of loyalty balances, the earning and redemption of coupons, and the provision of a digital receipt. The problem this solves is that the current point-of-sale exchange between a merchant and customer can often involve multiple transactions including a payment card (as token for the primary funding account), a loyalty card, coupons, and to the extent there is return a store-receipt from a previous transaction. Given these frictions, it is little wonder that while the average consumer is enrolled in 18 loyalty programs engagement (as measured by the proportion of active loyalty members) is in decline. Scott Rankin, COO of MCX, is unequivocal that “it is the integration of payments with value-added services [such as loyalty] that is the secret source that makes this work” adding correctly that “payments-only application have met with limited success” and that MCX will integrate not only merchant-level loyalty programs (such as Target RED and the CVS which has the largest loyalty program in the world) but also a consortium-level loyalty program with rewards based on customer behaviors such as spend volumes, tender choices, and the number of merchants visited. Furthermore, we expect member-merchants of MCX to make tender-reciprocity arrangements so that loyalty rewards earned at one can be redeemed at another.
  2. Using mobile as a platform to engage customers more deeply and, in particular, authenticating customers (through the log-on to the retailer app for payment) so that, rather than being anonymous, they can be personally-identified and their transactions can be aggregated over time by this name-identity to enable improved personalization of ads, offers, and the shopping experience more generally. The problem this solves is that presently ads and offers tend to be generic rather than relevant to the customer needs and context (e.g. time and location) and so risk engendering more annoyance than brand-affinity and incremental demand. Scott Rankin notes that “mobile provides merchants with the opportunity to convert consumers from being anonymous to being named” so that ads and offers, for example, can be customized based on what offers customers respond to and what products they buy.
  3. Controlling and protecting transaction data because of the concern among retailers that third-party wallets will use these data to steer customers to competitors. Indeed, as one of the founding members of MCX, Loews has expressed this concern directly: “what would those wallets be doing with that [transaction] data? Would they use it to steer consumers to competing stores? The control and ownership of the data is really important to all of us as retailers?” For MCX, Scott Rankin has repeatedly reiterated that the “[CurrentC] data is owned by the merchant”; if that merchant wants to provide data, either at basket- or SKU-level to MCX, MCX is looking to build capabilities to provide support for data-enabled services such as fraud risk-management and targeted marketing but the decision is the merchant’s to make.
  4. Moving the industry towards bilateral negotiation of fees between large retailers accepting card-tender and the large banks issuing it as opposed to the current setup where these fees (referred to as interchange in the case of the branded networks such as V and MA) are set by the networks thereby (because of honor-all-cards rules) forestalling any price-competition between banks to provide payment services. While Scott Rankin has said that “lowering interchange is a great outcome [for MCX] it was not the motivation”, large merchants are deeply concerned with the pricing arrangements in the payments business. Mark Horwedel, CEO of the Merchant Advisory Group (a trade group representing large retailers and airlines) makes the point in the context of NACHA which sets the interbank fees that apply for the ACH network: “I still question NACHA’s authority to set the price like that in what should be an open market”; indeed, the record suggests that, where issuers are forced to compete on price (as in the case of the competition for the Costco mandate between C and AXP) retailers can secure meaningful reductions in card-acceptance costs. A key challenge for MCX will be balancing the strategic objective of reducing the pricing power of the banks acting through the branded networks against consumer familiarity with using the payments cards of these network brands. Scott Rankin has observed that MCX is “not opposed to any form of payment in the wallet” but noted that the initial launch of CurrentC will be focused on the 75% of tender at member-merchants that is cash, ACH (i.e. check), debit, or private-label while Visa- and MasterCard-branded credit cards will be not be included until subsequently. Furthermore, he adds that he expects “direct routing with banks as well as network [routing]” and that MCX member-merchants will look to CurrentC to shape consumer behavior not only in terms of driving in-store visits but also in terms of steering to tender choices that are merchant-friendly. Indeed, we believe that Apple Pay, which wraps both retailer and bank brands for in-store purchases (and, in the case of banks, generates risk that Apple will increase provisioning fees), has motivated retailers and banks to negotiate bilateral arrangements for the acceptance of bank-branded mobile wallets via CurrentC[1].

The MCX Opportunity for PayPal

PayPal, through its March-announced acquisition of Paydiant which runs the cloud into which CurrentC payment and loyalty credentials are provisioned and also provides a tokenization solution to improve data security, is already a mission-critical partner to MCX and we expect the partnership to expand to engage the core capabilities of PayPal as well as the purchased capabilities of Paydiant. Among the third-party providers of wallets only PayPal has emphasized that merchants control and protect their own data with CEO-designate Dan Schulman commenting in March 2015 “we want to be the operating system for digital commerce [not narrowly payments] going forward…more than a button on a merchant site. [Merchants] are looking for a partner who respects that their data is their data, who can provide all the very difficult underlying plumbing that has to do with the payments infrastructure”. Indeed, the current PayPal wallet provides a very similar integration of payments with value-added services (such as loyalty and order-ahead) as we expect will be provided by the CurrentC wallet; at this point, the most significant differences are that network-branded cards cannot be provisioned into CurrentC (and, in the case of debit, may never be enabled) and that PayPal interacts directly with the ACH system while MCX interacts through FIS.

Scott Rankin comments that from the perspective of MCX “there are a lot of appealing things about PayPal” and makes a point of noting that the all-in cost of an ACH transaction includes the cost of settlement risk (because ACH is not a funds-good model) and, to the extent deemed necessary to generate consumer adoption at scale, reimbursing consumers for fraudulent use of their card or performance-failure by accepting merchants. He observes correctly that PayPal has invested heavily in fraud risk-management systems to keep bad transactions out of their systems while enabling good transactions with a minimum of friction. Furthermore, CurrentC will initially launch for in-store purchases only and not be available for in-app or e-commerce purchases. Aside from the possible customer confusion (since at Target, for example, there may be a period where consumers can use Apple Pay for in-app purchases but not in-store purchase and use CurrentC for in-store purchases but not in-app purchases), the inability of merchants to leverage CurrentC credentials support of in-app and e-commerce purchases can reduce the ability of a merchant to compile the complete transaction-record for a customer across all channels. As discussed in our note of April 20, 2015 titled “PayPal: From Branded Buy Button to Open Commerce Platform”, PayPal can facilitate omni-channel data capture at the middleware level through its gateway services business; a more intriguing possibility is that MCX white-labels the technology behind PayPal’s digital wallet for e-commerce and in-app transactions. PayPal would give up some brand opportunity in the digital space but, if the deal were linked to including PayPal as a payment option in the CurrentC wallet, would gain in-store acceptance for the PayPal buy button.

Regardless of possible broader opportunities for partnership, PayPal will likely accelerate CurrentC drive for scale relative to that which could have been achieved by Paydiant with Scott Ranking making the natural point that “PayPal has significant scale and resources that Paydiant was a ways from”. He added that despite the change in leadership, with former CEO Dekkers Davidson stepping down this month and Brian Mooney being appointed as interim CEO, “our path to market is still on track” so that, after private launches (i.e. available only to member-merchant employees) that began last fall, CurrentC will begin the regional rollout of public launches (i.e. available to consumers generally) beginning in late summer. Investors have been skeptical about the chance of success for MCX in part because of its “crawl” to market, and we expect this to change as the public launch of late summer approaches and as MCX adopts a higher profile with the public and with investors (so that Scott Rankin has made himself available for a number of investor events beginning this month).

The crawl to market itself differs from the splashier launch of, say, Apple Pay because merchants do not need to create a launch buzz; they have an opportunity to distribute the CurrentC app, just as they do private-label cards, every time a customer visits the store. Rather, the strategic priority for CurrentC is to ensure ease-of-use and security (particularly given the Target data-breaches of November 2013) so that MCX is proceeding methodically to test the various use-cases and transport-mechanisms: QR-codes for in-store purchases (given, for example, the limitation of NFC for pay-at-table checkout versus the inclusion of QR-code on a receipt and the ability of QR-codes to support the multiple data streams necessary for integration of loyalty andother value-added services versus NFC which is presently more restricted) and BLE for drive-through and fuel-pump checkout. Nonetheless, the ultimate objective is to get to scale through deploying in a secure way across the 115,000 locations operated by the ~40 MCX-members (who are organized into different ownership tiers but have equal voting rights).

The Possible Opportunity for MasterCard

Engaging consumers at scale is a clear priority for MCX and Scott Rankin has noted that he wants “CurrentC to go beyond the 40 founding merchants”. This creates possible opportunity for a third-party network to make available its processing footprint (in the same way that DFS has for PayPal albeit with limited success).

We believe MA is best-positioned for this role and note that CEO Ajay Banga has commented “I’m happy to be part of it [MCX] at the right time; if I get a chance, I’m going to try” while Chris Wilton, President of North America, adds “we’re looking for ways that we can work with our issuers because somebody has got to do the credit underwriting for these [MCX] programs”. MA has made clear strides with two of the anchor merchants of MCX through displacing DFX as the brand for the WMT co-brand credit card and displacing Visa as the brand for the Target co-brand card. Furthermore, in providing chip-and-PIN support for the Target RED card, MA has demonstrated that it is willing to provide technology independently of its brand; this will be important to MCX since it will likely want to avoid the possible customer confusion of operating its wallet under the CurrentC acceptance mark at MCX member-merchants and the MasterCard acceptance mark at other merchants. We discuss the MasterCard opportunity in more detail in our note of December 28th, 2014 titled “The Extension of MasterCard’s Cobrand Strategy to MCX”.

  1. We note that, like Mint.com and Knox, CurrentC will use online bank credentials (so not a blank check as in the case of Target RED or an SSN as in the case of some of the early private trials) to authenticate consumers to their bank providers although we assume this is one-off provisioning requirement and that, thereafter, consumers will be able to use a PIN for each transaction.
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