The history of mobile payments is, upon initial examination, a puzzling one. There are very few ideas in the tech industry that are as clear in their potential utility as user-friendly contactless payment. Enabling technology like near-field communication (NFC) chips has been available for years in both smartphones and retail registers. Mobile payments promised not only to deliver a better user experience, but also to lower the transaction cost for merchants, provide a timely opportunity to ditch the fraud-prone credit card system that has been with us since the 1960s and rethink payment security from first principles.
So why is the history of mobile payments littered with the corpses of ambitious challengers? In the 16 years since the founding of PayPal, why can we still not pay at the Safeway checkout counter with our PayPal accounts? Google Wallet launched over three years ago and to date has failed to achieve any meaningful market penetration. Infamous Stanford startup Clinkle set out to create a revolutionary mobile payment system and ended up shipping a glorified rewards credit card. Meanwhile, Square’s IPO dreams were crushed by the reality that it remains unprofitable.
Apple Pay is the latest in a long line of contenders for the Holy Grail that is mobile payments. By early accounts, it appears to be the strongest attempt so far. The main improvement to the user experience compared to previous attempts like Google Wallet is that security is handled by the fingerprint scanner and as a result, the payment flow does not require you to open the app or enter any PIN. Because Apple Pay merely stores digital tokens for your existing debit or credit cards, it also automatically works with any existing point-of-sale (POS) terminals that are new enough to have NFC support. It is still too early to conclude that Apple Pay has overcome the curse of mobile payments, but it is off to a promising start. The question then begs: Is this a good thing?
A week ago, Walmart and a group of retail partners, including CVS and Rite-Aid, pulled support for Apple Pay. Because Apple Pay worked by default with POS terminals that were already in use at these stores, this meant the retailers intentionally disabled NFC readers to prevent mobile payment apps like Apple Pay and Google Wallet from working. The reason is that Walmart is leading the Merchant Customer Exchange (MCX), a massive consortium of large retailers, that is planning to release CurrentC, a QR code-based mobile payment app that works outside of the credit card interchange network and allows direct payment between participating retailers and their customers, cutting out the interchange fees that issuing banks and credit card processors charge.
CurrentC is ultimately solving the merchant-side problem of transaction fees and is transparent in its self-serving goal. The app does not appear to be designed with the consumer experience in mind and has a payment flow that is far more tedious than Apple Pay. In their reactionary banning of Apple Pay, Walmart and its partners have cast themselves as the anti-consumer villains who would gladly inconvenience their customers just to grab a larger share of the profits. It did not take long for online opinions to take Apple’s side. It is easy to conclude that Apple is the David fighting the Goliath that is the evil Walmart and friends.
The reality is more complicated. In the fight between MCX and Apple, there is no underdog. The real Goliath is the massive duopoly that is Visa and MasterCard, which collectively processes close to 90 percent of all payment card transactions worldwide. The credit card interchange system is full of legacy complexity and obsolete middlemen, but as the dominant system it has the most to offer consumers in terms of reach and usability. The strong network effect and business contracts that are in place to preserve the status quo prevent tech companies like PayPal from breaking into traditional retail environments due to a lack of buy-ins from users already invested in the credit cards. Startups that attempt to work within the existing system like Square quickly feel the tight squeeze of the razor-thin margins, as there is little room to innovate and profit on top of the fees paid to the credit card middlemen.
In partnering with Visa and MasterCard, Apple has chosen the easy way out and avoided challenging the status quo. With its loyal user base and the popularity of the iPhone, Apple has the leverage it needs to extract profit in its present arrangement without upsetting the credit card networks. This is the same strategy it employed in first introducing the iPhone and partnering with AT&T and working within the existing terrible and consumer-unfriendly cellphone contract system. While a sensible move for Apple, this strategy is detrimental to the long-term interest of consumers.
True innovation in mobile payments that allows micro-transaction payments and affordable payment processing for small businesses and individuals will continue to be a pipe dream as long as we continue to have layers of middlemen seeking tolls. It is unfortunate that Walmart’s CurrentC initiative, the closest thing we have to a challenger to the credit card duopoly, has demonstrated itself to be both incompetent and self-serving in the past week.
Contact Raven Jiang at jcx ‘at’ stanford.edu.