Trends & Tactics

MasterCard Sees Dollars in Tokens

As mobile payments and the use of tokens for payment security grow, at least one card network is seeing an opportunity for new fee revenue.

MasterCard Inc. is planning new “digital enablement” fees, one for merchant acquirers and others for card issuers. The fees are outlined in two recent MasterCard bulletins for U.S. customers obtained by Digital Transactions.

Their arrival comes at a time when MasterCard is ramping up its Digital Enablement Service, a new platform that facilitates identification and verification of cardholders and generates tokens, or data packets, for use by issuers and so-called digital wallet operators that link to a card’s primary account number (PAN).

Unlike PANs, tokens are generally useless to data thieves. Customers of issuers using MasterCard’s service will be able to use their mobile devices for purchases through mobile applications, online, or at the point of sale.

The fees for issuers of MasterCard- and Maestro/Cirrus-branded cards take effect Sept. 1. They include a “Digital Enablement Service Lifecycle Management” fee of 10 cents per PAN, billed monthly. MasterCard also will charge a 50-cent “digitization” fee each time a mobile device is provisioned with a token.

The new acquirer-side “Digital Enablement” fee takes effect Jan. 5 and will be 1 basis point, or 0.01% of volume, billed weekly. The fee will apply to “select cardholder not present transactions” on consumer and commercial credit cards and signature-debit cards.

MasterCard did not respond to several requests for comment. The company, however, hinted at a June investor conference that it sees new digital services as ways to enhance data security while driving more transaction volume to its network—and generate more revenue.

MasterCard also will increase its existing Acquirer Brand Volume Fee by 1 basis point to 0.12% of volume, also effective Jan. 5. The increase will apply to all signature-debit charge volume and all consumer and commercial credit card volume under $1,000.

As usual, rising network fees are raising eyebrows in the acquiring community. Jeff Fortney, vice president of ISO channel management at Clayton, Mo.-based merchant processor Clearent LLC, says he’s trying to understand the nuances of MasterCard’s new fees.

“A basis point doesn’t seem like a lot—a basis point on a $100 transaction is a penny,” he says. Even so, implementing the new pricing schedule will require cost-generating back-office changes, he says.

And while the term “card not present” is an old one in the industry, MasterCard is now using “cardholder not present” terminology, he notes. The linguistic difference might or might not have operational implications. “I don’t see the difference,” Fortney says.

Consultant Steve Mott of Stamford, Conn.-based BetterBuyDesign says the meaning of cardholder not present is “to be determined.” But he believes it’s one part of MasterCard’s effort, with a similar one under way at Visa Inc., to find ways of capitalizing on tokenization and the still-small but growing shift to mobile payments.

Mott also says the digitization fee indicates MasterCard may be using static tokens to accommodate issuers whose back-office systems aren’t ready to handle more-secure dynamic, or one-time-use, tokens. “That gives security people palpitations,” Mott says. “They dumbed it down to accommodate the least-capable banks.”

A Visa spokesperson says Visa has not made any pricing changes recently regarding tokenization or e-commerce. The spokesperson also says Visa has no comment on MasterCard’s new fees.

—Jim Daly

 

Will Amazon’s Local Register Stop at Mobile Payments?

Rumors of Amazon.com Inc.’s foray into mobile payments inside stores came true last month as the giant online retailer unveiled Local Register, a tablet and smart phone-based point-of-sale service.

Similar to other mobile POS services, such as Square Inc.’s, Local Register requires merchants to create an account, purchase a card reader, and download an app to a compatible smart phone or tablet. Readers are $10 on Amazon.com, but merchants get a $10 credit on their transaction fees. Readers were to be available in Staples Inc. office-supply stores beginning Aug. 19.

Payment-processing rates for Local Register transactions, which can occur on Visa Inc., MasterCard Inc., Discover Financial Services, and American Express Co. credit and debit cards, are 2.5% for swiped transactions and 2.75% for manually entered ones. That pricing undercuts Square, which charges 2.75% and 3.5% plus 15 cents, respectively. Amazon is the merchant of record for Local Register clients.

In addition to payment acceptance, Local Register also enables merchants to view reports on sales, average transaction size, top-selling items and product categories, and the busiest times of the day.

Amazon faces competition from merchant acquirers, independent sales organizations, and other mobile POS companies. Some, like Square and PayPal Inc., a unit of eBay Inc., have similar products and distribution models.

Amazon says it launched the mobile POS service because it “makes payments easy, affordable, and secure—so that local businesses and organizations can get back to serving customers,” an Amazon spokesperson says in an email. To some extent, the new service had been expected. Inklings of it emerged in July when leaked documents indicated Staples would start selling a mobile card reader for Amazon.

Whether or not other retailers, especially brick-and-mortar merchants that haven’t traditionally competed with Amazon, will view Local Register with a beneficent perspective is uncertain.

“More and more retailers do not trust Amazon,” Nikki Baird, manager partner at RSR Research, a retail industry consulting firm, tells Digital Transactions. “I don’t see a lot of them getting excited about trusting Amazon with their transactions. The only angle I can potentially see on this is that maybe some marketplace sellers have been asking for it as a way to transact all their business—offline and online—through one provider, but I don’t see a lot of independent store retailers out there making the move to this payment method, and certainly not any independent book sellers.”

Although a massive online merchant now, Amazon started out on the Web in the 1990s as a purveyor of books.

What may be most significant about Local Register is that it represents Amazon’s first foray into payments inside physical stores, a path e-commerce processor PayPal began blazing two years ago. That effort could give Amazon a gateway through which it could provide other services in stores, suggests Jordan McKee, an analyst at Boston-based Yankee Group. “The real lucrative opportunity is in the physical world,” McKee says of payments. “Point of sale is an entry point.”

Merchant acquirers have views on Amazon Local Register, too. At Woodland Hills, Calif.-based payment provider Total Merchant Services, Shelly Plomske, vice president of product, says Amazon Local Register will aid merchant education.

“For us, it’s awesome,” she says. “There’s still plenty of runway for folks like Total.” Even with the advent of the self-service POS distribution model, many merchants want a one-on-one connection with a sales agent, she says. Local Register likely will help familiarize the business community and consumers with mobile POS services, thanks to Amazon’s recognition, she says.

At Merchant Warehouse, a Boston-based merchant-services provider, chief executive Henry Helgeson, like Yankee Group’s McKee, suspects Amazon has more to reveal with Local Register. “If you look at payments, it’s a highly commoditized business,” Helgeson says. “It doesn’t add a lot of value when it’s just payments.”

—Kevin Woodward

 

The Fed Gets a Fix on Mobile Wallets

Despite all the fuss mobile wallets have caused over the past few years, nobody has been able to get a fix on just how many transactions the digital devices are generating—until now.

This summer, the Federal Reserve released an update to the triennial payments-study summary it published late last year. In it, the Fed pegged mobile-wallet activity at 250.6 million transactions for 2012, the year under study. Users bought goods amounting to $9.5 billion in value that year. These numbers are minimums, or “lower-bound estimates,”as the Fed calls them. So the actual figures could have been higher.

The update represents the central bank’s first effort to measure activity in the fledgling U.S. mobile-wallet sector, which has sustained a number of jarring setbacks of late.

Rumors circulated in July that Apple Inc. is preparing to enter the wallet market, possibly with the expected introduction this month of its iPhone 6 smart phone. But Visa Inc. this summer replaced its V.me product with a new service called Visa Checkout, while in May Square Inc. discontinued its 3-year-old Square Wallet and substituted a more narrowly defined app called Square Order (for more about Square’s strategy, see the Cover Story). Search giant Google Inc. has struggled for years to establish Google Wallet with consumers and merchants.

Also trying to find a market with consumers is the carrier-controlled Isis venture, which is now in the throes of renaming itself to avoid association with the ultra-violent Islamic extremists rampaging through Iraq and Syria.

With a mobile wallet, users rely on a smart-phone app to store payment and loyalty cards for use at merchant terminals that can read barcodes generated by the app or perform tap-and-go near-field communication links.

Still, wallet enthusiasts are out there, as borne out by the Fed numbers. Users seem to prefer the products for decidedly small-value purchases. More than two-thirds of the wallet payments were for transactions under $10, with 42% of them falling under $5.

And mobile wallets remain a closely watched form of electronic payments as activity gives promise of continued growth, according to the Fed, despite recent missteps by wallet providers.

“As this is the first time data on mobile wallets was collected, evidence that the category is growing is based on industry projections,” the report notes.

How does wallet activity stack up against other alternative payments? The Fed looked at that comparison, as well, and found wallets beating out electronic person-to-person and remittance transfers, which totaled 205.3 million transactions. The top two alternative methods are online bill payments and so-called secure online payments, which include PIN-based Web payments.

The “2013 Federal Reserve Payments Study” expands on and updates the summary of results the Fed released in December as part of a regular series of statistical reports on the U.S. payments market. The last such Fed study appeared in 2010 and reported numbers for 2009.

Other results added since December’s release include these:

– Among active general-purpose cards, credit cards (334 milllion) outnumber debit cards (283 million) and prepaid cards (159 million), but consumers are more active users of debit cards (23 monthly payments) than of credit (11) or prepaid cards (10).

– Online bill payments came to 3.1 billion, with biller-direct transactions accounting for only 261 million of this total.

– Evidence that electronic payments for small-value transactions are eroding check writing includes the fact that 45% of the drop in checks stems from a decline in checks for $50 or less.

– The Fed’s study of checks shows further opportunity for growth in person-to-person payments, with 10% of all checks, and 5% of total check value, falling into the consumer-to-consumer category.

The Fed report, the fifth produced so far, is based on two surveys covering financial institutions, networks, processors, and issuers, and a third survey that looked at more than 41,000 check samples from 11 banks.

—John Stewart