The evolution of the digital wallet has seemed to accelerate in recent months, weeks and days, led, in my mind, by some important payment product launches by the retail community. These developments combine the long-standing heft and influence of America’s largest retailers with a seemingly more aggressive stance by these companies to both assert their primacy in the customer relationship (which they share with banks and other payment services providers) and their critical role as the fee-paying customer in the retail payments ecosystem. Given the overarching importance of the mobile data network in transforming all businesses, it is not surprising to see these dynamics playing out in the form of digital wallets.
Four major, recent developments stand out as proof points for a shifting competitive frame in which mega-retailers push for deeper customer relationships and more advantageous payment economics:
- Costco’s New Co-brand Deal. In March, Costco concluded a bidding process that combines a co-branded credit card program and an exclusive acceptance arrangement with a major international card brand. After several years of partnership with American Express, Costco announced that it would move its co-branded issuing to Citibank in partnership with Visa, who will serve as the co-brand network and exclusive acceptance network for credit cards at Costco. While Costco has long employed this unique and aggressive payments acceptance strategy, this routine re-negotiation of an expiring contract will reportedly reduce Costco’s interchange expenses by one-third and allow the discount retailer to express these savings across a Visa cardholder base that is more than ten times that of American Express. While not technically tied to a digital wallet, one could imagine that Costco has plans in that realm and that its new Citibank Visa co-brand cards would logically play an important role in it. We presume the new Citibank Visa card will maintain a reward structure similar to the current American Express product, through which consumers earn attractive cash-back rewards for their spending in the form of certificates that can be redeemed at Costco.
- Chase Pay and MCX. November’s Money 2020 conference brought the debut of Chase Pay, a digital wallet variation of the ChaseNet closed loop arrangement struck by JPMorgan Chase and Visa last year. Chase Pay is a QR code-based payment method in which Chase card transactions are routed directly from a participating retailer’s POS to Chase directly, bypassing the retailer’s acquiring processor and the card network in the process. Under this direct switching model, Chase agrees to charge no network fees or merchant processing fees to the retailer, and protects the retailer from fraud liability. Importantly, Chase announced that, by using Chase Pay, it will be possible to install Chase credit and debit cards in the CurrentC wallet being deployed by the vast MCX retailer consortium. This news was surprising in that MCX had been seeking to control payment acceptance costs through the use of ACH transactions and private label and co-brand cards. While not disclosed, it seems likely that Chase offered an interchange concession (in addition to the benefits enumerated above) in order to gain placement in MCX’s wallet.
- Amazon Store Card. While still relatively quiet in the market, Amazon introduced its private label Amazon Store Card in cooperation with Synchrony last spring. The basic form of the product is a relatively generic private label card account (which I say metaphorically, as no physical card is issued), but Amazon Prime members who obtain and use the card receive a 5% discount on their purchases at Amazon.com (or the option for interest-free installment financing on items costing over $149). This is a powerful incentive to shift consumer payment behavior, first used by Target for its private label REDcards, which grew to represent over 20% of tender at the large discount retailer. It will be interesting to see how the market responds if Amazon begins aggressive promotion of this product, but we believe the impact on card issuers (especially Chase, as the issuer of the Amazon co-branded Visa credit card) could be significant. Frankly, any share shift at all within the payment mix of the huge and fast-growing online retailer is, by definition, significant.
- Walmart Pay. Just last week came the announcement of Walmart Pay, another QR code-based payment method that will be housed within Walmart’s popular mobile shopping app. Users of the app will be able to install any credit, debit or gift card accepted by Walmart in the app, as many have already done to make online purchases at Walmart.com (which is the second largest eCommerce site in the U.S., though far smaller than Amazon.com). As with Chase Pay-MCX and Costco-Citibank-Visa, we suspect that Walmart has negotiated concessions in terms and pricing (in this case probably with the card networks) in order to neutralize the disadvantages of card-not-present credit card and unregulated debit card transactions via QR code and perhaps to move interchange charges below the standard rates published by the card networks. Interestingly, Walmart is a founding member of the MCX consortium. While the company has reiterated its ongoing support of MCX, this bold introduction of Walmart Pay would appear to undermine the MCX value proposition and market positioning. It’s not at all clear how Walmart might explain differentiated value propositions for Walmart Pay and an MCX-powered payment option to its customers.
These programs indicate a new-found willingness by retailers to try to shape the payment preferences of their customers, often utilizing in-kind loyalty incentives that drive business back to the retailer itself, rather than bank-sponsored reward programs that often provide third party rewards (e.g., airline miles, redeemable point currency, cash-back). At the same time, mobile apps facilitate a more intimate connection between retailer and consumer, such as the ability to know when a customer is visiting a store, while private label and co-branded cards deliver additional insight into who customers are and how they spend their money.
It is becoming clear that digital wallets will take many forms and come from multiple sources, likely reflecting the finite number of commercial relationships that assume special importance or value in the consumer’s life. The notion circulated not long ago that a single, “master-wallet” app would facilitate and guide consumer payments seems unlikely at this point.
That said, multi-merchant wallets will continue to have a place in the consumer’s financial life, providing an added measure of convenience for transacting at the long tail of small merchants, as well as at larger retailers where the strength of relationship does not justify the use of a dedicated app in the consumer’s mind. PayPal and the mobile wallets (Apple/Android/Samsung Pay) do this today. Checkout systems from Amazon, MasterCard, Visa, and American Express are attempting to do the same, as are some individual card issuers by using Host Card Emulation to install their cards within their mobile banking apps. Their success will probably be a function of what value added services they can introduce to complement their convenience benefits and each of these approaches should garner some following among a group of consumers.
Smaller merchants will continue to struggle to control payment acceptance costs in a world where they feel they must be passive takers of a range of consumer-determined payment instruments. Square and some other “next gen” payment service providers have improved the transparency and simplicity of acceptance pricing, but have limited ability to affect interchange costs and so far have not introduced alternative payment methods (e.g., ACH), which in any case, would need to be promoted through a consumer value proposition offered by the merchant.
Retail payments has long been a rather tilted game, with the largest merchants aggressively leveraging their huge transaction volumes to negotiate card acquiring fees that are frequently two orders of magnitude lower than those paid by local, independent merchants. We are now seeing that economic leverage gradually imposed on the rest of the payment value chain (short-circuiting network fees through negotiated, bilateral interchange) in a way that more fully reflects their importance of major retailers in the dominant consumer sector of the U.S. economy. The result will be some ongoing margin compression for the major financial players, which they could attempt to recoup through a range of actions, including pricing actions directed at smaller merchants and adjustments to consumer rewards programs. We’ll be watching the next set of moves on the payments chessboard with great interest.
This Payments View post was written by Glenbrook’s Bryan Derman.