A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

The latest version of the Mobile Payment Systems Game started in early 2015, with two significant changes in the structure of the Game.  First, the Mobile Carriers surrendered to Google. And second, Samsung entered into the game with its acquisition of a technology company that provides an alternative to Google Wallet. PayPal also joined the Game, allying itself with the Merchants, though this is a less-significant change than the other two. The structure of the game is presented in Figure 5.

Overview of the Game

Figure 5

Google and Mobile Carriers

On February 23, 2015, the Mobile Carriers announced they were conceding defeat with their Softcard payment system technology and forming an alliance with Google. The Mobile carriers are now supporting the Google system by preloading Google Wallet onto their Android phones and enabling Users to access the technology. With renewed access to Mobile Users through Android smartphones, adoption of Google Wallet will now be less hampered. In “Google Wallet Is Now Poised To Compete with Apple Pay After Its Deal with Softcard,” Davey Alba describes the change in alliance as follows:

The deal [with Google] marks a surrender of sorts for Softcard in what had been a war of attrition with Google. The venture [Softcard] kicked off in 2010, but its actual tap-and-pay app didn’t appear for another two years because of problems with development. Meanwhile, Softcard faced competition from Google Wallet, the NFC-based app introduced by the internet giant in 2011. The Softcard carriers blocked Google’s app, and that hurt Google Wallet. But Softcard’s own effort didn’t make as big a splash in the mobile payments space as the company had hoped.

Of course, Google still has to deal with the lack of Merchant adoption of NFC infrastructure, but at least Google is now, for the first time, effectively in the game.

Samsung

Samsung uses Google’s Android operating system on its smartphones, which means it has easy access to Google Wallet. However, in an effort to better compete with Apple, Samsung has decided to offer up its own payment system through the acquisition of LoopPay. The LoopPay technology works with the older magnetic stripe credit card technology to create a contactless system. The benefit of using the older technology is that Samsung’s system can be implemented immediately everywhere by Users, while use of Apple’s and Google’s systems are impeded by the slow adoption of NFC technology. In “LoopPay vs. Google Wallet: Which mobile payment method works better?” Amber Bouman describes Samsung’s situation as follows:

Samsung’s decision to nab LoopPay is an effort to distinguish itself against its main rival, Apple, by offering a service that’s already widely available. LoopPay has been in the mobile payments game since 2012 and it’s produced quite a few versions of its wire loop and magnetic field powered payment accessories, including a Charge Case, a keyfob, and now, the $50 LoopPay Card.

Wallet takes advantage of the existing Near-Field Communication (NFC) technology built into your phone, while the LoopPay Card instead uses a wire loop to create a magnetic field that mimics the stripe on your physical credit card when held near any point-of-sale system that asks for a card swipe. It doesn’t, however, work at terminals where you have to quickly insert and remove your card—like at a gas station or ATM machine, for example.

While Google Wallet’s tap and pay functionality works on any Android device running Android 4.4 or higher (save for these five devices), LoopPay works on most Android phones running Android 4.3 or higher, though there have been some compatibility issues.

Samsung’s payment system, Samsung Pay, will also be able to use NFC technology, which means Samsung won’t be out of the game when NFC terminals become widely adopted. It seemed that Samsung Pay might have had a jump on Apple Pay and Google Wallet by being compatible with existing infrastructure, as Jonathan Cheng and Alistair Barr report in “Samsung Looks to Outsmart Apple, Google on Mobile Payments.” However, Cheng and Barr go on to report that Samsung Pay won’t be rolled out until the “second half of the year.” Given the Credit Card Companies’ “liability shift” in October 2015 (more on this below) – compelling greater adoption of NFC technology at that time – that won’t give Samsung much of a head start.

PayPal and Merchants

PayPal acquired Paydient, which is the company whose technology supports the Merchants’ CurrentC technology. The PayPal – Merchant Alliance will enable Users to make purchases both in stores and online using a single payment system. As the Tribune Wire Reports in “PayPal to acquire mobile wallet provider Paydient”:

PayPal says the company says that the acquisition will let it offer its merchants another way for their customers to pay for goods. Merchants can use the mobile system both online and in stores in a variety of different payment types, such as store- branded credit cards and gift cards. Merchants can also use any payment technology in brick-and-mortar locations like QR codes or near-field communication to take payment.

Significant Issues/Actions

Liability Shift for Credit Card Fraud

As I have mentioned, adoption of Apple Pay and Google Wallet have lagged because the infrastructure (credit cards and Merchant terminals) has been slow to become adopted. More specifically, Credit Card Issuers have been reluctant to pay the costs associated with upgrading Users’ cards because not enough Merchants have adopted the new terminals. Likewise, Merchants have been reluctant to pay the costs of upgrading their terminals, especially since most Users have not yet upgraded their cards.

Back in 2011, the Credit Card Companies announced that in October 2015 they would shift liability for credit card fraud to anyone who hasn’t yet upgraded to the “contactless EMV chip technology.” Of course, this will provide a great incentive for Card Issuers to upgrade Users’ cards and Merchants to upgrade their terminals by this time, or else risk being held accountable for credit card fraud. Visa provides details “the liability shift” in “Visa Announces U.S. Participation in Global Point-of-Sale Counterfeit Liability Shift”:

Visa intends to institute a liability shift in the U.S. for domestic and cross-border counterfeit transactions effective 1 October 2015. Visa’s global POS counterfeit liability shift policies are designed to encourage EMV chip card issuance and acceptance in participating geographical regions, effectively creating a more secure environment for transactions within and between each participating Visa region. Note: The liability shift encourages chip transactions because any chip-on-chip transaction (i.e., a chip card read by a chip terminal) provides dynamic authentication data, which helps to better protect all parties.

With this type of liability shift, the party that is the cause of a chip-on-chip transaction not occurring (i.e., either the issuer or the merchant’s acquirer) will be financially liable for any resulting card-present counterfeit fraud losses. When a transaction occurs using chip technology, any liability for counterfeit fraud, though unlikely, would follow current Visa Operating Regulations.

The policy assigns liability for counterfeit fraud to the party that has not made the investment in EMV chip cards (issuers) or terminals (merchants’ acquirers). The policy encourages wider deployment of EMV cards and terminals.

By inducing Merchants to upgrade to NFC technology sooner than they otherwise might have been led to, the likely effect of the Credit Card Companies’ liability shift will be to speed up the rate of adoption of Apple Pay and/or Google Wallet.

On the other hand, there is the possibility that the liability shift might not compel quite the level of adoption of NFC technology that one might expect, especially at smaller retailers. According to Nandita Bose in “Costly shift to new credit cards won't fix security issues”,

Six of 10 small retailers in Chicago interviewed by Reuters said they had no idea about the deadline later this year and have no plans to upgrade their payment terminals. Three others said they had heard about the shift, but that their businesses were small and hadn't had problems with fraud that would justify the expense of installing new equipment. Only one business owner said she would like to upgrade terminals, though she says cost is an impediment.

Evolution of the Game

A summary comparison table of the characteristics of the different mobile payment systems is presented in Figures 6.

Figure 6

Merchants

•  The Merchants’ three-year exclusivity agreement on mobile payment systems expires in August 2015. Will Merchants who have upgraded to NFC (at some point) continue to block Apple Pay and Google Wallet?

I predict most MCX Retailers will choose to accept Apple Pay and Google Wallet rather than risk losing Customers. In fact, Target and Kohl’s, two member of the MCX Consortium, are members of Google Express (same day delivery services) (see Figure 7) and thus presumably already accepting Google Wallet (which is required for Google Express purchases), at least for those purchases.

Figure 7

MCX Retailers can entice Users to use CurrentC instead of Apple Pay or Google Wallet by offering them a small discount for doing so and still come out even when Credit Card transaction fees are taken into account. Even after giving Users a small discount of purchases, Retailers will still come out ahead, because they get to collect all the user purchase data. Indeed, such discounts are one of the key value propositions to Customers associated with using CurrentC to make purchases. According to Josh Constantine,

Discounts and coupons will be automatically applied to the purchase, and any loyalty program points will be automatically pegged to the customer’s account. CurrentC users will also be able to check their receipts in the app. These loyalty and discount programs may be the main selling point retailers use to try to convince customers to sign up for CurrentC.

•  MCX Retailers Can Speed Adoption of CurrentC by using it in conjunction with retailer-provided same day delivery services.

Especially with the advent of Google Express and Amazon Fresh same-day delivery services, many of the larger retailers have been trying to offer same day delivery services themselves (see, for example, WalMart delivery services, “Grocery shopping made easy: Save time and money with our pickup and delivery service”). Perhaps MCX Retailers can kill two birds with one stone – make (same day) delivery services to Customers contingent upon their use of CurrentC to pay for the transactions.

•  The Credit Card Companies’ “liability shift” occurs on October 1, 2015. Will Merchants pay to upgrade their terminals or will they stay with the old system and accept liability for fraud?

This question is a bit more complex that it seems at first blush. The technology at issue (NFC) is one that enables Merchants to accept credit cards in payment for purchases made by Users.

If the MCX Merchants have no plans to accept credit cards because they want their Customers to use their CurrentC payment system, then they don’t need to incur the technology costs of the upgrade.

If, on the other hand, MCX and non-MCX Merchants cannot afford to lose sales by not accepting credit cards from Users, then they can

(i) Choose not to incur the expense of the upgrade, but accept the liability for any credit card fraud, or

(ii) Incur the expense of the upgrade, but not have to accept the liability for any credit card fraud.

Other points to consider:

(a) In the US, currently 75% of Users have smartphones.

(b) Most people who use smartphones will presumably adopt Apple Pay or Google Wallet.

(c) The greater ease and convenience afforded by smartphone payment systems are expected to increase the volume of credit card purchases (or so the banks hope – see previous section “Mobile Payments Game v.2, Overview of the Game”)

(d) Taken together, (a) - (c) imply that if Merchants don’t upgrade to the NFC system and accept Apple Pay and Google Wallet, they risk losing out on greater sales volumes to a significant portion of Users.

Many of the larger retailers (e.g., CVS, Rite-Aid, Target, and Walmart) have already upgraded to NFC (they wouldn’t have had to block use of Apple Pay if they hadn’t already upgraded). Most, if not all, of the remaining (larger) retailers will presumably upgrade to NFC before the deadline, to avoid both the risks of losing sales, as well as the risks of being held liable for fraud.

On the other hand, many small retailers might not find it in their interest to upgrade, at least until adoption of Apple Pay and Google Wallet have become more widespread. As Nandita Bose reports in “Costly shift to new credit cards won't fix security issues”:

The upgrade of a single payment terminal to chip-and-PIN capability costs between $500 and $3000, depending on features…

Six of 10 small retailers in Chicago interviewed by Reuters said they had no idea about the deadline later this year and have no plans to upgrade their payment terminals. Three others said they had heard about the shift, but that their businesses were small and hadn't had problems with fraud that would justify the expense of installing new equipment. Only one business owner said she would like to upgrade terminals, though she says cost is an impediment.

•  Will CurrentC survive?

I predict that CurrentC will gain some traction, just like store credit cards have, if the Retailers make good use of loyalty programs, discounts, gift cards, etc.

Samsung

•  Will Samsung Pay survive?

Samsung Pay appears to offer no real value proposition over Google Wallet. Unless Samsung can find a way to better appeal to users of Samsung Pay, I predict it will not survive, and Samsung will eventually end up using Google Wallet.

Apple & Google

•  How will Apple and Google respond to the Merchants’ blocking of Apple Pay and Google Wallet?

When CVS and Rite-Aid initially introduced their block of Apple Pay, Apple responded to the incident with the following statement, reported by MacRumors:

The feedback we are getting from customers and retailers about Apple Pay is overwhelmingly positive and enthusiastic. We are working to get as many merchants as possible to support this convenient, secure and private payment option for consumers. Many retailers have already seen the benefits and are delighting their customers at over 220,000 locations.

By continuing to recruit more businesses who will accept Apple Pay (and Google Wallet) – and thus provide greater numbers of alternatives to (substitutes for) MCX Merchants for Apple Customers – Apple will continue to make it more and more costly for MCX Merchants to refuse to accept Apple Pay.

Unless the MCX Merchants can offer customers a compelling enough value proposition with CurrentC, they may very well end up losing Customers by continuing to block Apple Pay and Google Wallet. I suspect that after the Merchants’ exclusivity agreement ends in August 2015 (see section above on “Merchants”) many of the MCX Merchants (see Figure 7) will relent and return to accepting Apple Pay (and Google Wallet).

While larger Merchants have more to lose in absolute terms by not accepting Apple Pay (and Google Wallet), they may be able to offer better value propositions to Customers through discounts and loyalty programs when Customers use CurrentC. Smaller Merchants, on the other hand, may simply not be able to generate enough value to offer Customers. So it may end up that the smaller Merchants start accepting Apple Pay (and Google Wallet) again before the larger Merchants do.

•  How will Apple Pay and Google Wallet affect the values of the respective ecosystems?

It seems likely to me that Apple Pay and Google Wallet will become the dominant mobile payment systems and that both systems will continue to coexist together in the market. I think Gina Hall’s article title, “Google Wallet vs. Apple Pay: It's going to come down to which phone you own,” says it all, that Android Users will end up using Google Wallet and Apple Users will end up using Apple Pay.

There is the fact that Apple generates revenues from each payment Users make with Apple Pay, while Google does not generate any corresponding revenues from the use of Google Wallet. These revenues will certainly enhance the value of the Apple ecosystem for Apple, though not for its Users.

However, as I said in the introduction to Version 2 of the Game, it seems reasonable to assume that since smartphones enable mobile payment systems, eventually, Users will come to expect their smartphones to offer that capability. So, even though mobile payments are still relatively early in the adoption cycle, Users will come to expect having that feature available on their smartphones. In this case, the presence of Apple Pay and Google Wallet may not end up enhancing the value of Apple’s and Google’s respective ecosystems to Users as much as the absence of either mobile payment system would have hindered ecosystem value.