Is MCX Betting On QR Codes and ACH?

In my recent report on Digital Wallets, I discussed a number of players which while still keeping their cards close to their chests, have a potential to significantly influence the payments market. One of them is Apple, which made headlines recently with their patent for cash distribution without ATMs – see Bob Meara’s excellent blog and my related comments for more details. Another one is MCX (Merchant Customer Exchange), a joint mobile wallet initiative amongst a number of the US retailers. The initiative was announced in August 2012, but the details have remained scarce since. The participating retailers have been talking about their desire to have a collective voice in shaping the future of mobile payments, and protect their data and customers. They have talked about developing a wallet, but it hasn’t been clear if they also had ambitions to create a new payment scheme or would rather rely on the traditional cards in their wallet. So I was intrigued to come across an article that appears to shed a little more light on MCX ambitions in payments. Citing sources close to MCX, the article suggests that MCX is indeed planning to build a new payment system based on QR codes and ACH payments cutting the transaction costs to 4c. Two cents would go to the FI for processing an ACH payment and the other two would go to the technology partners and towards future MCX development. If it is indeed a confirmation that MCX are inclined to build alternatives to cards, then it is very interesting. However, it is still not clear how such a payments system would work:
  • Would the QR code identify the customer, the merchant’s payment request or just the merchant?
  • Would the customers be asked to register their bank account details with MCX wallet in the cloud? I can imaging this would be a big stumbling block for many consumers.
  • Will the transaction be based on ACH debit or credit?
  • If it’s debit, how will the authorisation happen? If there is no authorisation, will the fraud costs just become unacceptably high negating any savings on the interchange? There is speculation that consumers would be asked to register their debit card, which would be used for authorisation over card network rails, and then the transaction would convert into an ACH debit for clearing and settlement. If that’s the case, the overall transcation costs need to include the authorisation fee as well. And it sounds very similar to many decoupled debit propositions, most of which have failed to ignite the market so far.
  • If it’s credit, the authorisation challenge turns into the authentication challenge. One way to solve it would be to ask a customer to log-in to their bank account (e.g. through a mobile banking app) and authorise a payment to the merchant. Somebody would also need to pass a token to the customer’s bank with the payment request details. This is pretty much how Online Banking ePayments (OBeP) networks work; however, attempts to build such a network in the US (e.g. NACHA’s Secure Vault Payments) have again had limited success so far.
More questions can be raised and that’s just about the technical aspects of the solution. Commercial and other questions might prove to be just as difficult to answer. Will the banks co-operate? Will the proposed restrictions for participating retailers to accept other types of mobile payments (e.g. Isis or Google) work against MCX? Will the stated desire not to share any customer data amongst the participants limit the commercial opportunity? And will the (inevitable) delays to a project of such scale and uncertainty grind the intiative to a halt before it even has a chance to take off? Only time will tell if MCX succeeds. For now, I suggest we continue to keep an eye on its progress with a healthy dose of scepticism.

QR Codes in Payments

Recently there has been a noticeable increase in announcements to use QR (Quick Response) codes in financial services and payments context. Celent has already blogged about how the code can be used to buy a Starbucks coffee. Last week, Smart Transactions launched a loyalty card, where customers can check their card balances (and receive instant merchant offers) using unique two-dimensional QR barcodes printed on the back of each card. And perhaps most interestingly, eWise, a company promoting Online Banking ePayment solutions, such as Secure Vault Payments in the US and eWise payo in the UK, also said recently that it would be launching a QR-based application by the end of the year. QR codes are essentially two-dimensional barcodes, which when scanned are able to convey the encoded information. The technology is not new – it has been developed in 1994 and has become very popular in Japan and Korea, but its adoption in the West so far has been limited. There are many potential applications for QR codes, most obviously in marketing and advertising, especially with the smart phones gaining ground. As the user scans the code, he or she can be redirected to a site further explaining the product, enriching customer experience, and enabling social interactions. According to Wikipedia, in Japan, QR codes have even been used in cemeteries on grave markers as a way to share additional information and unite mourners. So, how likely will we see this technology becoming mainstream in financial services, and particularly payments? Given that QR codes are easy to print, even by individuals, they are likely to be handy in certain use cases, such as small mobile merchant payments, potentially as a cheque replacement. Of course, many issues need to be addressed in order to use QR in payments effectively, not least the security. QR codes can be copied and re-used for fraudulent purposes, so any application using QR to initiate payments, needs to have strong authentication and authorisation capabilities. Consumer education and awareness is another barrier. Are QR codes a threat to NFC? Not really. NFC roll-out in the developed world is not without its own problems (see Celent post on Isis announcement), but in my view QR codes are likely to complement rather than replace NFC. And I think they will be much more relevant in marketing than in payments in the foreseeable future.