“For their return home, the Greeks dedicate this offering to Athena”. Apple Pay and increased mobile payment fees.

The Blogosphere has been alive with information on mobile payment and Apples introduction of Apple Pay. The flame-out of PayPal Off-line, Google, Amazon, ISIS (or whatever), and MCX (whenever) have the experts writing and talking about how, when and where mobile payment will become common place.

Enter Apple. While Apple may indeed be the first broad based mobile wallet to achieve consumer adoption, Retailers will remember Apple as Odysseus’ and Apple Pay as a wooden horse bearing higher payment fees. New fees may start arriving in the first statements and no doubt merchants will be asking about the tokenization, wallet storage and API fees. According to legend, “after a fruitless 10-year siege, the Greeks constructed a huge wooden horse, and hid a select force of men inside. Once inside the walls of Troy, the Greek force crept out of the horse and opened the gates to allow the Greeks to enter and destroy the city of Troy.” A fruitless siege might be a good way to describe the tug of war between retailers and banks; abetted by the technology, to describe the painful march to mobile payment. Apple brings scale and technology, but it is their Trojan Horse approach to payments fees and merchants opening the doors to Apple Pay seems eerily like the Troy opening it gates.

Apple deserves applause for devising a strategy that hides their transaction costs within the issuer as a share of interchange rather than charging the merchant directly. Herein the lies the “Trojan Horse” and the promise of higher fees in the future. Published reports indicate Apple will be paid 15 basis points by the issuer (Banks). Retailers need to ask themselves, how long before this cost is shifted to the merchant by way of a higher acceptance fees? My guess, about the same time Apple reaches 10 million Apple Pay consumers.

The big unknown is how high will fees go? The answer is as high as possible. Merchants often say there is little competition in the card fee world and therefore it’s a monopolistic business. Apple Pay can only add cost and another partner that needs to earn profit. 20 years ago banks convinced retailers to accept card based payment using low fees, the results are clear. As merchants open the gates and let Apple Pay in, they should hardly be surprised when Apple Pay is earning 100 basis points rather than 15, and it won’t be the issuer paying the bill.

New Bank fees set the stage for Merchant Issued Debit and Rewards.

The stage is set for an epic battle between the merchant community and the financial industry to win the consumers method of payment (MOP).  This week, BoA joined the list of financial institutions announcing either fees, or cut backs in consumer rewards programs, for debit card use .  Senator Dick Durbin sounded surprised when he said of BoA’s actions; “It’s overt, unfair” adding that “Banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works”. Many in the industry had long predicted that this would be the immediate result of the regulation (see my June 13, 2011 Blog).  Regardless of the merits of the regulation, or the banks reaction to it, one immediate result is that merchants have the opportunity to steer consumers to a lower cost form of payment (debit): the question; will they be able to leverage this opportunity, or will the payments industry adjust their payments offerings steering consumers to unregulated forms of payment with higher fees i.e. credit, pre-paid cards, etc.

The pivotal decision for merchants is how to recapitalize the anticipated saving from swipe reform and use that money as an incentive for consumers to choose a lower cost form of payment.  Many merchants, particularly in the petroleum and grocery industry are already actively competing for method of payment by offering ACH decoupled debit card programs (merchant issued debit) or cash discounts. For these merchants, and vendors offering alternative payments  like PayPal or National Payment Card Association, the Durbin Amendment is living up to expectations providing them with a strong tailwind to the merchant and consumer.

Merchants are understandably cautious as they approach payment.  While technology, investment and ramp time look like the heavy lift, the real challenge is to understand the economics.  Traditionally merchants have relied on the bank and card associations to deliver payments.  During the lead up to regulation one argument was that; “there was no competition for payment”. Merchants’ successfully argued this point, irrespective of the intense competition between banks for consumers. What was missing from the debate is that the reason consumers use one form of payment over another is often rewards. These rewards had been paid by the issuers of the card using interchange fees (as much as 50%), and now with regulation, that funding source has disappeared.  Therefore merchants can provide consumers with the same incentive to use a low cost form of payment by offering merchant issued rewards.

Finally, there is a saying “He who enrolls; controls”. Issuance or enrollment is a critical question for merchants choosing to compete for MOP using rewards. Assuming that the merchant chooses to offer rewards for a specific MOP, which MOP should it be, cash, PayPal, Google, or perhaps a merchant issued debit card.  The smartest strategy might be a flexible approach to payment where rewards are based on the costs associated with the method of payment, regardless of whether the rewards are paid for by the merchant, or a 3^rd party.