MCX Wallet – QR Codes and Gemalto?

Rumor is MCX is going with a “Starbucks model” QR code payment mechanism. Gemalto is rumored to have won the wallet (… arghh why another one?).

There are many Merchant benefits to this approach, primarily it skips the entire bank owned payment network as QR codes are read directly by the ECR (IBM, Micros, Aloha, NCR, ..) with minimal hardware changes.  MCX members with Loyalty cards (ex CVS) would be able to skip the phone based wallet and leverage common MCX infrastructure (cloud) to enable payment on loyalty cards.

Fraud infrastructure will be critical to the success of this approach. Retailers have tremendous historical data for loyalty card customers… but they really don’t know who their customers are. Banks are certainly able to help solve this fraud, identity and reputation problem. MNOs may also be able to add value here IF they move quickly (example Payfone would be perfect here).

Another story I heard was the Starbucks was a founding member of MCX, but then left. If this QR code approach is accurate, their departure makes sense.. as they are the team that paved the way for the success of this approach. Why would they throw their technology and standards away for something exactly the same?

The payment mechanics of all this certainly look good. However what will be the consumer value proposition? I hope this QR code can be ported to other wallets (let the customer decide).


23 thoughts on “MCX Wallet – QR Codes and Gemalto?”

  1. How do QR codes address “cardholder not present” aspect of the transaction (I don’t think banks will be prepared to view it differently, under the circumstances)?

    1. excellent question that I share. My guess is that there will be a PIN, or something relating to the QR code generation that is 100% dependent on the phone’s information (aka IMEI). In other words the QR code changes every time.

      1. There are many systems that implement remote transactions with strong ENOUGH security. I helped to build some of them. We separate actor identification from actor authentication and from transaction authorization. Normally, something that you have identifies you (e.g. MSISDN from you SIM/UICC; IMEA is tough) and PIN or other passcode authenticates you (something you know). There are also systems that tie your voice print to the MSISDN (or other biometric – something that you are). Also, don’t forget that there always is a second party involved (payee) – thus you get to auth the 2nd party and the other party auths you (e.g. before you give ok to the transaction you could see payee data on the screen of your phone; and vice versa).
        What needs to be kept in mind is that security must not trump usability. The only system that is 100% secure is one that is turned off.

      2. Well, the conundrum is: there are indeed many interesting and secure payment alternatives (I am deliberately not using word “solutions” here), but… will banks accepted them? We are working on a cool biometrics-based payment pilot, and we have an issuer (scheme, in fact…) onboard because otherwise – despite space-age security – transaction would still be CNP.

        Now, retailers conceived MCX as more cost-effective alternative to the existing infrastructure. I am struggling to understand how that can achieve that “cost-effective” factor without issuers involved. Yes, you can bypass the schemes (good idea, anyway…), but the issuers do control the last mile.

      3. Alex- please take a look at my comment below (re. sources of tx funding).
        There is no cost-effective business model that stacks mobile distribution value chain on top of IX value chain. The entire transaction value chain will be collapsed. It makes no sense to “charge” a QR transaction executed on the cloud to a payment card. What you need is a simple access to electronic account (your electronic account to be sure) to debit the funds. This will happen and is happening. We keep discussing alternative payments and keep using terms like “issuers” – which assume the legacy processes and parties. Banks which are custodians of your funds, will be compensated for storing your funds and making them available for use. But in the brave new world they may not be (may not have to be) “issuers”.

      4. Mirek, the point is – there is no problem with payments to solve. Cards works really well. Mobile, MCX etc – do consumers really need all that? I don’t think so…

        As Tom said many times, (a) there is no problem in payments, and (b) there is no money for those who solve that (non-existent) problem.

        However, there is a problem with advertising. And a gold mine as reward.

    2. Alex – I agree with Mirek on the new paradigm where “issuers”, and possibly even “card networks”, “CNP” may not be applicable. MCX may not worry about V/MA/AXP/D’s “card not present” high rates in their new infrastructure.. If they offer an alternative instrument with a significant discount, they may not worry much about the higher CNP rates and possibly they may not even care about the “liability shift”!

      It looks like MCX is working with Gemalto to improve the “something present” (RedCard, Fast Forward) model. If they incorporate the prepaid feature into these accounts (pre-fundable like PayPal/Dwolla), they can probably give more discounts as they would have less risk mgmt costs.

      As an example, we may possibly see a cost structure like this:
      Pay with MCX prefunded account: $x
      Pay with cash: $x + 1%
      Pay with MCX card: $x + 2%
      Pay with traditional credit card: $x + 5% (or 6% or 7%)

      On the other point – there is no problem with payments. I completely agree. However, it is too expensive and that is the problem! If that problem can be solved with better advertising problem, the reward is a diamond mine! MCX maybe shooting for that.

      1. So there is no problem with payments. They are just too expensive and not ubiquitous. And cash transactions are predominant. And cash handling costs 5-10% of value. And electronic ticket value is some 30% larger comparing to cash. And sales are lost when customers have no funds in the pocket or acceptable instrument. LVP and micro transactions are still untouched in brick and mortar and on the web. And MCX is just an exercise in futility, a tantrum that Wal-Mart is throwing. And…

        1. Mirek, could I challenge you to make your point a little more politely. I complete agree with Alexander here. How many times have you left a merchant without your goods in hand because they didn’t take cash? Did you (as a consumer) have a problem with payments?

          Merchants have the option not to accept Amex, Visa, MA, or Cash… it is their choice. All of these options have different costs.

          Merchants also have a choice to create an alternative.. which is what MCX is doing. Will it be successful? who knows, but I am certain it will be more successful than any NFC trial that has ever been run. There needs to be a counterbalance in payments.. networks biased toward banks have the issues you outline above. There will be different issues facing a network run by merchants.

      2. Tom- I know that you agree. But you have not made your point.
        We all know that current methods of payments work as designed. If that is what you mean that there is no problem, that I concede the point. But please just re-read that last paragraph of last post.
        There is plenty of room for improvement especially on the cost side and in term of ubiquity. But I repeat myself.
        And to answer your question I hardly ever carry cash and sometimes get stuck because of that.
        On the merchant side, I am sure you know how much it costs to process coins, just to give one example.
        Finally you and I agree that there is no more money in merchant’s fees budget – but that there is plenty of money on the marketing side. Someone who figures out how to tap into that budget in a smart way will hit the jackpot. the payments can be then given away for free.
        So my general point is: you may not call these issues payment problems, but they need to be sorted out. They are business problems in the payment process.

  2. It’s only a matter of time when multiple alternative sources of transaction funding will be introduced and integrated with approaches such as MCX/QR and the entire 4 party value chain will be removed from the equation. With the cloud based architecture there is no need or use for interchange networks (as understood today). Direct access to any electronic accounts will be crucial and regulators need to look into this matter: a consumer with bank account at Bank X should be able to direct a payment services provider PSP Y to gain access to his bank account at Bank X and Bank X should not have a right to refuse (under equable terms of a business deal). This now works reasonable well for (offline) ACH. It’s time to seriously consumer a real time version of it a la EFT networks.

    1. excellent question. My guess is that Gemalto has leveraged their substantial leadership in security tech to construct a one time use QR code (software) leveraging phone device information. Another competitor for the project was Padient, which required data connectivity to a cloud service in order to generate the bar code. There are substantial signal issues in most large stores.. and the latency (and availability) really killed them.

      Gemalto could possibly even make the case for a TSM type of a model where the QR code is read and credentials are mutually validated… I do cringe at the thought of mentioning QSR codes and security.. but hey its still a giant leap above mag stripe if it is one time use.

  3. More details (of course rumors) on MCX here:

    With Gemalto, FIS, FirstData helping the processing.. Supposedly, the transaction cost (4c) beats Mike cook’s 5c vision!

    The question now is how much of this saving goes to the consumer. What incentive will change his/her behavior to use this MCX wallet and forego the card protection and the actual credit?

  4. What puzzles me is this. My preferred payment method is my Amex card. I am sure it’s not just me and Tom who like it, i.e. consumers do have reasons to use credit cards for payments. Why on Earth would I start messing around with QR codes etc? Indeed, did I see a penny from the savings Durbin brought? Whom are retailers fooling?

    There are ways to make a consumer switch to a different payment method, say, a closed loop card. And to convince major issuers to become part of such solution. That requires a carrot. On a plate, not up the… nostrils.

    1. True, Alex!

      Say, a 5% discount (just like Target’s Redcard) for a large ticket item might be tempting..but if I need the card purchase protection, I’ll think twice.

      Any less discount (even if the merchant passes the full savings, it will be around 2.5%), and that too for a smaller ticket item – well, I would still use my card coz of rewards, txn accounting, zero liability, protection, etc..

      1. AP, PR I agree with you both. MCX may be totally underestimating the challenge of consumer acquisition. But look at Starbucks success… I believe each merchant will need to act separately in incenting USE by consumers. Some retailers want all value to be tied to their loyalty program, others around targeted incentives or everyday low prices (ELP)… Amex has a single strong brand and a single defined value proposition. MCX seems focused on the backend low cost payment infrastructure and “capabilities”, while each retailer will be responsible for defining how this payment service is integrated into its overall consumer marketing, acquisition and loyalty strategy. Just as Visa is just the network, and the issuers create their own loyalty programs.

  5. Merchants (all payees) can give you all sorts of reasons to do things they want you to do. Do you have a supermarket card? I don’t know if you do grocery shopping, but if you do see how consumer behavior is influenced by daily/weekly deals. People can be redirected in other ways just like you were redirected to AX for payments (or I was to my 2% cash payback on everything MasterCard).
    Finally and slowly we are coming to the point that payment transactions price (to the beneficiaries) will be commensurate with the payment transaction cost (which is near zero when consumer risk is taken up separately from risk-free money movement by people in the business of lending and risk management). And smart merchants (or other players) will figure out ways to use this brave new world to their competitive advantage.
    By the way, there are other (better in my view) ways to accomplish what QR data exchange gives you. But let the free market decide.

  6. Good point about adding value proposition on top new payment method.

    However, if one needs to offer incentives (that cost money) to drive the use of a new payment method (that costs money to implement), financial viability of the above approach in case of low-margin retail sounds questionable..

  7. Not all merchant expenditures are the same. Merchants do not complain about the need to spend money. They do spend money to make money, in large quantities. The problem is the overpayment for a service that has inherent cost of a penny and cost 35 cents. Such difference of ~30 cents spent to bring 5 (new or incremental) dollars in revenue is money well spent. Just ask Google advertisers. Smart players will not offer incentives just to redirect the consumers to alternative instruments but to alter shopping patterns or as it was said above to fund a new “consumer marketing, acquisition and loyalty strategy”. So this is not about “redistribution” or “reallocation” of a fixed pool of money but about growing the pie.

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