The new fee is to be applied to “staged” digital and mobile wallets that provide a way for transactions to be charged to a customer’s credit card without any details about the purchase being passed on to the payments network. PayPal and Google Wallet as well as a number of other new market entrants are all expected to be affected but “traditional” NFC wallets will not.
MasterCard is fighting back against a new generation of “staged” digital wallets that threaten to undermine its business model.
A new fee is being introduced from June 2013 that will see wallet issuers having to pay a premium for transactions funded by MasterCard credit cards — unless they take part in a new registration process that requires them to implement revised data sharing and transparency rules.
The new staged digital wallet operator fee applies only in the US at this time, and only to transactions which are ultimately funded by a MasterCard credit card and don’t pass details of individual transactions to MasterCard.
Staged wallets, like those offered by Google Wallet and PayPal, draw down the funds spent by their customers from a payment card or account that has been pre-linked to the consumer’s digital or mobile wallet. The problem, it appears, is that this process often means that valuable data about the details of the transaction the consumer has made is available only to the wallet issuer and is not passed on to the payments network, card issuer or account provider.
The new rules mean that staged digital wallet issuers will either need to pay the extra fee or sign up for a new digital wallet operator registration process. This, payments consultant Tom Noyes says on his blog, requires that wallet providers pass both a Wallet ID and a Merchant ID to MasterCard for each transaction, ensuring that MasterCard can continue to build a detailed profile of a cardholder’s spending habits.
The digital wallet operator registration program is needed to “ensure the integrity of our brand/network as new ways of working with the network continue to evolve,” MasterCard says.
“MasterCard is revising its brand standards and rules in the US around digital wallets to actively support the next generation of payments developed to enhance consumer experiences,” the payments network told NFC World.
“Part of this is a digital wallet operator registration process that ensures better visibility into the various digital wallets, an enhanced level of transparency, as well as the proper level of management and oversight to maintain the high standards and integrity of our brand and network. This also ensures consistency with our efforts/rules that currently balance issuer, merchant and consumer needs and rights.”
Details of the additional fee were revealed in a research note focussed on how the new rules will impact PayPal, which was issued this week by Nomura Equity Research.
“Now that PayPal has started moving to the physical point of sale, competitive intensity levels are rising as PayPal encroaches deeper into what has traditionally been the incumbents’ turf,” the authors say. Google Wallet and “merchant aggregators” like iZettle and Intuit GoPayment are also highlighted in the report but Square is expected to escape the fee.
“Square is an example of a new entrant working with the incumbents to provide them with the information they need,” the analysts explain.
“MA executives said they’re imposing the fee in cases where (1) MA cards are funding a number of transactions in a digital wallet operator’s wallet construct; (2) the MA brand isn’t being displayed properly, despite the fact that MA’s network is backing up those transactions; and (3) merchants enjoy the benefit of getting guaranteed acceptance. The fees are intended to ensure that MA gets adequately compensated for the value of its network.”
“Payment Networks Are Taking the Gloves Off: Incumbents Move to Protect Their Turf” goes on to quote Chris McWilton, MasterCard’s president of US markets, speaking at a conference on 13 March:
PayPal rides for free on the back of other business models. So they ride on the back of the networks for a card-funded transaction. They ride on the back of ACH, which is owned by the banks, and I think they’ve got to be cautious that they don’t get too big and start making people wake up and say wait a minute, I’m actually losing business here because of your moving into the physical space. And, by the way, you’ve been able to ride for free on the back of the networks and the back of the ACH system—time out here.
MasterCard “has not commented on the magnitude of the new fees, but it has said that they will be tiered and based on prior-year volumes,” the Nomura analysts say.
“We view these new fees as an effective vehicle for diffusing much of the frustration that exists among incumbents who today view PayPal as a free rider. We would not be surprised to see other incumbent payment networks follow MA’s lead.
“We remain confident in the long-term earnings power of V [Visa], MA [MasterCard], and AXP [American Express] and believe they’ll be able to successfully defend and preserve their competitive advantages within the broader payments ecosystem. We’re reiterating our Buy ratings on all three names.”
UPDATE Visa has come out in support of MasterCard’s staged wallet surcharge.