Can Merchant Customer Exchange can pull payment volume away from Visa, MasterCard?

TUESDAY, OCTOBER 1, 2013

A Credible Threat to Visa, MasterCard

Sterne Agee says Merchant Customer Exchange can pull payment volume away.

We believe that the Merchant Customer Exchange has the potential to pull a modest amount of payment volume away from Visa and MasterCard over the next few years (about 1%) with the potential to pull a greater amount over a longer time frame. With that said, Merchant Customer Exchange (MCX) still faces significant hurdles including launching its service and signing consumers up, all the while juggling the potential competing interests of its large merchant partners. Although we are assuming that MCX’s payment choices will bypass Visa (ticker: V) and MasterCard (MA), the networks could ultimately reach agreements with MCX.MCX was formed in 2012 by a group of many of the largest merchants in the U.S. with the purpose of offering consumers a mobile commerce platform that works seamlessly across all merchant participants.

In our opinion, these merchants view the movement to mobile as a once-in-a-lifetime opportunity to gain control over a new communication and payment form factor and have therefore decided to take matters into their own hands by creating MCX.

We believe the two main goals of MCX are to control and/or lower payment processing costs and to control data. Many MCX merchants have been among the most vocal against the cost of interchange fees while also expressing concerns about “their” data being captured by third parties and then being sold to competitors.

MCX merchants should be able to achieve their goals if MCX is the only mobile commerce platform accepted at MCX merchants, the payment options within MCX are among the lowest cost, MCX enables the capture and use of data to increase sales while preventing third parties from accessing the data, and consumers increasingly use MCX while shopping and completing purchases at MCX merchants. All of this is obviously easier said than done!

Based on public comments by MCX, our conversations with people directly involved with MCX and others with knowledge of MCX, we expect MCX to launch its service late next year with a real-time debit payment option that bypasses Visa and MasterCard.

Financial Information Services (FIS) has been hired to build the authorization and settlement capability of MCX. FIS owns the NYCE network PIN debit network and we expect MCX’s payment capability to be built on top of NYCE’s existing rails. In order to use these new rails, we believe consumers will have to give MCX their checking-account data.

Some believe that MCX will be built on top of the Automated Clearing House (ACH) network, but we do not think this will be the case. Also, as a new network, we believe that banks will have the ability to decline connecting to MCX, thus potentially creating a large amount of tension since banks will likely not want to cannibalize their own interchange income, but they also want to serve their customers.

We believe that MCX has a number of factors working in its favor including: 1) The market for mobile wallets remains highly fragmented with no clear leader today so MCX is not losing much of a first-mover advantage as its service is being built; 2) MCX merchants account for over $1 trillion of volume and about 10% of the volume at Visa, MasterCard, American Express (AXP), Discover Financial Services (DFS), and the PIN debit networks combined so MCX clearly has the ability to throw its weight around; 3) MCX holds its merchant members to an exclusivity agreement that prevents them from accepting any other mobile wallet, which essentially locks out [ eBay (EBAY) unit] PayPal, Google (GOOG), Isis [a mobile-phone commerce platform backed byAT&T (T), T-Mobile US (TMUS) and Verizon Communications (VZ)], etc. from MCX merchants; 4) Consumers have readily adopted mobile and decoupled debit solutions at Starbucks (SBUX) and Target (TGT), respectively, which we look to as test cases for MCX.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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