By David Dorf on Feb 12, 2014
Today MCX announced its adding Paydiant's cloud-based payment technology to its platform. Recall that MCX was formed by several leading retailers to build new payment technologies. Although not overtly stated, they are clearly trying to bypass the fees charged by the credit and debit networks for processing payments. These fees are quite significant. For example, the NACS estimates that in 2007 the 146,000 convenience stores in the US paid $7.6B in credit card fees while generating $3.4B in profits. Granted, credit cards have several benefits for merchants such as speedier checkout and elimination of cash handling, but those fees seem very out-of-line.
So how does Paydiant help retailers avoid fees? They are taking a "push payment" approach that turns payments upside-down. Typically the consumer hands over their account number to the merchant so that the merchant can extract the appropriate funds for the purchase. That account number can be a checking account, debit card, credit card, etc. The merchant hands off to the acquirer (the merchant's bank) which sends the data through one of several payment networks (like VisaNet) to reach the issuing bank (banks that issued the account) where the transaction is approved or denied. And of course everybody gets a cut along the way.
The push model instead has the merchant give the consumer their account number so the consumer can "push" their money into the merchant's account. When the merchant sees the money in their account, they release the product. By skipping the acquirer and network and going directly to the issuer, most of the fees are avoided. This method has the added advantage of better security because the consumer never exposes their account information. Think about that. Plus, this approach works fine with the existing POS.
The trick here is getting the merchant's account number to the consumer. Paydiant does that by displaying a QR code at the POS that represents both the merchant's account and the transaction amount. The consumer must use their mobile phone running the white-label Paydiant application to capture that data and process the transaction. The request goes into the cloud, and the authorization is sent to the POS where the merchant is informed of successful payment.
Snapping a picture of a QR code at the checkout isn't exactly the most natural thing. Using NFC or Bluetooth would certainly be preferable, but I assume that's a follow-up innovation. Now that brings the customer experience into focus. Thus far we've seen the huge benefits to the retailer, but what does the consumer get out of this? Well, nothing. In fact, this payment process seems more complex than swipe-and-sign. Perhaps those consumers worried about privacy will love this approach, but most people appreciate the simplicity of a swipe. (I still use a paper boarding pass at the airport even though I can get my boarding pass on my phone. Less can go wrong with paper.)
Payment is a really tough area to win because all the different constituents have to buy-in. Merchants wants low fees; Banks want low fraud; Consumers want convenience. It sounds easy, but its far from it.