MasterCard's new wallet fee: taxing the competition?
MasterCard has opened a new front in the wallet war — a fee upon mobile wallet operators. The new "staged digital wallet operator annual network access fee" (SDWOANAF? A horrible acronym if ever there was one) is a kind of tax on what we used to call the "merchant of record" aggregators, and have more recently been called "cloud wallets." Not content to use common terms, MasterCard went and coined a new term with "staged digital wallet." Thanks for that.
MasterCard apparently announced the program a few months ago, but it went largely unnoticed until PayPal mentioned it as a potential threat in their latest quarterly report. Charlie Scharf, CEO of Visa, then piled on by saying that the fee was a reasonable response to the wallet phenomenon. Discover and American Express went on the record as having no plans for a mobile wallet fee, and Visa later backtracked, saying actually they also have no plans to levy such a fee.
Most of the discussion at this point has been about how the fee will affect PayPal. Yes, PayPal started the conversation, and they are a major part of a publicly traded company, but the threat seems overstated. The fee apparently does not apply to e-commerce wallets, so Paypal's exposure is limited to its POS initiatives. Furthermore, PayPal has multiple high margin funding sources, including ACH and idle balances, which further blunt the impact.
The new fee is likely to be a much bigger threat to Square and Google, who are more heavily invested in POS, and have no idle balance or ACH funding options. Google can weather the change — they already lose money on most transactions anyway — but Square’s already thin margins are going to get squeezed even further.
Smaller providers such as Level Up and GoPago will be in an equally tight position. An open question regards what I will call the "cross-network" wallet. (There we go, coining another term.) Visa and American express have said that consumers can load MasterCard cards in the V.me and Serve wallets. Is MasterCard going to charge them the fee? That would be interesting.
This type of "network access fee" was in many ways created in the wake of Durbin as a way to entice merchants to drive transactions to one network over another. By making it a monthly fee, the more traffic a merchant can send over the network, the more they can spread the cost across transactions. Such a fee structure also puts the revenue in the pockets of the network, not the issuer.
Before Durbin, the networks may have opted for a something like a new interchange category just for wallets, but now that option is less attractive. Of course, they are already charging CNP rated for POS transactions, but that revenue flows to the issuers. Now MasterCard can try to take a cut, too. Once a wallet provider has paid the fee, it would be in their interest to drive more MasterCard volume. Very clever.
For now, it appears that only MasterCard will charge the fee, but the other networks have a way of adopting each other’s innovations. It’s equally likely that MasterCard may back off when no one else jumps on the bandwagon — sort of like airlines trying to raise fares but failing when the competition doesn't follow along. Or Bank of America charging, then withdrawing, a consumer debit card fee.
Let the battle commence.
Aaron Press Aaron Press is Founder and Managing Director of Point02 Advisors. Prior to that he was Lead Strategist, Payment Solutions, for digital security provider Gemalto, and Director of Market Strategy for Chase Paymentech