As consumers warm to plastic card alternatives, such as contactless debit and mobile wallets, the roster of merchants that are brandishing self-branded payment options is also growing — and now includes fast food retailers such as Dunkin' Donuts (DNKN) and McDonald's (MCD).
For card-issuing banks, the increased acceptance of mobile and contactless payments is good news, since digital payments are more efficient to process. But the news isn't all good, since the aggressive moves by non-banks to brand and control customer relationships puts banks at risk of missing out on cross-selling and other opportunities to enhance relationships.
"On the back end, there will still be an involvement for banks, but you want to have the consumer relationship and the benefits related to that relationship as well," says Beth Robertson, director of payments research at Javelin Strategy & Research.
Dunkin' Donuts has released a new iPhone, iPod Touch and Android app that lets people purchase, manage and reload a payment card. American Express, Visa, MasterCard and PayPal are all supported.
Similar to the Starbucks mobile payment app, payments are executed by QR codes. And like Starbucks, Dunkin' Donuts plans to expand the payments application to include loyalty and merchant rewards that could prove lucrative for the retailer. In another new payments move, McDonald's plans to accept Interac Flash at a handful of stores in Canada ahead of a broader rollout in that country. InteracFlash will allow customers to make contactless debit transactions, with plans to offer mobile payments in the future.
"I could see why Dunkin' Donuts would want to do it — it gives them insight into how customers are using mobile phones and how they are transacting with the chain," says Gareth Lodge, a senior analyst at Celent. "The merchant will have first-hand data on who's making the transaction and the average spend."
For mobile and contactless payment applications offered through merchants, card issuing banks will still earn fees when the virtual cards or PayPal accounts tied to the new payment programs are loaded. But since the merchants are operating the application, they will control more of the revenue and data tied to the actual transactions. This relationship dilutes the benefits for banks, Robertson says. That better positions the merchants to cross sell and offer loyalty programs.
"For example, the funds for the Starbucks app go into a Starbucks bank account, but the difference that I'm thinking about is whether the financial institution is involved in supporting the consumer transaction, or is the transaction supported in some other area that's outside the banking environment?" Robertson says. She recommends banks stay abreast as new payments technology is introduced, and position themselves to offer mobile payments directly to consumers in partnership with merchants.
McDonald's and Dunkin' Donuts did not return requests for comment by Tuesday morning. Allen Wright, vice president of product management for Interac, says the firm has signed up Royal Bank of Canada (RY), Scotiabank (BNS) and TD Bank (TD) to offer contactless debit, as well as other retailers such as Quiznos. He says the business case for banks to offer contactless or mobile payments directly to consumers is pretty easy. "For issuers, this type of service is great to offer consumers directly, because contactless payments are typically lower value payments for everyday spending, which is also the bailiwick of debit," he says.
Despite the cross-selling and merchant rewards opportunity, the retail payment programs are not without drawbacks. The networks are typically closed — the apps can't be used at other retailers. "We will see more mobile closed-loop networks going forward, and that will have an impact on the bank revenues for interchange and that kind of thing. But at some point you will have consumers with 20 closed loop [apps] all with some balance on them. I'm not sure the benefit of that outweighs cash," Lodge says.
Interoperability of mobile and contactless payment programs among merchants is where banks can compete, since they have the ability to offer mobile wallet and other new payments over a broader network. ClearXchange is a bank-led mobile payments consortium that includes a large swath of the banking industry, though it does not cover the entire market. And the new Merchant Customer Exchange — a group of large national retailers says it plans to work directly with banks to deliver mobile payments.