Where Do MCX, PayPal Fit in an Apple Pay World?

Apple has a long list of supporters for its new mobile wallet, including a few key companies that had already thrown their hats in with PayPal and the Merchant Customer Exchange (MCX).

Target, one of the key backers of the MCX merchant mobile wallet, is adding Apple Pay to its mobile app. And Toys 'R' Us, one of the first partners for PayPal's retail push, is also an early adopter of Apple Pay.

PayPal is not a major proponent of Near Field Communication, the technology underlying Apple Pay, but it has experimented with NFC over the years. Retailers' support of Apple makes NFC a more likely prospect for PayPal mobile payments going forward.

PayPal could "turn NFC on very easily" if consumers suddenly take to the technology, said PayPal spokesman Anuj Nayar. But it's not a foregone conclusion that NFC will take off, even with Apple's support, he adds.

"This is still something that merchants will have to adopt in order for it to grow," Nayar said. "Apple mentioned 220,000 terminals 'enabled' for NFC, but they didn't say how many would actually be live. Plus it's still a small percentage of the 9 million terminals out there."

PayPal added support for NFC person-to-person payments in 2011, but later downplayed the technology, citing a lack of standardization. One merchant told PayPal's parent company, eBay, that it thought NFC stood for "Not For Commerce."

MCX, which unveiled its consumer brand CurrentC last week, had also ruled out NFC as it was developing the first iteration of its merchant-backed mobile wallet. However, the company left the door open to change, saying last year that it would "shift with technologies as necessary." MCX declined to comment on Apple Pay for this story. 

Whatever MCX and PayPal decide to do, it's clear that NFC is now "the de facto method for contactless payments," said Thad Peterson, senior analyst with Boston-based Aite Group.

In five years, virtually 100% of devices will be NFC-enabled, now that Apple is adding it to its new iPhones and its smartwatch, Peterson said.Apple's move is also a concern to PayPal's position in mobile commerce, considering that e-commerce merchants are likely to add an Apple Pay "buy button" to their apps when the payment system debuts next month.

"All of the sudden, there is a proliferation of buy buttons," Peterson said. "We have PayPal, Visa Checkout, Amazon, MasterCard and now Apple."

Merchants and consumers won't always know what to use, so confusion may rule for a short time, he added.

The fact that issuers are reportedly offering interchange breaks to Apple will leave others wondering how they can adjust their own costs, said Brian Riley, senior research director and analyst with Boston-based CEB TowerGroup.

"PayPal is not just going to sit there and do nothing," Riley said. "They will ask about interchange and there is also a possibility it would come out with some developer kits to interface with Apple Pay."

Even though "everyone will have to play with Apple one way or another," Riley said, such interaction could lead to significant confusion for consumers and the payments networks.

For example, Google allows PayPal as a funding method for Google Wallet purchases on its Google Play app store, but not for in-store purchases made with Google Wallet.

"If you are going to start stacking wallets on top of wallets, how far can that go?" Riley asks. At some point, it may become inefficient if a consumer is using a PayPal account through Apple Pay on the iPhone and linking it to a Chase debit card, he added.

Apple has the clout to set the standard for the industry, basically providing "much-needed direction" for merchants on where to invest in mobile payments, Zil Bareisis, a London-based senior analyst for research firm Celent, stated in his Sept. 10 blog.

It also helps that Apple's timing is aligned with EMV-chip card migration in the U.S. and any new terminal that the merchants install should be capable of accepting Apple Pay transactions, Bareisis said.

Most U.S. companies have until October 2015 to be able to handle EMV cards, which improve security over magnetic-stripe cards. The penalty for missing that deadline is a shift in fraud liability.

However, most of the largest merchants remain entrenched with MCX and many of these "were notably absent" from the initial list that Apple announced Sept. 9, Bareisis said. "But can MCX afford to boycott Apple, and can Apple Pay be successful without MCX merchants?"

PayPal, on  the other hand, appears willing to work with Apple if such an opportunity were to arise. PayPal is already a funding option for iTunes purchases.

"From our point of view, every company has its DNA, what it does well and what it bases its business on," Nayar said. "Google is a search company, Apple is a consumer electronics company, PayPal at its core is a payments company."

As such, PayPal has always been open to providing the payment component to another company's technology, Nayar added. "The open ecosystem and partner approach is something we are very committed to."