MAG Insights

Announcements from the MAG & Featured Articles

MAG CEO, Mark Horwedel, Quoted in "Merchants See a Dangerous Precedent in 'Honor All Wallets'"

JUN 3, 2016 9:34AM ET

Merchants sued Visa and MasterCard in 1996 when the card networks forced them to "honor all cards," and though the suit settled in 2003, the wounds are reopening with the spread of mobile wallets.

The card brands say no explicit "honor all wallets" rule exists and their focus is on the consumer experience — and thus, for a good consumer experience, merchants should want to accept any card or mobile wallet. Though this generally means merchants should support any Near Field Communication-based wallet, the messaging around this is chaotic for retailers and consumers alike.

"None of the networks have it explicitly described as an honor all wallets or honor all devices rule, but the network rules don't come neatly labeled like honor all cards,"  said Adam Levitin, a professor of law at Georgetown University Law Center. "I have trouble seeing a convincing justification for this rule, or whatever you want to call it."

Basically, an "honor all devices" interpretation comes about based on how the networks define cards "in their thick volumes of network rules," essentially wanting merchants to accept any card, any device, any wallet, said Levitin, who developed a report commissioned through the Merchant Advisory Group on the "honor all wallets" concept.

Stephanie Ericksen, vice president of risk products at Visa, explained Visa's position in an earlier interview with PaymentsSource.

"We support different mobile wallets out there, Samsung with magstripe, Android and Apple Pay with NFC, and we are not aware of any restrictions or rules about mobile wallets," Ericksen said. "It has been our belief that the consumer should decide how to pay, whether by card, phone or wearable."

Though it does not have a written rule requiring the honoring of all wallets, Visa does continue to want merchants to accept all credit and debit cards when presented, Ericksen added.

"We know more technology is available, and people are paying with cards, phones and watches," Ericksen said. None of the advancements should hinder a cardholder's choice and expectation about deciding how they want to pay, she added. 

In an emailed statement, MasterCard spokesman Jim Issokson said that the company regularly reviews rules and policies to ensure they are applicable in the evolving payments marketplace and that they ensure "a consistent, safe and secure consumer experience."

"This is especially the case as consumers migrate to more digital forms of commerce and leverage new ways to pay," Issokson added. "MasterCard recognizes the importance of providing flexibility to payments participants, especially merchants who seek to improve the consumer shopping experience."

He did not say whether MasterCard has a specific "honor all devices" rule or guideline, but said the card network works with merchants and issuers "to ensure our rules are aligned with current trends and advance next-generation technology."

The "honor all wallets" concept, especially one that is more philosophy than mandate, may seem trivial when mobile wallets are simply digital representations of bank-issued cards. However, many retailers have already built their own mobile wallets with their own branding.

These wallets, including Walmart Pay and the Starbucks app, typically work only in one retailer's store, but it's realistic to expect that they someday adopt a more open-loop model, said Leon Majors, senior vice president at Phoenix Marketing.

"The key pushback has been from Walmart and it is specifically targeted against Amazon, although there are others," Majors said. "Walmart, simply, in their view, does not want to do anything that helps direct competitors such as Amazon or Target [to their customers]. Technically, Visa could force Walmart to accept Amazon's wallet, then Amazon could insert marketing into that wallet to convince customers to move their purchases to Amazon."

Chaos at the Point of Sale

The technology commitment required for each wallet is also a factor. 

The most well-known mobile wallets rely on NFC, but Samsung Pay also supports a method that imitates a magstripe signal. Others use QR codes displayed on the phone's screen or terminal, and companies like Google, Square and PayPal have tested cloud-based systems that rely on little more than the phone's ability to get a signal inside the store. 

With all of these conflicting options — sometimes even from the same wallet provider — merchants that attempt to honor everything run the risk of creating a nonsensical payment experience. These include the CVS stores that kept their NFC hardware despite shutting down the option in 2014, or the Subway restaurant that has Apple Pay and Android Pay stickers on the door but a payment terminal that only shows the logo for Softcard  — a mobile wallet that shut down well over a year ago.

The situation is agitated by the added expectation that merchants implement EMV-chip card acceptance, which has generated its own issues around consumer experience and chargeback risk.

Especially in light of these concerns, there is less reason for card networks to endorse an "honor all wallets" rule in modern times than there was when payment cards were a new technology, Levitin said.

"There was a plausible argument that you needed the honor all cards rule in order to make multi-issuer networks work, especially in the days before you had interstate branch banking," said Levitin, who has studied the payments industry before and during his nine years at Georgetown. "A retailer in Maine being presented with a Bank of San Diego branded card, for example, might not know what that was."

A mandate for a particular type of payment acceptance technology does not exist in the U.S., though it is plausible such a directive could take hold in the future, Levitin notes in his report. But even without mandates, such as those unfolding in Europe, merchants realize that once a technology like NFC is commonplace, it is difficult to turn it off because consumers expect it to be available.

History Repeats Itself

It's not new territory for merchants. They have had conflicts with card networks over rules and guidelines before, especially with the dawning of the EMV age in the U.S., and particularly in how they are presented or communicated through acquirers.

Because of the "market power problem" created from a two-sided payment network with retailers on one side and issuers/acquirers representing the card brands on the other, it is not likely the issue of honoring all devices/wallets will be resolved without another legal fight, Levitin added.

"Past settlements haven't solved anything for merchants and nothing is going to happen on Capitol Hill, so the courts are the only open venue for merchants to seek redress," he said.

The history of electronic payments globally and "accept all" mandates has been based on a premise that if a consumer sees the card brand logos at the point of sale, they expect to be able to use that payment card at the terminal without any problems.

Honor all cards eventually became honor all products, to assure that merchants would accept preferred and gold rewards cards and other products, even though they didn't particularly like the sting of heftier fees on those cards, said Brian Riley, principal executive advisor with CEB TowerGroup.

"The essence of the current situation is that merchants are kind of running scared on the whole merchant acceptance thing," Riley said. "There will be some preferred plays, but if you get to the point where everyone has a different format, what are the merchants going to do?"

Calling the relationship between merchants and card networks "bittersweet," Riley said they will eventually have to do business together or there won't be a secure payments system in place. 

Rising Tide

Thirty-two percent of all smartphone-owning credit cardholders have loaded a credit or debit card to one or more mobile wallets, according to recent Phoenix Marketing research.

In addition, 67% of Millennial and 50% of Generation X smartphone owners have loaded a credit or debit card to Apple Pay, Android Pay or Samsung Pay. It stands to reason that upticks in adoption would prompt more usage.

The percentage of Apple Pay adopters who have loaded more than one credit card to the mobile payment service jumped to 74%, up from 58% a year ago, the report said.

It may not be a big deal for a restaurant to accept Apple Pay, but what about a Microsoft store or any other retailer that competes with Apple? 

Merchants simply are not keen to invite third party products to their stores' payment terminals, especially when they are not banks or credit unions, said Mark Horwedel, CEO of Merchant Advisory Group, which has issued its own position paper on the "honor all devices" issue.

"These might be competitors, or someone who wants to use your data," Horwedel said. "To me, that is a huge leap."

Visa or MasterCard likely does not view the situation in the same manner, Horwedel added. "Do they really care if it is a bank, credit union or non-bank, as long as the entity is going to pay them to switch the transaction? Probably not."