Last week, The Wall Street Journal reported that AT&T, Verizon and T-Mobile USA had dramatically scaled back plans for their NFC mobile payments start-up, Isis.
The joint venture had reportedly scrapped its plans for a standalone mobile payments network in favor of a basic mobile wallet, leaving the carriers funding the venture wondering how to make money off the project.
Now, Isis is coming out to clarify exactly what happened.
Jaymee Johnson, head of marketing at Isis, confirmed that the joint venture had given up on building its own mobile payments network in favor of a basic NFC-based mobile wallet service.
However, Johnson took issue with how last week's report construed the changes.
As Johnson explains it, Isis was forced to reevaluate its strategy after financial reform legislation made it more difficult for companies like itself to make money off payment networks.
Isis had planned to charge lower fees than existing payment networks, enticing merchants to sign up for the service. However, an amendment from Sen. Dick Durbin's (D-Ill.) in a major financial reform bill passed last summer put limits on the amount of money large banks could charge merchants on swipe fees for debit cards.
"Previously, merchants saw potential in mobile, but the most tangible reason to adopt it was to reduce the acceptance costs they pay [for debit card transactions]," Johnson says. "In the post-Durbin world, merchants had achieved the reduction in acceptance costs they were looking for and weren't really in a position to favor one method of payment over another."
One month after Isis made its formal debut, the Federal Reserve announced that it was lowering the swipe fees on debt cards by more than 70 percent under provisions of Durbin's amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The caps are expected to take effect this summer.
Before the Federal Reserve issued its proposal in December, Isis had believed merchants would quickly adopt its mobile payments service because it would reduce the cost of electronic payments. Swipe fees charged by banks and credit card companies posed substantial costs for retailers before the passing of Durbin's amendment.
However, merchants had less incentive to adopt a new payments system – especially one that would only work with specially-equipped smartphones – after Durbin's amendment passed and the Federal Reserve put substantial caps on the amount of money that retailers could be charged for debit transactions.
The legislation left Isis without the bargaining power it had counted on to get its technology into retail stores.
This left Isis in a sticky spot. Merchants were the third leg of the stool needed to get the joint venture's NFC-based mobile payment business off the ground – without NFC terminals at the point of sale, there was no way for consumers to use their NFC-enabled smartphones to pay for transactions. But with the passing of the Durbin amendment, retailers had no incentive to adopt Isis' payment services – the fees had just been cut on their existing credit card services, so they had no reason to shoulder the cost of an additional payment network.
"They weren't likely to have any bias toward one payment network over another because all the payment networks were cheaper," Johnson says. "That posed a question about how to go to market."
Johnson said Isis had received considerable interest in its services from existing players in the payments industry, as well as merchants, after the Federal Reserve announced the fee caps, further dissuading the company from building its own separate payments network.
"We've had an unexpected degree of alignment with the existing payments industry," Johnson says. "From that standpoint, we didn't need that price setting control that the payment networks play today."
Isis ultimately decided it would be more cost-effective to run its service on existing payment networks run by the likes of Visa and MasterCard instead of building its own network, which would have been a complex and expensive undertaking with limited potential for return on investment under the Durbin amendment.
Before Isis decided to change course, the company had planned to issue debit and credit cards under its own brand, instead of allowing customers to transfer their existing accounts to the Isis service.
By partnering with existing payment networks, Isis will be able to transfer customers' existing debit cards and credit cards to their NFC-equipped smartphones. This is expected to help Isis get to market much faster than it would have if it had built its own payment network.
Johnson conceded that piggybacking on a third-party payment network cuts out a source of income from fees, but said the service would still have two streams of revenue: the service Isis provides to banks to extend their credit card services onto NFC-enabled smartphones, and advertising revenues from retailers trying to get customers to buy more goods once they're in stores.
Isis may have decided to change course even if the Durbin amendment hadn't passed, Johnson says. By leveraging existing payment networks, the company avoids the hassle of building its own network and expands its reach. It also loses a potential source of revenue by eliminating the fees it could have collected from its own payments network.
Now, Isis' scope is limited to a mobile wallet, but Johnson doesn't see this as a setback for the venture – he says it will ultimately help the joint venture to reach more consumers, and do so faster.