A pending MasterCard "staged wallet" fee, set to take effect in June, is setting a new tone for the emerging payments landscape.
MasterCard made no formal announcement of the pending fee, but informed some companies earlier this year it would charge the new volume-based fee as part of a registration process for third-party payment providers.
MasterCard is "revising its brand standards and rules in the U.S. around digital wallets to actively support the next generation of payments developed to enhance consumer experiences," MasterCard said in a statement provided by spokesman James Issokson.
The registration process exists "to ensure a proper level of management and oversight" to maintain brand and network standards, Issokson says.
For now, PayPal looks at the fees as business as usual, says PayPal spokesman Anuj Nayar.
"Negotiating fees is par for the course in our business operations," Nayar says. "Historically, our transaction expenses have been relatively stable over time, averaging just 1.06% over the past six quarters, despite underlying pressures from different components that comprise this metric, like the new MasterCard fee."
PayPal parent company eBay disclosed the fee in a regulatory filing and factored it into the 2013 budget guidance provided in January, Nayar adds.
EBay's share prices have declined since the first public mention of the MasterCard fee in its annual report on Feb. 1, losing about 12% of its market value, Reuters reports.
"Up to this point, PayPal has been a free rider on this entire process," says Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC. "Now, MasterCard is looking to make sure they don't leave money on the table through a third-party provider."
The introduction of cloud-based payments has moved digital wallet providers "well beyond the network's way of thinking" and MasterCard wants to ensure it is compensated, Crone says.
The fee would also affect Google, Square and other wallet providers. Representatives from Google and Square did not provide comment by deadline.
Visa CEO Charlie Scharf recently described the concept of a digital-wallet fee as "totally appropriate."
Aaron McPherson, a practice director for IDC Financial Insights, says the fee and the registration process hint at the sort of muscle the card brands could eventually exercise.
"If these [mobile wallet companies] get big enough to be a threat, Visa and MasterCard have the ability to shut them down," says McPherson, who suggested such a move could result in anti-trust litigation.
Mobile wallet providers could avoid the fee if, following the example of Visa's V.me or MasterCard's MasterPass, they choose not to list themselves as the merchant of record. But there's a disincentive to do that, McPherson says.
"One reason Square, for example, can charge less is they are aggregating. They can aggregate transactions from a single cardholder and run them through all at once to save on interchange," McPherson says.
Crone says PayPal and other wallet providers could act simply as a gateway or payment switch to get around the definition of a wallet provider.
"But the value is in the data, not the payment switching," Crone says.
PayPal and all other staged digital wallet providers hoard more than just merchant data, he adds. "They have data feeds and customer relationship information on every critical touchpoint before, during and after every sale, and they use the data to render competitive ads and offers at promotional premium levels."
MasterCard did not address what third-party mobile wallet providers could do to avoid fees or other measures connected to its registration process.
MasterCard also did not answer questions about the size of the fees or when they would go into effect, though eBay indicated it would be June.
Crone says his research indicates the volume-based fee could be as high as 40 basis points per transaction. For example, a $500 transaction could result in a $2 fee.
The digital wallet movement thus far has been led by technology providers such as Google, PayPal and Square, says Denee Carrington, an analyst for Forrester Research.
"These wallets sit between consumers and their bank cards that can be used to fund transactions made in the wallet," she says.
Issuers consider it critical to preserve a direct relationship to drive spending on their cards based on rewards and targeted offers—especially as digital wallet adoption ramps up, Carrington says.
"This is further evidence of how early we are in the digital wallet evolution," Carrington says. "There is still a great deal of complexity and uncertainty and business models will continue to evolve."
PayPal has a history of using pricing incentives to encourage customers to fund their PayPal accounts directly from a bank account instead of a credit card, Carrington says.
"This approach is not likely to work as well as consumers begin to use PayPal in-store," she says. "Consumers want flexibility and payment options that meet an array of general commerce needs."
MasterCard's registration process is also "a brand play," says Jeffrey Green, director of emerging technologies advisory service for Boston-based Mercator Advisory Group. "With PayPal and other digital wallets, MasterCard felt it was losing brand recognition."
In some digital wallets, consumers may not even see the MasterCard brand, Green says.
The card brands have another weapon in their arsenal: their own branded digital wallets. In late February, MasterCard announced the MasterPass digital wallet. Visa Inc. offers V.me, which its first bank partner, PNC, praised for preserving the same cardholder data it would see for a swiped card transaction.
How PayPal responds to the fee could set the stage for other actions in the market, says Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup.
"PayPal is getting real close with Discover and, even though they can't take MasterCard entirely out of the picture, they could develop some sort of loyalty play with Discover on their wallet," he says.
Issokson says the digital wallet operator registration program was not put in place to create an advantage for MasterPass over other wallets, including those that act as a merchant of record.
Rather, he says, MasterCard wants to ensure the integrity of its brand and network "as new ways of working with the network continue to evolve."