The impact of digital wallet platforms on traditional loyalty and rewards programs is a hot topic right now. The uncertainty about these platforms and how they work is driving concerns among merchants and consumers alike. This recent NerdWallet article outlines some of the problems that digital wallets may cause for the tracking and attribution of credit card rewards.
“Digital wallets are appealing to consumers not only because they offer convenience, but also because their encryption technology adds a measure of security to everyday transactions. Many digital wallet services function by charging the transaction to their own payment account and then charging you separately. For example, when you use the PayPal app or Google Wallet to buy groceries at a grocery store, it will be listed as the merchant on your credit card statement instead of the grocery store.
The problem is that if you have this credit card that offers limited 6% cash back at U.S. supermarkets, you’ll miss out on the extra cash back bonus because the credit card issuer sees an MCC based on PayPal or Google as the merchant and not the grocery store.”
The article also points out that some newer digital wallet offerings may not be subject to the same types of problems.
“Unlike PayPal and Google Wallet, Apple Pay authorizes transactions by tokenization. The process works by removing the credit card number and replacing it with a random number (called a token) that expires after the purchase. Not only does this prevent fraudsters from stealing the information and using it, but it also keeps the user’s credit card information off the merchant’s servers, where it could be vulnerable to hackers.
Because Apple Pay uses tokenization to secure the transaction instead of using its own payment account, a grocery store purchase made with Apple Pay would reflect the grocery store’s MCC instead of Apple’s, ensuring that you still earn your bonus rewards.”
Ultimately, while the concern over merchant category codes is relevant to older (and in the case of Google Wallet, defunct) digital wallets, it is not likely to be an issue with the next generation of tokenization-powered wallets that will follow in Apple Pay’s footsteps (Android Pay, Samsung Pay, etc.)
Overview by Alex Johnson, Sr. Analyst, Credit Advisory Service at Mercator Advisory Group
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