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    SCOTT KIRSNER | INNOVATION ECONOMY

    Digital wallet firm’s travails offer a lesson: Put customers before merchants

    A man uses a smartphone in front of an electronic stock indicator of a securities firm in Tokyo, Thursday, June 22, 2017. Asian financial markets were mostly higher after a plunge in oil prices dragged down energy stocks on Wall Street. (AP Photo/Shizuo Kambayashi)
    Shizuo Kambayashi/AP
    More consumers are using their phones to make financial transactions, and companies are competing to offer the platform of choice.

    The world’s biggest merchants — players like Walmart, Target, 7-Eleven, and Dunkin’ Donuts — saw the future coming. They knew they had to respond. And so they set up a technology development lab in Boston to formulate their response.

    The oncoming train they were staring at was the mobile wallet: the idea that we’ll all eventually dispense with credit cards and cash and use our smartphones to buy everything. This group of major retailers was concerned about a company like Google, Apple, or PayPal taking control of the transactions at their millions of cash registers. And they had long complained about the fees they have to pay to credit card issuers, which average 2 percent on every transaction that involves plastic. What if technology could reduce that, or eliminate it entirely?

    The companies launched Merchant Customer Exchange, or MCX, five years ago this summer. It eventually grew into a team of 80 people in Waltham — and a case study in the things that can go wrong when big companies try to respond to tectonic shifts in their industries.

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    For months after the initial news release went out in August 2012, MCX consisted of a small team of digital payments consultants working in Dallas. Negotiations between 40 separate merchants behind MCX were complicated by antitrust concerns, as well as by complex math over who would contribute how much money to the effort.

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    It wasn’t until June of the following year that MCX hired a chief executive, Dekkers Davidson, and decided to plant its headquarters in the Boston area, to get better access to software developers who understood smartphones and payments.

    One major misstep was the idea that to cut those pesky credit card fees, the app that MCX was developing, dubbed CurrenC, would link directly to the user’s bank account to withdraw money via electronic funds transfer.

    “That happens in other countries, but Americans are just not used to it,” says Brendan Miller, an analyst at Forrester Research who follows digital payments.

    Plus, pulling money directly from a bank account didn’t offer the same purchase protections or rewards points that credit card issuers provided.

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    In 2014, MCX suffered from a security breach before it had even really launched. That same year, when Apple debuted its own mobile wallet, some of the merchants participating in the MCX effort earned negative press when they decided to block Apple Pay from being used in their stores. That also led some people to give the MCX app negative ratings in the app stores even though they had never used it, says Eran Hollander, a former MCX employee. “That didn’t help,” Hollander says.

    But Hollander says the environment at MCX was “the same as any other startup I’ve been at. You had really smart people, and the retailers provided so much support.”

    It was September 2015 by the time MCX began a pilot test that any shopper could participate in, at a handful of retailers in Columbus, Ohio. “The results were just off-the-charts bad, in terms of consumers using it and the customer experience,” says Miller at Forrester. At the outset, cashiers weren’t trained on how to accept payments with the app, and there was little signage, according to a report in the trade publication Digital Transactions News.

    By the end of 2015, Walmart had broken away from MCX and was testing its own mobile wallet technology around its headquarters in Arkansas; it combined coupons and other savings-related features. And by June of last year, MCX had ended the pilot test in Columbus, and said it had no plan to roll the app out nationally.

    While MCX was focused on CurrenC, other Boston-area startups were developing their own mobile wallet technologies. One, Burlington-based LoopPay, was acquired in 2015 by the consumer electronics maker Samsung for $250 million. It now provides much of the technology for the Samsung Pay service. Another company, Newton-based Paydiant, was bought by PayPal for $280 million that same year.

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    In March, the technology that MCX developed was acquired by JPMorgan Chase & Co. The purchase price wasn’t disclosed, but a news release at the time said the main objective was “to help expand Chase Pay,” the company’s own mobile wallet offering.

    A JPMorgan Chase spokeswoman wouldn’t answer my questions about whether anyone continues to work for MCX in Waltham. But MCX’s phone numbers no longer work, company e-mails bounce back, and none of the former MCX employees with whom I spoke said they knew anyone still working there.

    The merchants who formed MCX “had a world view that they were going to show up on the scene, and everyone would bow at their feet,” says Max Metral, a former PayPal executive and entrepreneur who built some of the earliest mobile wallet technology, in 2010. “But the world right now favors companies that don’t try to get everything right at the beginning, but have the ability to tack and move left and right, and eventually get things right. That’s what you’ve seen Apple doing with Apple Pay.”

    “It’s generally true that elephants can’t dance,” says Dan Von Kohorn, a Somerville venture capitalist who put money into LoopPay. “Smaller companies can be more nimble. They iterate more quickly. They can test products and strategies without nearly as much cost, and so they’re likely to capture the new opportunities that emerge from a changing landscape in the way transactions happen.”

    And let’s not forget the nimble big companies, like Amazon. It just paid $13.7 billion for Whole Foods Market, giving it a bigger foothold in the grocery business.

    A big factor in MCX’s failure, says Miller at Forrester, was that the retailers behind it didn’t focus enough on the role their app could play in helping customers collect and use digital coupons or loyalty points. Instead, they were too obsessed with eliminating the transaction fees they paid.

    “They didn’t start with asking how do we make the whole buying and shopping process at these retailers better?” Miller says. “It wasn’t about how do we improve the customer experience, and make the buying process more seamless.”

    Even in the venture’s name, the word “merchant” came before “customer.” And that doesn’t fly in this customer-centric age.

    Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner and on betaboston.com.