The following companies may be competitors in the retail arena, but when it comes to mobile commerce, they're joining forces to fight rising transaction fees from credit processors. Target, Best Buy (NYSE: BBY ) , Wal-Mart (NYSE: WMT ) , and CVS (NYSE: CVS ) are among the leading merchants that have agreed to form a mobile payment network, to be known as the Merchant Customer Exchange, or MCX.
The new entity will take on Google and others for share of the growing mobile payments market. Let's take a look at what is at stake for these retailers and how the strategy will impact the retail business in the long-term.
Race to the finish
Payments made on mobile devices such as smartphones totaled $172 billion this year. By 2016, that figure is expected to reach $600 billion worldwide, according to research from Gartner. A separate report from Juniper Research said mobile payments would top $1.3 trillion yearly by 2017. It only makes sense then that everyone from eBay (Nasdaq: EBAY ) to Visa wants in on the action. However, the bricks-and-mortar retailers behind MCX bring something new to the table.
Major brands like Target and Best Buy are in the business of understanding people's shopping preferences. Together these merchants ring in $1 trillion in annual sales. In fact, it would be worrisome if they didn't want to have a say in the evolution of mobile and digital payments. While there are few concrete details about MCX, what we do know is that the system will let customers pay for in-store purchases using their smartphones and will work across a range of devices.
Confusing the customer
The drawback for these retailers is that they run the risk of further fragmenting an already crowded mobile payments space. Plenty of other digital wallet systems are currently on the market, which gives them an advantage over MCX's proposed service. Earlier this year eBay's PayPal segment inked deals with 15 U.S. companies to bring its platform to their stores. In fact, eBay CEO John Donahoe now expects PayPal along with eBay Mobile to jointly generate $20 billion in transaction volume this year.
If and when MCX becomes available, the flood of alternative payment options may confuse people, or worse, stall the future adoption of digital wallet technologies. Still, these retailers have a lot to gain from creating their own platform. For example, if MCX can gain a foothold in the space it would give participating retailers like CVS and Wal-Mart more control over the transaction fees they pay to credit card processors.
Retailers are growing frustrated from the rising cost of "interchange" fees, which they're forced to pay card issuers such as Visa and MasterCard. Last month, Wal-Mart took a stand against the proposed $6 billion settlement with Visa and MasterCard. Target also backed up Wal-Mart's stance in opposing the deal, saying it would "perpetuate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers."
For major U.S. retailers this conflict punctuates the importance of developing their own digital payment platform. MCX, if successful, would help merchants gain an edge over the so-called price-fixing tactics used by credit card companies.
Wild West of banking
However, MCX is still in the early development stage, not to mention miles behind similar offerings from PayPal and Square, both of which are already in use in the market. Starbucks' (Nasdaq: SBUX ) newly inked deal with Square, a start-up payments system, will bring mobile purchase services to 7,000 Starbucks coffee shops around the country.
The java giant's investment in Square puts the mobile payments company right where it needs to be -- in the mainstream. Adding more disruption to the industry, Square revealed a new monthly pricing plan that gives merchants the choice to pay $275 a month instead of the established 2.75% fee per transaction. Either way, Square's solution is a welcome alternative to the hefty transaction fees that the credit card processors and banks currently demand.
However you cut it, these mobile innovations will certainly have a transformative effect on the payments industry. Going forward, it is retailers like CVS, Best Buy, Target, and Wal-Mart that have the most to gain. But investors can also capitalize on these opportunities by staying on top of emerging technology trends. That's why I encourage you to check out this free report from The Motley Fool: "The Real Cash Kings Changing the Face of Retail." In it you will discover two surprising stocks that are ringing in record profits, despite the tough economy. The report won't be around for long, so click here to get your free copy now.