CVS (NYSE:CVS) and Rite Aid (NYSE:RAD) are disabling near field communication services at their registers, effectively blocking consumers from using Apple's (NASDAQ:AAPL) new Apple Pay service and setting the stage for a battle for walletless market share.
The move is likely to surprise consumers given that it smacks of a "my way or the highway" mentality that doesn't jibe with retailer's customer-first mandate; however, like most things, there's more to this decision than meets the eye.
First, a bit of background
Ask any retailer for their opinion on the merchant fees charged by Visa (NYSE:V), Mastercard (NYSE:MA), and American Express (NYSE:AXP) and the response will typically involve the word "evil."
That's because credit card companies charge retailers a toll on every credit card sale that ranges between 2% and 5% of the purchase amount. Those tolls amount to billions of dollars in retailer payments every year. For instance, Visa and Mastercard's revenue over the past 12 months totals more than $21 billion. And those payments are climbing, too. According to the Federal Reserve, the number of credit card transactions jumped by an annualized 6.8% between 2009 and 2012.
Given the sheer size of those payments (and their corresponding impact on retailer profit), it's not shocking to learn that retailers have been working on a new mobile payment system of their own. That service, taken on by a consortium of retailers under the banner Merchant Customer Exchange, or MCX, is just months away from launching.
MCX's new mobile payment solution, CurrentC, is an app-based approach that uses QR codes -- scan-friendly, box-shaped ink blots commonly used in mobile marketing -- instead of near field communications technology.
CVS and Rite Aid are among those retailers already committing to CurrentC, so it's probably not too shocking that they've shut down near field communication readers in their stores that are critical to supporting Apple Pay. What may be more surprising is how many retailers are involved in Merchant Customer Exchange and therefore may follow in CVS and Rite Aid's footsteps.
The list of MCX retailers includes Goliath's WalMart (which effectively runs MCX), Target, Best Buy, Lowe's, and Sears. Collectively, the companies behind MCX account for $1 trillion in annual payments. Many of those retailers have paid hundreds of thousands of dollars to support CurrentC's development and have agreed to accept CurrentC exclusivity; barring them from accepting Apple Pay purchases.
Why balk at Apple Pay?
Since Apple Pay relies on credit cards, which can be entered individually or linked through iTunes, retailers remain on the hook for transaction payments to Visa and Mastercard for every Apple Pay purchase. That's not the case for CurrentC, which instead of linking to credit cards connects directly with consumer bank accounts using the ACH system commonly used to conduct money transfers.
The fact that CurrentC bypasses credit cards is a big incentive for retailers to create roadblocks to Apple Pay, but it may not be the only reason. CurrentC also offers significant data mining potential that can be used by companies like CVS and Rite Aid to offer discounts, expand loyalty programs, and drive foot traffic. CVS and Rite Aid may similarly be attracted to data mining opportunities related to healthcare. That's because CurrentC is designed to track health spending, which could offer important marketing opportunity for the two pharmacy chains given they're increasingly offering more healthcare services through their healthcare clinics.
Ground war coming
Apple users shopping at pharmacies will need to make a decision. They can shop at Walgreen (NASDAQ:WBA), which isn't an MCX member and does accept Apple Pay, or download the CurrentC app for use at CVS and Rite Aid.
CVS and Rite Aid are betting that push back from Apple users will be small and if they're correct, their decision could save shareholders millions of dollars in transaction fees, while also creating new revenue opportunities. If they're wrong and Apple users revolt, they may lose market share to Walgreen's and eventually be forced to accept payments anyway.
Regardless, MCX members need to convince Apple consumers that CurrentC is better than Apple Pay. That may not be easy given that Apple Pay is arguably simpler to set up and use. To overcome that ease-of-use advantage, retailers may need to offer CurrentC users special discounts or coupons, which could erase much of their savings on credit card fees in the short run, but make them far more money in the long run.
Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends American Express, Apple, CVS Health, MasterCard, and Visa. The Motley Fool owns shares of Apple, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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