If you've been following the news about Apple's (NASDAQ:AAPL) new payments system, you probably heard that CVS and Rite Aid blocked Apple Pay functionality last week. In the first few days after Apple Pay went live last week, the system worked (for the most part) at both drugstore chains. Then it was abruptly turned off.
The explanation for this turn of events is that both drugstore chains belong to a joint venture called Merchant Customer Exchange, which is developing its own mobile wallet. This venture is backed by dozens of top U.S. retailers, including Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Best Buy (NYSE:BBY).
Members of the MCX group are not accepting Apple Pay in their stores in order to boost their CurrentC mobile wallet. Yet three of the biggest MCX members -- Wal-Mart, Target, and Best Buy -- are also major Apple resellers. Blocking Apple Pay is a dangerous game for them, as they risk alienating an important supplier.
A new type of "CurrentC"
Wal-Mart, Target, and Best Buy have been three crucial backers of MCX since its creation. Executives from those three companies (and only those three) were quoted in the press release announcing the launch of MCX in 2012.
More than two years after that announcement, the CurrentC mobile wallet app still isn't available nationwide, but pilots began in September 2014. The full rollout is scheduled for 2015.
Members of the MCX joint venture have agreed to make CurrentC their exclusive mobile wallet -- they won't accept in-store payments through Apple Pay or other mobile wallets. This is why CVS and Rite Aid went to the extreme step of turning off their near-field communication terminals to block Apple Pay. As MCX members, they were obligated to do so.
Why retailers care
There's a good reason why many retailers are willing to go to great lengths to make CurrentC viable. First, the CurrentC app will enable retailers to better track data on customer purchases. This allows them to send targeted ads or change merchandising strategies based on customers' shopping patterns.
Even more importantly, CurrentC draws funds directly from users' bank accounts. This means retailers can avoid paying swipe fees (which usually cost 2%-3% of the transaction amount) to credit card companies. Considering that Americans spent more than $2 trillion using credit cards last year (and nearly $2 trillion more with debit cards), a lot of money is at stake.
It's already clear that Apple Pay is technologically superior to CurrentC. Apple Pay doesn't share data with merchants (CurrentC does), Apple Pay works with most credit cards (CurrentC only works with direct debits from a bank account), Apple Pay is more secure, and Apple Pay works even with the phone asleep and unlocked. (CurrentC uses QR codes, meaning that you need to unlock the phone and open the app to pay.).
However, a mobile payments platform will need wide utility to take off. Since MCX includes numerous high-volume retailers with combined annual sales of more than $1 trillion, exclusivity is CurrentC's key weapon. If a host of top retailers all accept CurrentC -- but not Apple Pay or other mobile wallets -- the MCX platform has a better chance of succeeding.
The lurking problem
Given their central position in the CurrentC effort, Wal-Mart, Target, and Best Buy don't accept Apple Pay in their stores, and don't plan to for the foreseeable future. (Apple Pay works with Target's mobile app, though.)
All three, though, are major Apple retail partners. Best Buy is the most dependent on Apple: Last year, it disclosed that 45% of its sales came from five suppliers, with Apple in the No. 1 position. In fact, Best Buy sells about 10% of all iPhones in the U.S.
Best Buy didn't disclose the exact percentage of its sales attributable to each supplier. However, since the top 5 retailers accounted for 45% of Best Buy's sales and Apple was the biggest, Apple must represent at least 10% of Best Buy's sales, and probably closer to 15%. Moreover, Apple is gaining share from Samsung -- Best Buy's No. 2 vendor -- increasing the brand's importance to Best Buy.
Wal-Mart and Target aren't as heavily dependent on Apple, since electronics make up a smaller proportion of their sales volume. Still, Apple is a key vendor for both discount giants, as it offers products that many consumers want -- which can get them in the door to spend more money on other goods.
Indeed, both Wal-Mart and Target (as well as Best Buy) offered numerous Black Friday deals last year on Apple products. Wal-Mart sold about 1 million iPad minis on Thanksgiving Day, when it offered a $100 gift card with the purchase of a $299 iPad mini. Target also gave out gift cards with the purchase of most iPad models. Various iPad models took the top 3 spots in Thanksgiving sales volume at Target.
Wal-Mart stores also offered $75 gift cards with the purchase of an iPhone 5s or iPhone 5c for Black Friday last year; plus, the 5c was discounted from $99 to $45 with a two-year contract. Meanwhile, Wal-Mart's Sam's Club warehouses offered the iPhone 5c for just $0.96 with a two-year contract during a VIP event the Sunday before Thanksgiving.
Kicking the hornet's nest
No other brand in the U.S. would be as effective as Apple for drawing in consumers on Black Friday and other key shopping days when these retailers and their peers are fighting for consumer dollars.
They all desperately need whatever sales they can get. Case in point: last quarter, comparable sales were flat at both Wal-Mart and Target -- sustaining trends seen for the past two years. Best Buy's domestic comparable sales, meanwhile, dropped 2%.
Given this dependence on Apple, can Wal-Mart, Target, and Best Buy really afford to alienate the tech giant by rejecting Apple Pay? Apple could raise antitrust concerns if it retaliated by dropping them as resellers, but this is a gray area. Even just getting lower priority in terms of iPhone supply would be damaging for the retailers.
Apple may simply make it clear to Wal-Mart, Target, and Best Buy that it thinks they are acting like bad partners by blocking Apple Pay. It doesn't need to go to the extreme of pulling its products from big-box stores to send a clear message that excluding Apple Pay is a bad idea.
A skirmish worth watching
Wal-Mart, Target, and Best Buy account for close to $500 billion in annual sales within the U.S. (nearly half of all MCX group sales volume). If Apple can peel them away from MCX, it would give Apple Pay a much higher likelihood of wide adoption.
For Wal-Mart, Target, and Best Buy, abandoning MCX would mean losing out on the possibility of reducing the cost of swipe fees. But the chances that CurrentC will succeed are slim, based on the record of other clunky mobile payments apps. It took Apple less than a week to become bigger than all other mobile payments providers combined in terms of usage.
Furthermore, MCX won't penalize retailers that leave the joint venture -- contrary to initial reports -- although those stores won't be able to use the CurrentC app. Wal-Mart, Target, and Best Buy have to weigh the small chance that CurrentC becomes widely adopted against the risk of angering a critical supplier.
In the long run, the advantage probably goes to Apple. Wal-Mart, Target, and Best Buy might wait until CurrentC rolls out next year, but if it doesn't catch on quickly, the cost of holding out and further damaging their relationships with Apple won't be worth the potential gains.