Here's Why Visa and MasterCard Are Rooting for Apple Pay

A proxy battle is brewing between mobile wallets. Apple, Google, and credit card companies are on one side, with MCX merchants on the other.

Jamal Carnette, CFA
Jamal Carnette, CFA
Aug 22, 2015 at 8:45AM
Technology and Telecom

Source: Apple.

By now, the phrase "cash or credit" is so firmly entrenched in Americans' vernacular that our decision seems almost instinctive. However, the collective answer is worth billions to the world's largest corporations.

On one hand, you have those dependent on credit and debit card transaction fees, including banks and the so-called toll-road operators -- Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP) -- strongly preferring that you opt for the latter.

On the other hand, merchants are hoping that cash or cash equivalents -- including gift cards, checking accounts, and private-label store cards -- are your preferred transaction method. The reason: These payment methods are generally cheaper for them to process. Recently, a consortium of merchants including Target, Wal-Mart, ExxonMobil, and Best Buy have banded together to form the Merchant Customer Exchange, or MCX: a mobile payment system owned and controlled by merchants.

Instead of using VisaNet and MasterCard's network to conduct transactions, and paying those companies dearly for the privilege, these merchants are pushing an alternative system, dubbed CurrentC, that utilizes cheaper cash-equivalent payment methods.

But if a new report from Re/code is correct, these merchants are finding out how hard it is to develop a product outside their core competency. According to the article, the CurrentC launch appears to be delayed from its originally planned timeframe of later this year to sometime next year. In the meantime, however, Apple (NASDAQ:AAPL) Pay and Google (NASDAQ:GOOGL) (NASDAQ:GOOG) Wallet have lined up with the credit card companies.

Continued defections to Apple Pay could seriously damage CurrentC
Per Re/Code's article, there appears to be a proxy battle between credit card processing systems and CurrentC being fought through Apple Pay and Google Wallet. Last year, pharmacies Rite Aid and CVS stopped supporting Apple Pay after initially accepting the payment method. Most observers attributed the about-face to their involvement in MCX and CurrentC. Industry analyst Patrick Moorhead went even further: "Apple Pay, I believe, was viewed as a threat ... [T]hey seemed to back away from it and not support it."

What a difference a year makes. This month, Rite Aid announced it will (re)-begin accepting Google Wallet and Apple Pay as payment methods. Although a spokesman reconfirmed Rite Aid's support for CurrentC, the action to accept Apple and Google's payment systems strengthens the hand of credit card companies at the expense of MCX's nascent technology.

Could this portend future defections?
But what starts as a trickle could end with a flood. As a part of the initial agreement with MCX, members were required to sign exclusivity agreements that would prohibit using competing mobile-payment wallets, but those agreements will expire this month.

Right now, Best Buy has joined Rite Aid in accepting Apple Pay and Google Wallet, but there hasn't been a mass migration toward acceptance yet. However, with MCX sidelined until next year and Apple Pay continuing to grow, it's possible that we will see more of these large, important merchants accepting Apple Pay going forward.

For credit card companies, this is a huge win. Using the first-mover advantage, Apple and Google may mitigate the threat of CurrentC to Visa, MasterCard, and American Express. After all, they'd rather pay Apple 0.15% of every Apple Pay purchase -- but still be involved in the transactional monetization chain -- than have to compete directly against a service designed to replace their business model. You can bet credit card companies are watching closely -- and rooting for MCX owners to accept Apple Pay.