Why Is Wal-Mart Stores, Inc. Stepping Into Mobile Payments?

Wal-Mart's (WMT 0.08%) new mobile payment system launched in Arkansas this month, and the company has plans to launch it throughout the United States in the next year.

While many headlines are focused on pitting Wal-Mart against Apple's (AAPL -0.91%) and Google's (GOOGL 0.51%) (GOOG 0.50%) mobile payment platforms, the real reason behind the launch is probably to compete with a different sector entirely.

In this clip, The Motley Fool's Chris Hill and Alex Scherer discuss the context that led to Wal-Mart's payment system, what industries are really going to be affected by it, and why it decided to launch its own platform rather than buy a start-up and use its system instead.

A full transcript follows the video.

This podcast was recorded on Dec. 10, 2015.

Chris Hill: The mobile payment industry has been one of the more interesting industries to watch over the last couple years. When you just look at the major players, you look at the start-ups like Square, Xoom, PayPal (PYPL -0.14%), etc. And now, a little company by the name of Wal-Mart has entered the space. Wal-Mart is launching its own mobile payment system. They're starting small. They're testing it in Arkansas, launching it today.

Alex Scherer: Rolling it out, I believe, over the next six or nine months in the rest of the United States, and it'll be an app that'll be available on both the Apple iPhone as well as the Android system. I think people spend a lot of time focused on the app versus Apple Pay, or the app versus Google Pay, as if that's the real competition. Like, is this gonna be a blow to Apple in some way? Or make Apple customers less likely to purchase the next iPhone?

Hill: Certainly that's what all the headline writers are thinking today. If you just looked at the headlines --

Scherer: I think it's all, like, "Wal-Mart's Taking on Apple!" That's actually completely beside the point, in my opinion. I think that this move is just one more salvo in a very, very long-running, vicious war between merchants and the credit card companies and processors and networks like Visa (V 1.56%) and MasterCard (MA 1.30%). And the reason I say that is because, first of all, the Apple app is gonna be available on the iPhone just as it is on Android phones.

But if you think about what Wal-Mart's real motivations are, they don't really care what phone is in your pocket. They care very deeply about how much they pay every time you swipe a card and use a payment system. In Target's (NYSE: TGT) case, for instance -- they want you to use the Target card, or they want you to use the debit card network. And Wal-Mart wants you to use your debit card, not your credit card, because their processing system, they pay about one-tenth of the cost if you use a debit card through the Automated Clearing House network, as opposed to using Visa or MasterCard's rails.

So creating this app allows them to have control of the customer data and, eventually, if it's successful, to promote more heavy usage of debit cards, Wal-Mart gift cards, and anything other than credit cards, which they pay very steep fees for.

Hill: I'm not rushing out to buy shares of Wal-Mart because of this news, but I like the way they're going about this. I mean, I'm sure that when they were having these discussions, someone must have put forward the idea, "Look, why don't we just buy Square?" Or, "Why don't we just go out and acquire a start-up or something like that?" And I like the fact that they're going with their own system, and rolling it out over time.

Scherer: I think if this has any real implications for anybody in particular, it's going to be for the MCX network, or the currency system, which Wal-Mart was a huge proponent of, one of the leaders of, when it was created, and that was a wallet that was basically owned by a lot of large merchants like Rite Aid (NYSE: RAD) and Best Buy (NYSE: BBY) and Wal-Mart and on down the line, and that was specifically trying to create a system that was an alternative to Apple Pay and Google Pay but had a ton of delays -- it's not very easy system to use -- and Wal-Mart coming out with their own proprietary system that basically is in direct competition to what they had been supporting before, I think, pretty much spells the death of the currency network.

So the implications outside of Wal-Mart, I think, are that you're going to see those other companies, the Targets, Best Buys, Rite Aids of the world, drop currency as a system in the future, and probably more strongly grasp partnerships with Apple and Android.

Hill: Do you think it does anything to speed up the death of the penny? The physical penny?

Scherer: God, I can't even remember the last time I used a penny. I was cleaning out my basement last week, and I found a Ziploc bag that was so heavy, there was nothing but pennies in there, and I didn't spend the time counting it out, but there must have been three or four hundred pennies in there. And I couldn't even conceive of why I would have put a stack of 300 pennies into a Ziploc bag before.

Hill: You got a Coinstar machine anywhere near your home?

Scherer: We do, yeah. There's one in Wegmans, actually.

Hill: There you go!

Scherer: We do go to Wegmans a lot. 

Hill: We were just talking about that before we started taping.

Scherer: I'm a Wegmans champion.

Hill: You're one of Wegmans' best customers.

Scherer: Unfortunately.