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Why Wal-Mart Stores, Inc. Is Trying to Get Into the Payments Business

By John Maxfield and Gaby Lapera – Mar 6, 2016 at 11:00AM

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The world’s largest retailer is trying to drive down costs further by breaking the oligopoly that sits atop the payments industry.

As a discount retailer, few things are as important to Wal-Mart (WMT -0.73%) as driving down its costs. This is why the megaretailer has its sights set on the payments industry, recently rolling out its own payments network to consumers in Columbus, Ohio. Its objective is to break the oligopoly of payments companies that take between 1% and 3% of every Wal-Mart transaction.

In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and John Maxfield discuss Wal-Mart's ongoing efforts to break into the payments space.

A transcript follows the video.

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This podcast was recorded on Feb. 29, 2016. 

Gaby Lapera: Whereas, CurrentC, which is the product created by Wal-Mart that is still in beta test, I don't think you can get it unless you live in Columbus, Ohio -- I guess you can download it, but it's not going to do anything for you -- it's trying to cut out the payment processors entirely. Wal-Mart and its little consortium decided that they were spending too much money paying the credit card processors, and they were going to just cut out the middleman entirely and hook up customers' bank accounts directly to Wal-Mart or whoever it is. That way, they could get paid directly without having to pay any service fees.

John Maxfield: Yeah, and if you think about it, you think, why would Wal-Mart want to get involved with this? But if you look at its income statement, and you look at its revenue, it earns more than $400 billion worth of revenue. And it's a discount retailer. The name of Wal-Mart's game is to sell things as inexpensively as possible. If you look at interchange fees, they're anywhere from 1-3%, 3% being American Express (AXP -1.33%), and Visa (V -0.30%) and MasterCard (MA -0.25%) on the lower end of the spectrum, well, that 1-3%, if Wal-Mart could somehow take that out of the equation, so just take Visa, MasterCard, American Express totally out of the equation, it could drive down the cost to its consumers even more. 

So, this is not a tangential thing for Wal-Mart. This is a fundamental piece of its business. Now, the question is, whether it can get its own payments system up and going. But if it can, that's unquestionably bad news for Visa, MasterCard, and American Express.

Lapera: Right. But of course, there are other concerns with the Wal-Mart system. I don't know if you remember QR codes from a few years ago?

Maxfield: I don't. (laughs) I don't.

Lapera: They're these blocks that were speckled black and white, and you could take a picture of it with your phone and it would redirect you to a website or, I don't know, give you something. Do you remember? They would have it and it would be like, "Take a picture with your smartphone and it'll give you all this interesting information."

Maxfield: I now know exactly what you're talking about.

Lapera: OK. The Wal-Mart CurrentC app uses QR codes to make these payments.

Maxfield: Oh, it's like the 90s. But not the 90s...

Lapera: Right, (laughs) it's like early 2000s, exactly.

Maxfield: (laughs) Blast from the past.

Lapera: Exactly, and it's just kind of bulky. Apple Pay, Google Wallet, Android Pay, all of those things operate using near field technology. You just hold up your phone to the pay pad and it beams the information that it needs, then they talk to each other, and that's it. Whereas, with the Wal-Mart thing, you actually have to pull up your QR code and take a picture, or maybe the app takes a picture, it's not 100% clear to me exactly how the QR codes work for the CurrentC.

Maxfield: It seems clumsy.

Lapera: Exactly, it's just an extra step you don't need to take when you're swiping a card or holding up your phone to pay, just tapping it.


Lapera: Do you want to hear, I just pulled up a list of merchants who are part of the Merchant Customer Exchange. Do you want to hear what some of them are?

Maxfield: Yeah, let's hear this.

Lapera: We've got Wendy's, Wawa, 7-Eleven, Chili's, Baskin-Robbins, Bed Bath & BeyondDunkin' DonutsExxonCVS, obviously Wal-Mart,Gap. The list just goes on and on. Hy-Vee, which was my favorite grocery store in Nebraska, (laughs) I don't think they exist in Virginia.

Maxfield: Wait, let me get this straight. All of these have disabled near field communications on their readers?

Lapera: I'm not sure if all of those have. I know Wal-Mart definitely has. But, there's the potential for all of those merchants to disable the near field communications on theirs as well. If you're a listener and have used near field communication, Apple Pay or whatever, at any of the merchants I just listed, definitely write in, because I'm really interested in hearing about this.

Maxfield: This is, to just get back -- this is such an unbelievable opportunity for disruption. Again. So, you'd think something -- whether it's CurrentC or whatever it is, you'd think something is going to happen in this space at some point. And I think that's why so many fintech companies are focused on it. So, it'll be interesting to see if anybody can actually tap into it.

Lapera: Yeah.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, MasterCard, and Visa. The Motley Fool recommends American Express, Bed Bath & Beyond, and CVS Health. The Motley Fool owns shares of ExxonMobil. 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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