CVS and RiteAid’s much-derided break with Apple Pay makes perfect sense for them.
Apple Pay, like Uber, is a good product with a great user experience, but unlike Uber, Apple Pay is not disruptive. Apple Pay won’t reduce costs or improve efficiency in the credit card payments industry, which taxes merchants 2% to 5% of top-line revenues to pay transaction fees. Merchants’ acceptance of Apple Pay is for their consumers’ convenience, no different than accepting cash, checks, and credit cards. Saving the consumer the time it takes to put down his or her iPhone to pull out a credit card is Apple Pay’s only advantage.
Currently, at least three organizations are involved in every credit card transaction: the merchant acquirer bank that represents the merchant taking the payment, the issuing bank that issues the credit card to the consumer making the payment, and the credit card company that transfers the funds between them. All share the fees.
Now Apple has its hand out for its share of the fees attributable to credit card transactions with Apple Pay. The merchant cost of Apple Pay transactions will be the same or more than a regular credit card transaction. Where is the efficiency from disruptive industry restructuring that accompany the growth and make tech companies legends? There isn't any.
CVS and Rite Aid, the second- and third-largest pharmacies in the U.S., are part of a consortium led by Wal-Mart called the Merchant Customer Exchange (MCX) that is building a cheaper mobile payment system for retailers called CurrentC. If Wal-Mart could bypass credit cards and convert all Apple Pay and credit card fees at 2% to debit cards fees at 0.5% by adopting CurrentC, the impact on the company’s profits and market capitalization would be significant. A back-of-the-envelope estimate using Wal-Mart’s 2014 income statement offers a very compelling reason to break with credit cards and never accept Apple Pay; Wal-Mart would realize a $3.6 billion increase in profits and a $55 billion increase in the value of its investors’ shares. Even if the Wal-Mart’s profit improvement is half this estimate, the magnitude will intrigue senior management paid on the company’s financial performance.
Though information is limited on CurrentC’s website, it indicates that QR codes will be used to generate a one-time payment transaction code, read at the checkout counter. QR codes don’t compare in user experience with touching an iPhone to an in-store NFC reader. CurrentC is limited to QR codes because Apple has locked out other payment providers from using the iPhone’s secure element necessary for secure transactions. Softcard, the consortium of AT&T, T-Mobile, and Verizon, also lock out other payment providers from using the secure element in the Android smartphones they sell unless they get a piece of the credit card fee action. QR codes are the only payment method that will work on Android and iOS that bypass the credit card tax.
In its announcement last month, CurrentC described its smartphone payment app as more than a payment service. It will also replace the many merchant loyalty barcode tags consumers have on their key chains, apply qualifying coupons at checkout, and account for merchant rewards programs. Consumers can pay with CurrentC using every kind of payment except Visa, MasterCard, American Express, and Discover. The group said in its press release, "CurrentC will offer customers the freedom to pay with a variety of financial accounts, including personal checking accounts, merchant gift cards and select merchant branded credit and debit accounts. Additional payment options will be available in the coming months."
Rewards, coupons, and holiday discounts are meant to lure consumers to CurrentC, and could very well be successful in doing so. Two for one at the grocery store and an extra 10% off post-Christmas shopping, when consumers use CurrentC like store-brand credit cards, would convince most consumers to download the app. Compared to paying with a credit card and getting one point per dollar in return for rewards, which the Points Guy values at between $0.005 and $0.02 per point, CurrentC payment offers could be crafted to entice consumers to use it.
CurrentC could be really cheap for retailers. CurrentC transactions support electronic checking account payments, referred to as ACH payments. A high-level industry source speaking off the record said that fees for this type of payment are fixed at about $0.05 per transaction, a fraction of the cost of credit and debit card payments, and in large volumes could cost less. Most retailers still accept hand-written checks and individually manage the risks of bad checks. For a consortium of retailers sharing payment data, CurrentC could improve risk management and reduce the losses from bank overdrafts while bringing transaction fees close to zero.
Consumers could use either Apple Pay and CurrentC as replacements for the physical wallet replacements. Mobile wallets from Google and PayPal haven’t succeeded simply because it’s just not that hard to pull out a credit card and pay. The user experience of an app is much more compelling than mobile wallets. When a consumer needs a ride, Apple Pay or CurrentC won’t be used to call an Uber car; the user will open the Uber app to order a car, and whether it’s paid for through Apple Pay or any other payment service is inconsequential. For consumers using branded retail apps to guide them through stores with Bluetooth beacons and coupons to the checkout counter, be it at a Burberry’s on Bond Street in London or a Wal-Mart in Akron, how they make these payments will be the last and least important issue, that is if it doesn't include a coupon discount.
It’s more likely that software developers will build branded apps for retailers concentrating on the retailers’ brands and related user experience. Apple is limited to about 40% of the market in the U.S. and less than 20% worldwide. Seemingly by design, Apple’s iOS and Google’s Android apps have to be designed and built by developers with different skills using different tools for each platform. Enterprises want to reuse as much of the software they create as possible but have been forced to accept the cost and complexity of building for two mobile platforms. IT architects designing new retail apps will want to avoid the additional complexity of supporting an Android and iOS payment system that Apple Pay will impose and look for a single alternative. If CurrentC’s only disadvantage is QR codes, given the robust savings in credit card fees, retail enterprises will pay a lot to developers to build CurrentC apps offering a great user experience and an incentive to use it.
It’s too early to even guess if consumers will use Apple Pay or CurrentC as a replacement for their wallets, or if both forms of payments will be buried in branded apps. Apple Pay is just another form of payment that retailers may or may not choose to accept for no other reason than customer convenience. It doesn't make or save retailers money. In comparison, the 1.5% or greater savings to the retailers' top-line revenue that could be shared with the consumer in cash back, discounts, and other promotions could motivate retailers to commit to CurrentC.