Why WalMart's decision to shut out fight Apple Pay will backfire (updated)

By Michael Carney , written on October 27, 2014

From The News Desk

(* See update below *)

Much was made over the weekend about measures taken by several large retailers, including CVS, Rite Aid, 7-Eleven and the grandaddy of them all, WalMart*, to avoid supporting Apple Pay. The retailers, which have their own mobile payment solution in the works, elected to disable NFC support on the payment terminals in their stores, rendering Apple Pay, and also Google Wallet and all contactless credit and debit cards useless. It’s a frustrating move, no doubt, but one that is likely to backfire for a number of reasons.

The first, and most obvious issue is that consumers don’t take kindly to being told what they can and can’t do by retailers. Any consumer with a NFC-compatible payment method is going to be less than thrilled to see the contactless payment logo on the card terminals at these retailers only to be told by the cashier that it’s been disabled.

An internal memo sent to Rite Aid employees reads:

Please note that we do not accept Apple Pay at this time. However we are currently working with a group of large retailers to develop a mobile wallet that allows for mobile payments attached to credit cards and bank accounts directly from a smart phone (sic). We expect to have this feature available in the first half of 2015.

If customers attempt to pay for a transaction with Apple Pay, a message will prompt both customer and cashier for a different form of payment. Please instruct cashiers to apologize to the customer and explain that we do not currently accept Apple Pay, but will have our own mobile wallet next year. Many angry consumers have already vowed to take their pharmacy and drugstore business to Walgreens, which is an original Apple Pay partner. It’s likely that only a small number will follow through on this threat, but as mobile payments become more ubiquitous, these retailers will quickly look like they have their heads in the sand.

The bigger discussion to be had is about the viability of the retailer’s upcoming alternative mobile payment solution. In a WalMart-led partnership dubbed MCX (Merchant Customer Exchange) – that collectively represents more than 110,000 total retail locations and accounts for more than $1 trillion in annual payments – these retailers plan to adopt CurrentC, a QR code-based payment protocol that supports debit cards and in-store gift cards and coupons, but not credit cards.

Ha! QR codes and no credit card support? Good luck with that.

It’s no secret that retailers badly want to cut banks and payment processors out of the equation to avoid paying so-called interchange fees, which today account for 0.15 to 0.25 percent of all transactions. Saving a few cents per transaction is understandable, but many consumers prefer to shop exclusively via credit cards for the rewards or miles that they offer. The second you eliminate a consumer’s preferred payment method, your solution goes from making the payment experience easier and more rewarding to being more trouble than it’s worth.

New payment technology will succeed in replacing existing methods – cash, physical payment cards, and checks – only when they deliver some combination of easier use and material benefit to the consumer like enhanced security or rewards. “Sex appeal” and excitement of use won’t hurt either – Apple Pay certainly has these in spades – but these are short-term qualities that will matter only for initial adoption. Utility will ultimately win the day. CurrentC fails on all attempts. It’s a clunky solution that is basically dead in the water before it starts.

QR codes are an awkward barcode-like technology that have failed to take off for the last decade and remain largely foreign to most consumers. Using them as the primary interface for CurrentC makes it look outdated, first and foremost, but also risks making the payment process more confusing, rather than less.

Also, the CurrentC checkout process is more complicated than even traditional cards. And unlike Apple’s offering, it’s far less secure. Specifically, Apple uses biometric security via its TouchID scanner plus a dedicated secure-element chip to transfer sensitive payment information. CurrentC won’t have access to this hardware on Apple devices and makes no mention of taking advantage of it where present on Android devices. And because these merchants will be asking consumers to download a standard mobile app, users will need to unlock their device, and launch that app and sign in, all before checking out. Worse, each retailer will have its own standalone app, making it a far less universal solution. The more steps in the process, the more attractive simply paying by traditional credit card becomes. Apple Pay and Google Wallet, on the other hand, offer essentially one touch checkout.

But beyond these very real user experience issues, the biggest problem consumers should have with CurrentC is the security risk of trusting retailers with your payment information. CurrentC requires that consumers give retailers persistent access to their payment information, a risky proposition given the recent history of data breaches across the industry. Like existing payment options, this creates a central point of failure where, if hacked, tens of millions of payment credential will be compromised. Worse yet, because consumers will be giving CurrentC debit card or bank account information (for use in ACH transfers), rather than using a credit card, any fraudulent spending will immediately deduct money from their balance, rather than simply ending up on a credit account. This can be a major issue for consumers living without much cash cushion.

Apple Pay, on the other hand, does not centralize payment information and only passes a device-specific, tokenized, one-time-use credentials to each merchant at checkout. Put another way, Apple Pay is far more secure, and, of course, it allows consumers to choose any payment card to associate with the account.

The final issue, in my mind, is privacy. Apple has stated repeatedly that it does not track its consumers' spending behavior and similarly does not sell data on its users for use by advertisers. Rather, it’s designed around making the consumer experience better. CurrentC is an explicit attempt by these retailers, not only to circumvent banks and credit card companies, but also to collect shopping data to better target ads. To quote Daring Fireball’s John Gruber:

CurrentC is designed around the collection of customer data and the ability to offer coupons and other junk. Here is what a printed receipt from CVS looks like. It looks like a joke, but that’s for real. And that’s the sort of experience they want to bring to mobile payments.
The CurrentC app, which is already available for download on iOS and Android  (invite code required) due to an active beta test in Minnesota, notes in its Terms of Service that it may share information with software companies, app stores, your device maker, or developers, and that it may collect consumer health and location data – all necessary to process your payment, naturally. The app also notes that all of this information will be shared for marketing purposes unless consumers opt-out.

It’s often said that you need to be 10-times better than an existing solution to convince consumers to switch. CurrentC is looking worse, rather than better than traditional payment options. It’s highly unlikely that even once available, whenever that may be, the platform will generate much consumer adoption.

The move by CVS, Rite Aid, WalMart*, and other MCX merchants to eliminate support for NFC payment is an act of fear, rather than strength. Quicken Loans and Cleveland Cavaliers owner Dan Gilbert was recently quoted saying to car dealers in the anti-Tesla fight, “Just man up and compete.” The same message applies here. If these retailers think they can offer a truly better payment experience – spoiler: they can’t – then they should compete on the grounds of delighting their users and driving adoption that way. But by refusing to compete they are simply harming their end customers, a strategy that can only backfire.

Unfortunately, if reports are true, any merchant wishing to abandon the MCX partnership likely faces steep fines and penalties for doing so. Also, exclusivity clauses mean that these merchants cannot support multiple payment solutions in parallel. So as backwards as this current situation looks today, it's unlikely to get much better any time soon.

It’s likely that some combination of consumer backlash, pressure from existing payment processing partners, and inquiries from regulators will eventually force these merchants to reverse this decision. But by then, they will have bought enough time to bring their competing solution to market, which was their only goal to begin with. Sadly, that’s the only thing about this strategy that’s likely to work according to plan.

Whether it’s Apple Pay, Google Wallet, or even PayPal, mobile payments will be centralized. The winner will be the platform that places the user experience ahead of all other concerns and which works across the most payment locations. MCX and CurrentC have already demonstrated that they have the wrong approach. While it remains to be seen which of the other market entrants will rise to the top, it’s a sure bet that it won’t be someone who would rather take their ball and go home than compete.

Updated 9am, 10/20/14: The headline on this post has been updated to reflect new information. The original headline was "Why WalMart’s decision to disable NFC to fight Apple Pay will backfire." A WalMart spokesperson tells Pando:

We have not supported contactless payments. There are a lot of compelling technologies being developed, which is great for the mobile-commerce industry as a whole. We’ve said that we’re not participating in Apple Pay at this time. Apple Pay relies on the NFC payment model and we have never had NFC enabled at terminals in our US stores.
[Image via tropical.pete, Flickr]