Nov Retailers Launch Opening Salvo Against Apple in Digital Payment Wars

pple Pay has a fight on its hands it seems. Drugstores CVS and Rite Aid have disabled the tech giant’s new digital wallet service in its stores, according to reports. Both retailers are part of a consortium of merchants who plan to offer their own payment system, CurrentC. Developed under the Merchant Customer Exchange (MCX) consortium which includes Walmart, Target and Gap as well as CVS and Rite Aid, CurrentC is positioned to rival Apple Pay and Google Wallet. It seems the battle for customers’ digital wallets has begun.

Despite media attention and online interest, there are no legal restrictions in terms of CVS’ and Rite Aid’s decisions. “Store owners have the right to use whatever system they want. But with the President pushing for tighter controls on the payment card industry you can bet there soon will be [legal implications to these types of choices],” said Charles Tendell, CEO of Azorian Cyber Security.

Joseph Bailey, an electronic commerce expert and research associate professor of technology, management and policy in the University of Maryland’s Robert H. Smith School of Business, said that this is clearly a battle for standards, network effects (a large group of users), and data.

What makes Apple Pay attractive to consumers – its promise of anonymity – could be its biggest stumbling block with retailers.
“One of retailers’ most despised partners (until now) has been the credit card companies,” he said. “However, since the credit card companies have the network effects, the retailers don’t have much choice.  Accordingly, they try to find the lowest transaction fee so they can still accept credit cards.  In some cases, retailers will not even ‘take’ one of the branded credit cards because they don’t like the fees or other terms of service.  In other cases, retailers will actually give a surcharge to customers for using credit cards.”

Bailey explained that in the case of Apple Pay and Google Wallet, there is no dominant player—yet.  “Apple thinks it can be this. Google has been around longer and may leverage its large user base of Android.  However, the market has not ‘tipped’ in any one direction. The strategy of retailers to turn off NFC or not accept Apple or Google is (in part) a delay and negotiating tactic.”

Charles Tendell, CEO of Azorian Cyber Security
Charles Tendell, CEO of Azorian Cyber Security
Gregg Aamoth, co-founder and CEO of omnichannel redemption solution POPcodes, added that the Rite Aid and CVS back-out was probably due to their contractual obligation with MCX. “My understanding is that there is a clause in the agreement that says participants will use MCX as their exclusive mobile payment option,” he said.

It may not only be a matter of contractual obligation and competitor positioning, however. Tendell noted that RiteAid and CVS have a few concerns and the biggest is that Apple Pay charges the merchant an additional 2.5 percent on the transaction. Apple, he said, gets to collect meta-data about customers and transactions.

“Privacy concerns abound and experts are right now looking to see how well the technology is working to protect users’ data,” he said. “In the end it comes down to money and yes the general consumer is left out there flapping as usual. The technology naturally lends itself to a more secure transaction.”

Gregg Aamoth, co-founder and CEO of POPcodes
Gregg Aamoth, co-founder and CEO of POPcodes
Nishat Mehta, Executive Vice President, Global Partnerships at dunnhumby, said that CurrentC provides two significant benefits to its retailer partners: bypassing credit card companies to save on interchange fees, and collecting customer data. “However, it requires customers to share their bank account information, which removes the fraud protection that credit cards offer to their customers and it enables retailers to use the customer data they are collecting any way they prefer, rather than for the benefit of the customer,” he said.

Mehta explained that Apple’s model, instead, has been to either not collect any data or provide a repository for this data, which is controlled by the customer. “While many arguments have been written touting Apple Pay’s ease-of-use, I believe as more violations of customer trust occur, Apple’s ability to be highly profitable without having to depend on using customer information in ways they might not want will be their biggest differentiator, one that very few will be able to copy, and the reason the Apple Pay model will be successful,” he said.

In fact, what makes Apple Pay attractive to consumers – its promise of anonymity – could be its biggest stumbling block with retailers. Time Magazine reported at the end of October that retailer backlash against the anonymity of Apple Pay was mounting.

Aamoth added that consumers might also be short-changed by that anonymity.

“Consumers should have choice; they should have the ability to choose any legal and financially backed payment option they want. But they need to realize that if they choose truly anonymous payment, the kind Apple Pay promises, there could be unintended consequences. For example, they may not see the promotions and service they expected before, because merchants are unable to tap into purchase data that helps them better understand individual shopping behavior,” he said.

Tendell cautioned that until Apple reveals how much data is collected and how it is stored, it is tough to know the privacy and security of the technology. “On paper it looks great, but where is all this data stored? Who has access to it and how is it being used are questions that will be asked later. Right now, the main concern will be staying safe with the upcoming holiday season. Consumers should tread lightly because there are likely going to be a lot of eyes looking not only for security risks but privacy leaks as well,” he warned.

For Aamoth the downside of anonymous payments is the taking away of the choice to be identified. “Choice and control should be given to the consumer,” he emphasized.

CurrentC has its own privacy issues to contend with, even before it has launched. “With CurrentC being hacked before it’s even come out it is safe to say Apple Pay will dominate this market for a while,” Tendell said. MCX admitted that hackers had accessed an undisclosed number of email addresses from its CurrentC system, but, according to ComputerWorld, downplayed the threat.

Apple’s promises of security and anonymity are tempting, but no system is completely secure. “Consumers need to be aware. They need to be cautious. If you want to get away from any malicious activity with digital currency, the only way to do so is to resort back to cash. The battle between the people who build security systems and those that desire to break them will go on forever,” said Aamoth.

“Banks have been charged with protecting our money and have failed so far. The technologies are necessary to move things along and banks will adapt.” – Tendell
There are others with an interest in keeping Apple Pay from gaining customer dominance. Bailey explained: “New payment systems for retailers are more disruptive for existing payment systems than they are for retailers. It may be possible that Visa/MC/AmEx/Discover want the retailers to flex their muscles a bit here. Retailers need these current systems so they may be trying to curry favor with the credit card companies.”

Tendell added: “Banks have been charged with protecting our money and have failed so far. The technologies are necessary to move things along and banks will adapt.”

While the battle continues between Apple Pay and its competitors as well as retailers and financial institutions with their own interests, in the end it will be consumer choice that shapes the field. As Aamoth said: “The consumer will define the ability for a system to meet their needs. The combination of the consumer and merchant adoption can certainly create enough of an alternative to effectively compete with Apple Pay. My feeling is that the tenets of Apple Pay: high level of security, multi-factor identification, are something that all payment systems will ultimately implement.”

The battles playing out on the payment system field are a warning for financial institutions. Aamoth added: “Banks have been resting on consumer’s wallets for a long time. They’ve taken advantage of exorbitant payment rates and pay structures to compensate for true savings and the cash they would have gotten through that. They need to adapt and shift to a customer and merchant-centric approach.”