Recent moves by Rite Aid and CVS to stop taking mobile payments from Apple Pay and other NFC-enabled systems stem from a protracted battle between major U.S. retailers and Visa and MasterCard.
The battle goes back to at least 1996, when Walmart, Sears and other big retailers filed a class-action lawsuit arguing that Visa and MasterCard violated antitrust laws. The credit card companies ultimately agreed to pay the retailers $3 billion to settle the suit in 2003.
In the current skirmish, the issue is over retailers paying 2% or more in fees, better known as "swipe fees," to credit card companies for customers to use Apple Pay or other systems that rely on major credit cards.
"Retailers and credit card companies have been going to war for years [over the fees retailers pay], but this latest battle will be fought more vigorously," said Gartner analyst Avivah Litan in an interview. "Consumers all want to pay with Apple Pay and love it and that's why this is headed to a huge conflict that will eventually play out in the courtroom."
While other analysts downplayed the prospects of a legal fight between credit card companies and retailers, they agreed that the dispute is contentious and the stakes are enormous.
What's clear is that consumers aren't getting the consideration they deserve by having access to a more widespread system for secure mobile payments through Apple Pay.
Both Rite Aid and CVS are members of Merchant Customer Exchange, which is made up of 58 of the nation's largest retailers, including Walmart, Sears and Best Buy. MCX launched a mobile payment network called CurrentC in September (download PDF) that competes with Apple Pay, Google Wallet and others that rely on a Near Field Communication chip inside a smartphone.
CurrentC technology relies on QR codes in a smartphone app to communicate with retailers via more conventional in-store payment terminals using QR code readers instead of NFC-ready terminals. The CurrentC app will be free in Apple's App Store and in Google Play sometime in 2015.
MCX argued that CurrentC will be honored in 110,000 merchant locations when available and that customers will get to pay using a variety of financial accounts, including a checking account, merchant gift card or "select" merchant-branded credit or debit account. Apple Pay requires users to back payments from a number of large banks that use Visa, MasterCard or American Express.
MCX also said that CurrentC will be a more secure way to pay because it stores sensitive user information in its cloud vault and not on a phone. Apple Pay has been called the most secure mobile payment services launched to date: it is backed by token security -- a secure element chip inside a device and the Touch ID fingerprint scanner on the latest iPhone 6 and iPhone 6 Plus. Apple plans to expand the system to other devices in the future.
Apple didn't even list CVS and Rite Aid as supporting Apple Pay among the 39 merchants it named on Oct. 16 that would initially support the service. Even so, some Apple Pay users said they were able to use the service at those stores for a short while, only to see the capability turned off. Incensed customers in a MacRumors.com message board said they would take their drugstore business to other retailers such as Walgreen's, which supports Apple Pay.
An internal Rite Aid memo obtained by SlashGear instructed store employees to tell customers that Rite Aid is working with a group of large retailers to make its own mobile wallet available next year, presumably referring to CurrentC.
Rite Aid and CVS weren't the first to turn off NFC payments. In March, Computerworld found that Best Buy and 7-Eleven stores had turned off NFC payments. Both are members of MCX. At the time, the move affected NFC payments using Google Wallet, Softcard (earlier known as Isis), and some others. But Apple Pay is widely expected to be more popular than other NFC models.
Litan argued that Visa and MasterCard might have grounds to file a lawsuit against retailers like CVS and Rite Aid if the card companies argue that all forms of their cards, even on an iPhone, should be acceptable in a store.
However, Peter Olynick, payments lead of Carlisle and Gallagher Consulting Group, said he doesn't see grounds for that kind of lawsuit. "It's up to the individual merchant what type of payment terminal they use and whether it's a card swipe or imprint machine or whatever," Olynick said.
He said MCX is finding ways to "sidestep Visa and MasterCard" and will probably allow payments over CurrentC to be made by what's known as an Automated Clearing House from a personal checking account that charges far lower fees to merchants than banks do for credit cards.
Credit card fees paid by merchants can run from 2% to 4%, with smaller retailers paying higher rates. By comparison, Square's technology allows any small business to attach its square card reader to a smartphone or tablet for a 2.75% fee.
Consumers might not care what fees a retailer pays to a credit card company, but it has become a major concern to large stores who have argued that lower fees could result in lower prices to consumers. "MCX has mobilized a fleet of the most powerful retailers in the US, giving them considerable bargaining power," said Jordan McKee, an analyst at 451 Research. "A group of high-volume merchants oriented around a common goal, with a collective, deep-seated hatred for swipe fees, is clearly something that the payments industry cannot completely disregard.
"Many of these merchants have been pushing back on swipe fees for years and feel their concerns have not been answered by the bank issuers and credit card networks," McKee said. "They see the transition to mobile payments as the opportune time to equal the score."
He argued that the MCX approach to keep its merchants locked to CurrentC by turning off NFC terminals is "undoubtedly misguided" and is a "scorched earth approach that attempts to stifle the competition. It's a classic case of businesses acting on their own self-interests while completely disregarding the consumer.
"Inevitably, these merchants will realize that limiting consumer choice at the point of sale is a significant misstep," he said. "MCX must understand that consumers are like water; you can try to constrain them, but they'll inevitably do what they want and cause damage along the way."
Litan was more sympathetic to the plight of retailers: "I'm on the side of free competition and a big believer that there's not a fair playfield, since Visa, MasterCard and American Express have a virtual monopoly with over 80% of the market -- which is the definition of a monopoly.
"Walmart and Best Buy and others don't want Apple Pay because it just promotes the Visa and MasterCard payments approach and the retailers are just exhausted at having to pay these high rates," Litan said.
In the 2003 case, the large retailers had argued that Visa and MasterCard violated antitrust laws by forcing merchants to accept their debit cards if they wanted to accept their credit cards. Visa and MasterCard agreed to no longer require merchants to accept both types of cards and in addition to making the $3 billion settlement, the card networks lowered the fees they charged merchants for debit card transactions.
Though the MCX opposition to NFC payments could slow the adoption of mobile payments in the U.S., Litan took the other view.
"This battle will accelerate mobile payments and cause it to roll out faster because of the competition from Apple Pay," Litan said. "MCX has taken forever to roll out CurrentC and they should get off their duff. The question is whether they really are competitive, but they haven't done squat and have just been talking it about for years."
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