Today's Opinions, Tomorrow's Reality 

Rewarding Bad Behavior

By David G. Young

Washington, DC, October 28, 2014 --  

Apple's new mobile payment system threatens to enrich the credit card industry for yet another generation.

When Macy's bridal registry began offering cash back to the bride for all purchased gifts, it marked a new low for rewards programs. The company was essentially bribing couples to team up with the department store to overcharge their guests for wedding gifts. Not very nice. Fortunately for wedding goers, Macy's has since discontinued the egregious policy.

This sketchy practice is similar to what consumers do every day with their reward credit cards at local stores. When people buy a coffee with a rewards card and get 1 percent cash back, that money comes out of the two to three percent swipe fee the bank charges the merchant. Why should people pay with cash when they can get "rewarded" for helping banks screw over merchants?

It is this system that is behind a brewing fight between banks, technology companies and a group of merchants who are starting to fight back. Over the weekend, American pharmacy giants CVS and Rite Aid pulled the plug on the week-old ApplePay system and the three-year-old Google Wallet system1, two similar mobile payment technologies that let consumers pay for goods by tapping their phones to a checkout terminal.

CVS and Rite Aid are part of a consortium of retailers called MCX who are developing a rival payment system called CurrentC.2 Unlike ApplePay and Google Wallet, CurrentC does not piggyback on the credit card system (and its corresponding swipe fees and rewards kickbacks). CurrentC works by going around the credit card companies and deducting payments directly from consumers' checking accounts. Big name retailers like Target and Wal-Mart have signed on to this initiative, and its reported exclusivity clause probably explains why CVS and Rite Aid pulled the plug on Apple Pay and Google Wallet.

For retailers, which payment system succeeds is a huge deal. Swipe fees cost retailers $30 billion each year, according to the National Retail Federation.3 Merchants have long hated paying these fees, and it has been a growing problem as credit cards have become an ever larger percentage of retail transactions. If folks truly do switch from plastic cards to mobile phones, then retailers want to make sure they don't get stuck paying a two to three percent vig for the next generation.

For consumers, the relative benefits of each system are less clear. Yes, getting cash back from credit card purchases (plus the float of not having to pay your credit card bill for a month) are real benefits. But to the extent that merchants pass on the cost of the swipe fees to consumers through higher prices, this latter benefit may be nil. Is getting one percent cash back really better than just getting a lower prices on products?

The fact that Apple and Google have systems that ride on top of the existing credit card infrastructure has little to do with their love for swipe fees, and more to do with the fact that it is the path of least resistance. Neither company has a big incentive to pick a fight with the credit card companies. And while not publicly disclosed, Apple probably does benefit from the status quo by taking a small cut of the swipe fees for ApplePay transactions in return for extra anti-fraud protection.

Google, meanwhile, has been too busy with other fights over Google Wallet to take on the credit card industry. For three years, Google Wallet has been disabled on Android phones customized by Verizon and other network carriers so the carriers can promote their own rival system named SoftCard, which is also compatible with near field communication (NFC) terminals.5 This rivalry is one of the main reasons Google Wallet (and SoftCard for that matter) has never really caught on. But Google Wallet's troubles may be coming to an end. Google quietly released a new technology in the spring called Host Card Emulation which promises to let it to circumvent carrier blocks on devices with the latest Android operating system.

Apple's launch of ApplePay last weekend has added huge momentum for NFC payments. Its system is compatible with the same retail hardware used by Google Wallet, giving these technologies have a big head start. The retailers' rival CurrentC system isn't planned for availability until next year, and uses an awkward mechanism of scanning QR codes to process payments. This QR code system is similar to the way airlines' mobile boarding passes work today, and probably will be less popular with consumers. Buy there is no technical reason that a mobile payment system that bypasses the credit card companies has to be clunky. If CurrentC somehow gains traction, you can bet that Apple and Google will partner with it to make the experience as slick as it is on their own platforms.

Related Web Columns:

Partners in Crime
The Fundamental Cause of Identity Theft
, July 21, 2005


1. Forbes, Apple Pay Is Now Blocked At CVS And Rite Aid, October 27, 2014

2. Ibid.

3. National Retail Federation, Swipe Fees, As Posted October 27, 2014

4. Business Insider, Wal-Mart's Answer to Apple Pay Sounds Terrible, October 27, 2014

5. Marketing Land, Like Google Wallet, Apple Pay Blocked By Merchant "Conspiracy", October 28, 2014