This Is How Walmart Can Win Its War With Apple

Corrected — 5:21 P.M.

When Apple Pay triumphantly launched last week, there was hope in the air. The service generally worked as advertised. The reviews were mostly positive. For a brief moment, it seemed, the emergence of phones-as-wallets would be one technology transition that happened smoothly.

But it's never that simple; not with this much money on the line. Over the weekend, news broke that Rite Aid and CVS were dropping support for Apple's payment system. An in-house memo, leaked by Slashgear, revealed the reason: The merchants plan to release their own mobile wallet next year. Until then, users of Apple Pay—or Google Wallet, or any other mobile payment service—would simply have to pay with plastic.

Apple Pay is not simply a fun new feature for your smartphone. It's the most audible shot in a larger conflict that pits retailers against credit card companies and banks in a battle for the future of payment. Apple is just the most recent—and most visible—belligerent in this battle, and now the fight is finally spilling over into the mainstream.

What This Is Really All About

Doug McMillon, CEO of Walmart, is at war with credit cards. From his perspective, American Express, Visa, Mastercard, and the banks who issue their products are shaking his company down for billions each year. Whenever a customer swipes a credit card, part of that payment—between 1% and 3%—goes to the card's issuer in what is known as an interchange or "swipe" fee. That means Walmart, and other major retailers, are losing serious money every time someone pulls out the plastic.

The retail giant has been fighting this situation for more than a decade. Back in 2003, Walmart was one of around 50 retailers to join an antitrust suit against Visa, Mastercard, and the banks that issue their cards, accusing them of conspiring to inflate credit-card fees above market rates. The card companies offered merchants $5.7 billion in compensation, as well other other concessions, but Walmart rejected the settlement in favor of filing separate lawsuits against individual companies.

It's not hard to understand why Walmart turned down the deal. Depending on how many of the company's customers are using credit cards, major retailers can spend billion of dollars in a single year on fees. That's why, at the end of the day, Walmart felt that money alone could not make things right. "The settlement does nothing to reform the price-fixing payments system that has let credit card swipe fees skyrocket over the past decade and nothing to keep them from continuing to soar in the future," explained Mallory Duncan, general counsel at the National Retail Federation, after his group (which includes Walmart) rejected the deal.

What merchants like Walmart really want is their own payment system -- one that isn't controlled by third-party financial companies who take whole percentage points of revenue for their services. So they decided to make one.

Wallet Wars

The retailers faced two challenges in trying to disrupt credit-card companies: One, getting a competing payment system into the hands of consumers; and two, creating a cheaper system to process those payments.

On the first count, companies like Starbucks have proven that consumers are willing to embrace proprietary wallet apps if they get deals in return. The coffee giant's app, released in 2009, allows users to fill a virtual Starbucks card with money and then pay by scanning an advanced bar code called a QR code. Loyal customers are rewarded with free coffee. The Starbucks app now accounts for 11% of the company's sales and over four million transactions a week. (Benjamin Vigier, the mastermind behind Starbucks' application, joined Apple in 2010.)

While apps emerged as a good consumer-facing approach to a modern payment system, merchants were also hard at work developing behind-the-scenes payment-processing systems. Target's REDcard looks like a normal debit card (it even offers cash back), but works only at Target stores and dodges traditional payment networks. "It’s a debit card in the sense that it’s debiting straight from a bank," explains James Wester, research director of global payments at IDC, "but using different rails."

Cheaper rails, that is. Target uses something called Automated Clearing House (ACH) to process REDcard transactions. Michael Archer, a global financial services expert at Kurt Salmon, estimates ACH transactions are one-tenth as expensive for retailers as credit cards, and a little less than half the cost of a normal debit card transaction. Multiply that times billions of transactions and it's a lot of savings.

In 2012, a group of retailers led by Walmart decided to combine these two approaches and make a mobile wallet app that would work across all of their stores. The companies formed a group—Merchant Customer Exchange, or MCX for short—and set to work creating a product that would be as usable as credit cards and work over a cheaper payment network, just like REDcard, by connecting directly to a user's checking account.

The result was CurrentC. The app, which is set to launch in the first half of 2015, works on iOS and Android phones and allows users to pay at participating retailers by scanning a code at checkout. CurrentC will automatically apply coupons and loyalty programs at the register, giving consumers an incentive to choose CurrentC over competing e-wallets.

Apple the Underdog?

Initial reviews of CurrentC are not flattering. TechCrunch called the service a "clunky attempt to kill Apple Pay and credit card fees" and complained that the system seems built for retailers, not consumers (which, after all, is true). Quartz mocked MCX merchants' penchant for developing anti-consumer technology (like this comically long receipt) and others worried the app was a conspiracy to grab customer data.

Apple Pay supporters have a point. CurrentC is clunky—at least in its current beta state—and Apple Pay certainly wins on privacy by keeping all transaction data away from merchants. But as hard as it is for Walmart detractors to admit, CurrentC also also has some advantages over Apple Pay.

For one, the largest retailers in the country have hitched their horse firmly to the CurrentC bandwagon. Apply Pay may have some big names—such as Walgreens, Toys R Us, McDonalds, and of course, Apple itself—but MCX has more. CurrentC's coalition includes Walmart, Target, K-Mart, 7-Eleven, Best Buy, Gap, Banana Republic, Dunkin' Donuts, and a host of other major retailers from a diverse mix of industries. Together, the participating merchants process more than $1 trillion in payments every year.

This stable of retail powerhouses puts CurrentC in a powerful position. Are consumers going to boycott their favorite stores just because they're asked to scan a code (or swipe a card) instead of wave their iPhone? Unlikely. Especially considering Apple Pay is limited to iPhone users only. The cross-platform CurrentC app may win fans simply because it's available to millions more people, and works at more popular stores.

Second, Apple Pay isn't especially appealing to retailers. The payment system costing merchants interchange fees every time it's used and they don't get any consumer data from purchases. The QR code technology that powers CurrentC is also less expensive than the NFC terminals required by Apple Pay, and many more stores already have QR readers installed.

Another problem with Apple Pay is that it's not built to support merchant loyalty programs. "The real value of mobile wallets is merchants can put loyalty in them and get repeat business," says Henry Helgeson, CEO of Merchant Warehouse, a company that provides point-of-sale technology for both platforms. (Helgeson predicts Apple will add loyalty features in the next version.)

"Apple Pay is a different form factor for the same things that have been plaguing [retailers] for decades," says IDC's Wester. "Other than getting a very vocal group of people who are loyal to Apple, I'm not sure a good value proposition has been shown to merchants yet." CurrentC, meanwhile, has the potential to save the MCX coalition billions annually in processing fees.

Third, and perhaps most importantly, Apple Pay isn't really a great deal for customers, either. Industry experts are skeptical the masses will adopt a mobile wallet that offers a slightly more convenient experience, and not much more. "'Hey, I get to use a credit card on my phone' is not a sufficient value proposition," argues Archer, the financial services analyst. "Ongoing use requires a return of value. 'Cool' is good for one time. Probably not beyond that."

The research backs him up. In a recent study by his firm, 61% of current mobile wallet users said rewards and loyalty programs are the primary reason they use their smartphone to make payments. CurrentC is built around these sorts of deals. Apple Pay decidedly is not.

Who Should We Root For?

Of course, neither side is really in it to help consumers. Apple is arguably in league with the banks and card companies, accepting a slice of each transaction as a reward for helping perpetuate the credit-card status quo. Meanwhile, Walmart is in this fight to lower its expenses, not make things cheaper for the average Joe.

However, despite MCX's less-than-pure motivations, its wallet app is more likely to save customers money. Target's REDcard offers 5% off all purchases as a reward for using a cheaper payment processor and giving Target information on what you buy. If CurrentC ultimately offers similar deals, consumers will be forced to choose between cool and cash -- and many may ultimately opt for the latter.

One thing's for sure: Neither side will go down without a fight.

Correction: A previous version of this article said Apple Pay did not support debit cards. In fact, some debit cards are supported.