Weekly Update

The folly of MCX’s exclusivity mandate

CVS and Rite Aid made headlines over the weekend by pulling the plug on Apple Pay, disabling NFC readers that had already been installed to work with Apple’s new mobile payments system as well as Google Wallet. Like Walmart, which has never supported Apple Pay, the drugstore chains are part of a consortium of dozens of retailers developing their own mobile payments offering, which is dubbed CurrentC and is expected to launch nationwide next year.

CurrentC withdraws money directly from consumers’ bank accounts, enabling the consortium – known as the Merchant Customer Exchange, or MCX — to avoid paying roughly two percent in transaction fees charged by credit card companies. Just as importantly, operating their own mobile payments scheme would give MCX members access to invaluable transaction data, enabling them to deliver highly targeted marketing messages based on users’ purchases and other shopping habits. Apple Pay encrypts customers’ purchases, preventing retailers from tracking users across merchants for the purpose of delivering targeted ads.

Neither CVS nor Rite Aid have commented on their dismantling of Apple Play, but MCX reportedly forbids its members from supporting competing mobile payments systems without incurring steep fines. That prohibition could be costly, however, if Apple Pay quickly gains traction. Consumers who use iPhones are generally affluent, tech-savvy types who are likely to experiment with mobile payments, and Apple CEO Tim Cook said this week that iPhone 6 owners registered more than 1 million credit cards through the first three days of Apple Pay. And while Apple’s NFC-based system is being praised for its simplicity and ease of use, CurrentC – which involves PIN numbers and QR codes – is more cumbersome and time-consuming, and may be less secure.

Prohibiting members from supporting Apple Pay and other competing systems is short-sighted and dangerous, but MCX may be able to leverage some important advantages as it brings its system online next year. Unlike Apple Pay, which is supported only by the newest iPhones and iPads, CurrentC can be used by almost any smartphone with a camera. CurrentC could generate an enormous amount of data that would be presumably be shared by the retailers, laying the foundation for targeted, customized mobile marketing campaigns. MCX members could also develop collaborative loyalty programs, providing the kind of valuable incentives that have driven the success of Starbucks’ mobile payments initiative. And because the system cuts out credit card companies, retailers might be able to provide substantial discounts to CurrentC users.

FierceWirelessIT reported last year that MCX began signing its retail partners to three-year exclusivity deals beginning in early 2012, so initial backers may be free to accept Apple Pay and other mobile payments systems starting in the next several months. Despite CurrentC’s potential advantages, users won’t embrace any mobile payments scheme that is less convenient than using credit cards or cash at the point of sales. Meanwhile, users with Apple Play-enabled devices account for a small fraction of the overall market of smartphone owners, leaving MCX a huge audience that isn’t addressed by Apple’s system. MCX would be wise to kill the exclusivity requirement entirely, enabling backers to accept Apple Pay while it streamlines CurrentC enough that users will tolerate it. If MCX continues to enforce the three-year exclusivity mandate, members should be prepared to fully leverage Apple Pay the minute they can.