Why Rite Aid And CVS Stopped Taking Apple Pay

The introduction of Apple Pay last Monday was widely described as the dawn of a new era for smartphone payments. But within a week, two major pharmacy chains, Rite Aid (RAD) and CVS (CVS), rejected Apple’s (AAPL) version of the future: Both disabled Apple Pay (as well as other tap-to-pay mobile payments systems Google Wallet and Softcard). As expected, customers took to Twitter to complain, and they almost universally sided with the smartphone company over the drugstores.

CVS hasn’t publicly explained itself. Rite Aid spokeswoman Ashley Flower defended the company in an e-mail to Bloomberg Businessweek. “We are continually evaluating various forms of mobile payment technologies, and are committed to offering convenient, reliable, and secure payment methods that meet the needs of our customers,” she wrote.

That’s not the whole story. Objections to Apple Pay aren’t actually about convenience, reliability, or security—they are about a burgeoning war between a consortium of merchants, led by Walmart (WMT), and the credit card companies. Rite Aid, CVS, Walmart, Best Buy (BBY), and about 50 other retailers have been working on their own mobile payments system, called CurrentC. Unlike Apple Pay, which works in conjunction with Visa (V), MasterCard (MA), and American Express (AXP), CurrentC cuts out the credit card networks altogether. The benefit to the merchants is clear: They would save the swipe fees they now pay to the credit card companies, which average about 2 percent of the cost of transactions.

CurrentC is also likely to allow merchants to gather data about transactions and offer discounts and loyalty programs. This stands in marked contrast to the anonymity built into Apple Pay, which has drawn concerns even from some merchants that are actively supporting the system.

Apple Chief Executive Tim Cook would be happy to have this fight with CurrentC’s backers. When he introduced Apple Pay last month, Cook said mobile payments had failed so far because they were built to serve the business models of their creators, rather than to provide a useful experience for customers. Because Apple’s primary goal is to sell more phones, tablets, and laptops, its system is more straightforward.

Rite Aid and CVS screwed up the optics on this one. It’s hard to argue that you’re doing right by your customers when you stop accepting a form of payment that you’ve already demonstrated presents no technical hurdles. They also don’t have an alternative to offer. CurrentC isn’t expected to be ready until 2015, and the specifics of the system aren’t public.

The irony of this conflict is that Apple, the innovator, is in the position of endorsing the status quo. Walmart and its brick-and-mortar allies, on the other hand, are actively trying to turn the payments industry on its head and challenge the entrenched power of the credit card networks. Apple is happy to help the incumbents make the existing system feel slicker to customers, without touching the underlying economics. In return, American Express, Visa, and MasterCard have been solidly in Apple’s corner.

(Bloomberg Businessweek)