Apple Pay Faces Challenge as CVS, Rite Aid Reject System

Apple Inc.’s mobile payment technology ran into a roadblock a week after its introduction as CVS Health Corp. and Rite Aid Corp., part of a consortium developing a competing system, disabled Apple Pay in their drugstores.

CVS and Rite Aid are among 220,000 U.S. merchants that already have technology in place to read the short-range wireless signals that enable customers of Apple Pay or similar services to make a purchase by waving their smartphones. The retailers weren’t among those specifically named as accepting Apple Pay when the iPhone maker revealed its system last month.

The drug retailers stopped Apple Pay last week, said a person familiar with the situation who asked not to be named. The website MacRumors.com earlier reported that the stores disabled so-called contactless payment systems, and Slashgear.com published a purported internal memo in which Rite Aid says it is instead focusing on the consortium’s system.

“This act by CVS and Rite Aid heralds the advent of the imminent battle in the mobile pay system,” Anindya Ghose, a marketing and information-technology professor at New York University, said yesterday in an e-mail.

Spokesmen for Woonsocket, Rhode Island-based CVS and Camp Hill, Pennsylvania-based Rite Aid didn’t respond to voice messages and e-mails. CVS has about 7,700 retail pharmacies and Rite Aid has about 4,570.

Customer Feedback

“The feedback we are getting from customers and retailers about Apple Pay is overwhelmingly positive and enthusiastic,” Trudy Muller, a spokeswoman for Apple, said in an e-mail. “We are working to get as many merchants as possible to support this convenient, secure and private payment option.”

Apple’s shares, up 31 percent this year through yesterday, fell 3 cents to $105.19 as of 1:39 p.m. in New York.

At stake is a market that’s projected to jump to $90 billion in 2017 from $12.8 billion in 2012, according to Forrester Research Inc. Apple’s entry into mobile payments follows efforts by Square Inc., Google Inc. and Softcard -- a wallet application backed by the three largest U.S. wireless carriers -- that all failed to gain widespread appeal.

Chief Executive Officer Tim Cook is trying to push Cupertino, California-based Apple into new businesses that further immerse users in the Apple digital ecosystem, which encourages repeat purchases over time.

Merchant Group

CVS and Rite Aid are part of a consortium of retailers called the Merchant Customer Exchange that has been working on its own mobile payment system to help bypass credit card companies. The group’s system, called CurrentC, is in pilot tests in select locations across the country with plans for a national rollout next year, according to a statement on its website. Network members include Wal-Mart Stores Inc., Lowe’s Cos. and Target Corp., the website shows.

Apple’s strategy is the opposite. It partnered with the major banks and credit card companies -- Visa Inc., MasterCard Inc. and American Express Co. -- that Apple says account for more than 80 percent of U.S. credit-card purchases, allowing the iPhone maker to piggyback on their checkout systems. Apple will also collect fees from the card issuers, according to three people familiar with the deals who weren’t authorized to discuss them.

Apple Pay works on the company’s new iPhone 6 and 6 Plus, which have so-called near-field communication technology built in. The big catch for Apple is that merchants have to upgrade their credit and debit card systems to them read those short-wave signals.

Card Issuers

Credit-card issuers are pushing U.S. merchants to upgrade their payment terminals within the next year to accept chip-based debit and credit cards, which are usually capable of handling near-field communications technology. The deadline for merchants to make the switch is October 2015; so far about 220,000 U.S. stores have done so, out of more than 10 million. The upgrade costs $500 to $1,000 per checkout terminal, according to Javelin Strategy & Research.

Some merchants are finding themselves tied to the Merchant Customer Exchange, known as MCX, while Apple Pay is being rolled out. “Merchants are contractually obligated to MCX, so they really don’t have a choice,” Nathalie Reinelt, an analyst with Aite Group, said in an e-mail.

While hundreds of thousands of stores have NFC technology, it doesn’t necessarily mean their systems have the software or ability to facilitate Apple Pay, said Richard Crone, chief executive officer of Crone Consulting LLC, a researcher in San Francisco.

Terminal Technology

“They are old terminals,” Crone said. As many as half of them aren’t operating because either merchant turned them off or the processor and infrastructure isn’t in place to support them, he said.

Apple Pay had been working at CVS and Rite Aid, Edward McLaughlin, chief emerging payments officer at MasterCard, said in a telephone interview. “It was working great,” he said. “It’s almost baffling to me” that stores would block the payment systems.

Even before Apple Pay began working on Oct. 20, some retailers were expressing concerns, especially those that want to collect user data.

“The one who enrolls is the one who controls” the data and the ability to deliver ads and offers, Crone said. “We figure that is worth $300 per active wallet user per year. To put that in perspective, that’s twice the gross revenue that a bank makes on a checking account.”

At Panera Bread Co., which is experimenting with taking to-go orders through its app and replacing registers with tablets, a customer using Apple Pay would still have to hand the cashier her rewards card or recite her phone number to get a loyalty discount.

“Obviously, that’s not where we want to be,” Blaine Hurst, Panera’s executive vice president for technology and transformation, told Bloomberg Businessweek. “Why can’t I just walk up to a cashier with my phone and all that information magically appears?”

(An earlier version of this story had an incorrect share price in the fifth paragraph.)

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