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Attention, Wal-Mart Shopper: Apple Pay Isn't for You

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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If retailers roll out a mobile wallet that bypasses the major credit card networks, which types of consumers benefit? Will the payment network, ultimately, catch on?

These questions became more that just hypothetical amid reports that Rite Aid and CVS disabled the use of Apple Pay at the checkout counter. The stores are presumably trying to scupper Apple's mobile wallet rollout because they are part of a consortium developing a mobile payment product of their own, CurrentC.

When a group of retailers including CVS, Rite Aid, Wal-Mart, Target and Lowe's got fed up with the fees charged by Visa, MasterCard and American Express (Apple's big partners on Apple Pay), they started working on CurrentC, which cuts those networks out of the payment process. When it rolls out next year, CurrentC is expected to connect with checking accounts and gift cards. For consumers who don't have enough money in their checking accounts to cover their purchases, it also connects with store-brand cards, also known as private-label or white-label cards.

You've probably seen the offers for these cards: 30 percent off your purchase today if you open up a Gap credit card! Take $10 off your first purchase with your new TJ Maxx card!

Here's where I think the calculation gets interesting: If merchants want to dent reliance on Visa, MasterCard and American Express (which have about 80 percent of the market), they'll implicitly be encouraging consumers to use white-label cards. That would be a boon to big players in that market, including Synchrony Financial and Alliance Data. But would it be better for consumers?

Even though consumer credit card use overall has recently slowed, presumably because more people have jobs, store cards have boomed since the financial crisis ended. Balances grew by 6 percent in 2013, versus 3 percent for general-purpose cards, the Wall Street Journal reports.

White-label cards are generally perceived to be riskier than your typical Visa or MasterCard, meaning analysts worry that more store-card users will run up debt they can't pay back. For example, the leader in the space, Synchrony -- which provides cards for huge brands including Amazon, Wal-Mart and T.J. Maxx -- said last year that it was setting aside more money to cover the cost of delinquent loans. At the same time, the core businesses at Visa and MasterCard got stronger.

In addition, store cards have historically charged very high interest rates and late fees to account for the fact that they cater to higher-risk consumers.

Lots of people have focused on ease of use as the factor that will determine whether Apple Pay or CurrentC wins more customers. User experience will probably play a big role, but I also wonder which groups of people these two payment systems will capture, and how that affects adoption.

When it comes to figuring out how payments systems win, PayPal and eBay provide an interesting case study from the past. Citi and Wells Fargo were working hard to create products that crushed PayPal, but PayPal prevailed because it solved a very specific problem for sellers on the eBay platform: it protected them from online fraud. That very real value meant that it grew like wildfire on the eBay network. And despite the fact that eBay hated PayPal, despite the fact that it at one time teamed up with banks to destroy the payments company, eBay eventually capitulated and PayPal blossomed.

One way to think about which mobile payment system will win is to think about which consumers will be better credit risks when they do use a mobile wallet. Another is to think about which payment system most elegantly solves a problem for customers, as PayPal did for eBay.

Apple Pay targets the mass affluent, that group of middle-class and wealthier folks who can afford the latest iPhones and have credit ratings that are good enough to qualify for Visa, MasterCard and American Express accounts. That's a large market that propels U.S. economic growth, but it doesn't necessarily account for the majority of Americans. The problem for them seems primarily to be ease of use.

CurrentC seems to be starting first with the lower end, higher-risk piece of the market, consumers who might use cheaper smartphones and may already have store-brand credit cards. It could appeal to a demographic that has a hard time getting access to credit, or has a hard time paying it back.

So there's a real possibility that adoption could vary based on the merchant, with a Target customer using Apple Pay and a Walmart customer hooked into CurrentC, because the e-wallets are solving two different problems for two different Americas.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editors on this story:
Toby Harshaw at tharshaw@bloomberg.net
Toby Harshaw at tharshaw@bloomberg.net