New Retail Alliance Takes on Google & Apple
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Digital payments are expected to be one of the largest growth areas in technology over the coming years, as the way that consumers pay for goods adapts to new trends. Google (NASDAQ: GOOG) is expanding Google Wallet, Apple (NASDAQ: AAPL) has Passbook and others are rushing into this new battleground from all sides.
In one of the most significant developments for the field, a new venture called the Merchant Customer Exchange (MCX) was recently formed through the collaboration of some of the nation’s leading retailers. The MCX, which will target near-field-communication (NFC) technology, is focused on providing a legitimate alternative to offerings from the big name players.
The Current State of the Industry
As things stand today, there is a growing battle heating up between the new and the old. On one side of this fight, the major credit card companies have come under pressure from many major retailers as processing fees have continued to accelerate. On the other side of the battle are products like Google Wallet. This digital wallet can be downloaded to any Android smartphone and allows consumers to use it to make payment at specific locations. There are currently a few hundred places that accept Google Wallet, but the number is rising. Apple’s Passbook works through a customer’s existing iTunes account, but follows the same basic principle.
A major feature of Google Wallet is its ability to work with GPS-enabled technology to provide consumers with relevant discounts from retailers that are in close proximity. This should give the company an attractive feature on which to advertise. Apple’s Passbook should have similar functionality and is expected to be included in the new iPhone to be released later this week.
Recognizing the importance of the growing mobile payment market, an impressive group of U.S. retailers has come together to form the new MCX. Included in the group are both Target (NYSE: TGT) and Wal-Mart (NYSE: WMT); these are two of the companies leading the lawsuits against the major credit card companies, claiming unfair practices resulting from swelling processing fees. It is not surprising that each is looking for an attractive alternative. The venture is "dedicated to offering consumers a versatile mobile commerce experience that will combine the convenience of paying at the register with customizable offers."
Clearly this group, which collectively represents over $1 trillion in annual sales, is forming an organization built to compete. What is perhaps most interesting about the MCX is that is has attracted direct competitors like Wal-Mart and Target, each with significant levels of enthusiasm. Terry Scully, Target’s President of Financial and Retail Services said "We believe MCX is uniquely qualified to offer the most comprehensive mobile payment options for consumers.” Mike Cook, Corporate VP and Assistant Treasurer at Wal-Mart stated, "MCX will leverage mobile technology to give consumers a faster and more convenient shopping experience while eliminating unnecessary costs for all stakeholders.”
Not only do these statements illustrate a rare point of agreement between the two major discounters, they highlight a critical point of differentiation between the MCX and other options. The MCX solution will be designed by the retailers themselves, meaning that its offering will likely address the needs of the retailers as much as those of consumers. This should give this option incredible leverage relative to its competition because while Apple and Google consumers tend to be extremely loyal, cost savings associated with using MCX may be too strong a pull.
As some evidence of this phenomenon is the success that Target has had with its Redcard. Target offers consumers a 5% discount when they use their Redcard; the option not only drives fees that more than offset the cost, it has successfully boosted business and shoppers choose Target trying to capture the savings. The MCX option will likely follow the same path on a much larger scale.
While it remains to be determined what technology choices will be made by the new entity, the capital behind the group has the potential to change the landscape, particularly for chip makers involved in the space. Broadcom (NASDAQ: BRCM), for example, is currently considered to have the leading chip in NFC. The company’s dominance in the 40-NM chip space gives it a competitive advantage in winning new business from the MCX, although it is far too early to have any concrete views on which suppliers will benefit.
In terms of how investors may monetize this news, there are two options. First, you may wish to buy a collection of the leading NFC chip makers to obtain broad base exposure to this growing industry. Companies like Broadcom, Qualcomm and NXP Semiconductors all produce competitive chips. The second option is to become vigilant in watching how this development unfolds in the market, waiting to commit your investment dollars until a more direct path appears. In either case, both NFC and MCX have significant potential over the next several years and should not be overlooked.
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