Mercator Blog

Analyst Back and Forth: CVS Pay—One Too Many “Pays” or Just Enough?
Date: September 15, 2016
Research Team
Below Raymond Pucci, Associate Director, Research Services, Mercator Advisory Group shares an email exchange he recently had with two Mercator colleagues regarding CVS Pay and the recent flurry of single-merchant payment programs. They discuss the recently announced CVS Pay and the growing list of mobile pay and integrated feature/functionality among major U.S. merchants. The following is an edited transcript of Ray’s email exchange with Sarah Grotta, Director of Debit Practice, and Joseph Walent, Senior Analyst, Emerging Technologies Advisory Group.

Ray: The recent CVS Pay announcement reminded me of a movie sequel, with a familiar plot and story line but a new cast of characters. Any thoughts on how CVS Pay will impact the payments industry and what the future implications for other retailers seeking to offer similar payment apps of their own? CVS is distinct for the sheer size and depth of its customer base. Even if not all of the supposedly 70 million users are active users, that’s a big footprint for sure. CVS has seemingly built an integrated system that ties together (1) mobile payments via bar code scan (sorry, no Near Field Communication accepted here, Apple or Android), (2) CVS ExtraCare loyalty features, and (3) pharmacy prescription order and pickup. Not bad for starters. CVS Pay is initially being tested in selected Mid-Atlantic stores. Too bad, since I was hoping we could do a Mercator payments case study in the CVS conveniently located across the street from our worldwide headquarters.

Sarah: I agree, Ray, the app is a bit “me too,” but at least it appears to include the same features as successful mobile payment solutions like Starbucks and Dunkin’ Donuts. CVS promises to make prescription management easier through the app and also includes its ExtraCare capabilities. The combination of convenience and loyalty has worked really, really well for Starbucks and Dunkin. Walmart Pay, however, did not include loyalty functionality and is off to a rather slow start. Perhaps that will change over time, or it may be an indication that mobile as solely a new payments form factor just doesn’t cut it with consumers. There has to be a real reason to change the engrained habit of paying with cash or card.

I don’t live in the test markets for CVS Pay either. I would really like to see how the payment process works. If the interaction with the point-of-sale terminal is more intuitive and faster than a payment using an EMV chip card, then that would be a plus. Perhaps CVS is borrowing some technology from the erstwhile MCX CurrentC platform.

Joe: You both bring up some interesting points. In light of continued consolidation under way in the retail pharmacy market with Walgreen’s proposed acquisition of Rite Aid Pharmacy under review, CVS had to make sure it was positioned to take on Walgreen’s expanding loyalty and mobile pay format. The advantage that single-merchant wallets originally held over universal payment mobile wallets was the integration of loyalty program with the payment scheme. Of late, that distinction has become increasingly porous. Walgreen’s integration of its Balance Rewards program with Apple Pay and its recently launched integration with Android Pay creates a NFC-oriented solution that will speed up the checkout process at the front of the store. While it remains to be seen how Walgreen’s acquisition of Rite Aid will play out, should it come to pass it will be interesting to see how the integration of the two companies’ corresponding loyalty programs is handled, not to mention what will happen with Rite Aid’s membership in Plenti, the multi-merchant rewards program. As a Rite Aid customer and an “accidental” Plenti beneficiary as a consequence, I am curious to see how the various programs are combined. In-store pharmacies will be the other option. I’ve read that Kroger is looking into acquiring the Rite Aid and Walgreen’s outlets that would need to be divested in the Walgreen’s acquisition of Rite Aid as means to expand Kroger’s own footprint in the pharmacy market. It would be interesting to consider how grocery store loyalty and payment programs match up as there is increasing cross-over between the two retail segments.

Ray: I concur with both of you that loyalty and convenience are two key drivers of these mobile pay programs. Sarah mentioned Starbucks. Look at how that company achieved escape velocity in the world of loyalty programs. Starbucks has made accruing loyalty rewards like a game and is adept at generating purchases by sending members targeted promotions for extra points: “Buy these 3 drinks in the next 5 days” or “Make a purchase for 5 or 10 consecutive days.” You get the point. And Starbucks gets the results: 25% of Starbucks transactions at the point of sale are paid via smartphone. Additionally, the program’s Mobile Order and Pay feature increases customer throughput and enhances store productivity throughout the day. Members also spend more than nonmember customers in Starbucks stores, and the rewards program provides excellent analytics data to boot. Also, like Joe, I am an “accidental” Plenti loyalty member. (FYI—see the August 2016 Mercator research note Can Coalition Loyalty Programs Succeed in the U.S.?  Plenti’s website is extremely passive and yawn-inducing, and to me, fails to energize member participation. I’m curious to see how well CVS Pay enhances their existing Extra Care loyalty program and whether it’s more emblematic of Starbucks than Plenti. Having the pharmacy tie-in is certainly a big CVS advantage. But I still think CVS Pay is missing the boat on NFC enablement. That may change down the road, especially with rival Walgreen’s having both Apple and Android Pay.

Sarah: Oh, you had to go there. NFC. CVS was a very early adopter of NFC, way back to version 1, so probably has more experience with it than most retailers do. If you will recall, CVS terminals took NFC payment devices, but then the company turned off that capability with the roll-out of Apple Pay. This was done in support (either moral or contractual)of the now defunct MCX/CurrentC product. CVS was a partner in the MCX consortium, which offered a merchant-based mobile payment and loyalty solution, based on, you guessed it, QR codes. Perhaps CVS is thinking that with rather anemic statistics on the use of payment apps like Apple Pay, Android Pay, and Samsung Pay, and the fact that very, very few issuers provide EMV chip cards with dual capabilities for both contact and contactless payment, it was just easier to not support NFC until it could support a broader range of customers. Right now, fewer than 10% of U.S. terminals are supporting NFC.

Joe: I agree. CVS is likely playing a canny game, well aware of consumer adoption of NFC payment schemes. I think the CVS program will be a good test case of how QR-coded payment schemes coupled with loyalty programs operate outside of quick serve restaurants. That said, I am curious how the CVS program will handle prescription refills. Will they be handled using something like the “order-ahead” capability that both Starbucks and Dunkin’ Donuts have rolled out? I also am wondering if pharmacies, which widely have drive-thru already in use, allow for “Mobile order, drive-thru pick up” where a customer refilling a prescription might also add some health and beauty aids and other products to the order that could be dispensed via the drive-thru. Now, it would be hard to fit the 8-roll of paper towels through the drive-thru drawer, but I am sure that people who have difficulty walking or parents of young children who do not want to wrangle their tots through the store would want to use it for smaller items like toothpaste. Paying for those items at the time of order, as with the QSR order-ahead capability might make it work economically. Now, I’ll crawl back out of that rabbit hole and say that while NFC is limited in where it is supported, I am finding that retailers in my area are reporting a lot more use in the last six months. I would guess that trend is in part driven by the roll-out of the iPhone SE and the natural device refresh cycle progressing. But don’t get me started on that or I’ll get nostalgic for the old Square Pay!