Home Depot, Best Buy In Contactless Interchange Fee Showdown

Two of the biggest powerhouses in retail today—Home Depot and Best Buy—are about to reflect the yin and yang of the contactless payment struggle, with Home Depot quietly planning on deploying contactless chainwide in about a month. At the same time, Best Buy—an early and prominent contactless advocate, with full deployments from April of last year—is threatening to abandon much of the technology.

Ironically, the same contactless albatross is behind both moves: Visa's pricing policy that charges a lot more for contactless debit transactions, compared with MasterCard.

Home Depot's move will quietly start happening in about a month, as it will start to distribute more than 20,000 contactless readers it obtained from Ingenico, more than enough to outfit lanes in all of its 2,238 stores. The full deployment is expected to be complete by the end of the year.

But even though the contactless endorsement of the $71 billion chain is quite powerful and influential, it may well be the ambivalence from the $35 billion Best Buy chain that could have the greater impact.

"I am very concerned about the Best Buy move," said Philip Philliou, a former MasterCard and American Express executive who now trains on payment issues as a principal with Payments DeepDive. "The Best Buy consumer is the best base to use for contactless. If there are any fast adopters out there, it's going to be those customers."

Added Philliou: "Best Buy killing contactless at the POS would be like returning a plasma screen for an old cathode ray tube tv. Why would Best Buy of all retailers go backwards?"

Best Buy, which has been using contactless readers from Motorola's Symbol group, has been pushing back against Visa interchange fee changes that have the effect of forcing retailers to pay a lot more for contactless debit transactions than for traditional magstripe debit transactions. In a statement issued late Wednesday (July 16), Best Buy said that it "is constantly looking at ways to reduce the cost of check lane tender. As part of this exercise, we are evaluating the continued acceptance of Visa-issued contactless payment cards in our stores in light of recent price increases. However, at this time we have not completed our analysis."

That's a clear shot across the bow at Visa, in effect threatening the card brand to either back off its contactless pricing policy or risk losing a lot of Best Buy contactless transactions. Best Buy officials have been talking at industry events about their unhappiness with the Visa contactless approach, suggesting that they might pull back from contactless altogether or that they might merely refuse to process Visa contactless debit transactions.

The Visa contactless issue is, technically, not a difference price for contactless per se. The problem involves a Visa prohibition against allowing a PIN to be used with a Visa contactless debit card and it's the lack of a PIN option that pushes those transactions into a much higher interchange rate.

Home Depot officials are also unhappy with the Visa pricing move, according to consultants and others working with them closely on contactless, but the chain found that a contactless deployment would make sense given other factors.First, Home Depot isn't paying any hard dollars for the deployment, with Ingenico paying for much of the hardware and MasterCard "making a bunch of money available to Home Depot to do PayPass. That drove the whole deal," said one official familiar with the arrangements.

Another official involved was more blunt and he put the deal into a broader context. "Every retailer is fairly pissed about the interchange fees, but the interchange fee is one that everyone has been dealing with and they will reach some type of resolution," said the source. "But at the end of the day, that doesn't mean that you stop looking at technologies that are appropriate. If it was a big outlay for Home Depot, I would seriously doubt that they would have done it."

It's hardly news that contactless payment hasn't exactly had a bump-free existence, with even some recent endorsements—such as this one from Subway about a Canadian contactless trial--having a very lukewarm quality.

The Home Depot deployment is another good example. On the one hand, this isn't a trial. Home Depot is making the unusual move of bypassing a trial and immediately deploying contactless across its entire chain. But people close to the deal have gone out of their way to stress that this should not be interpreted as a strong endorsement of contactless payment.

Home Depot corporate would not comment on next month's deployment, beyond issuing a short statement Wednesday (July 15) that "The Home Depot routinely reviews and tests new technology in our stores to make the shopping and checkout experience more convenient for our customers." Paula Drake, from the Home Depot corporate communications department, added helpfully: "Other than (what is in that statement), I decline to comment on any specifics."

The concerns that many retailers have expressed—beyond the card fee issues—is the lack of a substantial value-add for the cards. Contactless vendors tout the cards as more convenient and faster, but consumers have been—for the most part—unimpressed with the convenience difference between taking a card out of their wallet and swiping it and taking a card out of their wallet and tapping or waving it. Even to the extent that there is a convenience boost, that only makes money for retailers if it accelerates lines to such an extent that it can cram in more sales. And then even if that happens, it still needs to overcome any increased processing fees. That said, the future of contactless could carry and transmit much more information and it might permit larger read distances (with security protections) to truly enable better convenience.

For now, though, contactless is at a crossroads, if you will. If a few more powerhouse chains like Home Depot come on board, that could raise the comfort level of quite a few retailers, which might make a major marketshare difference for contactless. On the flip side, though, if a few more major players like Best Buy start abandoning contactless (or sharply limit it, as Best Buy is threatening to do), that could also mushroom, giving other retailers cover if they, too, want to pull back. Such a stampede could easily cripple if not outright kill the contactless movement in the U.S..

Until then, though, ambivalence certainly seems to represent a lot of the contactless sentiment. "Some retailers are saying that they'll do it when they absolutely need to" because of consumer demand, said Russell Hardy, the VP for retail channel sales for Ingenico, the contactless vendor working with Home Depot.

That's where contactless can get very chicken-or-the-egg. Consumers aren't likely to demand it until they've used it a lot and grow fond of it. And that's not likely to happen until many—if not most—of their favorite retailers start showcasing it. In short, consumers are waiting for the retailers to deploy and retailers are waiting for consumers to demand it.

Another hurdle for contactless is that, beyond convenience chains, it's rarely seen in small to mid-size players. There are several reasons for that. First, unlike Home Depot, there aren't vendors lining up begging to deploy the technology for free, nor are the card brands offering big-money deals. Secondly, smaller merchants often have shorter customer lines. Without those lines, it's much more difficult to justify a contactless deployment.