Apple Pay leaves out several store-branded credit cards

Video: MasterCard Will Borrow A Touch ID Trick For Fingerprint Scanning Credit Card

Macy’s, Bloomingdale’s and Toys R Us, were among the first retailers to accept Apple’s new payment system last week, letting some customers check out by flashing their new iPhones near a reader at the register.

But Apple Pay left out a large chunk of the retailers’ most loyal shoppers.

The payment system does not yet accept several major store-branded credit cards, which are tied to coupons and reward programs. These cards are major drivers of sales for retailers.

“Apple’s really sabotaging itself,” said Burt P. Flickinger, III, managing director of consulting firm Strategic Resource Group. “Apple Pay will still revolutionize the industry. It will just revolutionize retail transactions a lot slower than it should.”

Macy’s made $27.9 billion in sales in its last fiscal year. Macy’s credit cards — which give customers access to special coupons and promotions — account for half of the department store’s sales, said spokesman Orlando Veras. By cutting cardholders out of Apple Pay’s launch, repeat customers will have to choose whether they want to be a part of the next big thing in shopping or spend more.

Apple unveiled the new payment system during its release of the new generation of iPhones in September with the promise of more than 220,000 participating retail locations, from McDonald’s to Staples. Owners of the new smartphones sign up by taking a photo of their bank-issued credit or debit card using their phone’s camera or add it using iTunes. Once the bank verifies the account, users simply hold their smartphones near a sensor to pay. The user’s fingerprint is placed on the smartphone’s fingerprint scanner to authenticate the purchase. The process relies on technology called near-field communication.

Carved out new spot

“We’ve created an entirely new payment process,” said Apple’s CEO Tim Cook at last month’s press event.

MasterCard demonstrates Apple Pay at the launch of MasterCard's NYC Tech Hub on Monday, Oct. 20, 2014 in New York. MasterCard demonstrates Apple Pay at the launch of MasterCard's NYC Tech Hub on Monday, Oct. 20, 2014 in New York. Photo: Charles Sykes, Associated Press Photo: Charles Sykes, Associated Press Image 1 of / 4 Caption Close Apple Pay leaves out several store-branded credit cards 1 / 4 Back to Gallery

Beyond the technology, what’s new is that Apple has carved itself a spot in a long-standing deal between retailers, banks and credit card companies.

In purchases with credit cards, retailers pay a fee associated with the transaction. Part of that fee goes to issuing banks. In sales made with Apple Pay, Apple takes a cut of that fee, analysts said.

The reason banks and credit card companies are willing to work with Apple is because they want access to the tech giant’s customers, said Bryan Yeager, an analyst with research firm eMarketer.

“They tend to be more affluent and tend to spend more on mobile commerce,” Yeager said. “The banks and the credit card companies see a lot of value.”

Apple benefits

Apple will benefit too, although the financial boost will be relatively small at first. Apple will gain $89 million in “high margin fees from transactions” in 2015, with the possibility of that increasing to $310 million in 2016 — still less than 0.5 percent of the company’s operating income in 2016, Gene Munster, senior research analyst at Piper Jaffray & Co. wrote in a note.

But Apple might not get as much from store-branded cards. When a customer makes a purchase on a store-branded credit card at the issuing store, the retailer pays a lower transaction fee, according to analysts.

Despite the likelihood there is less money in these transactions, Apple has worked out some deals with companies offering branded cards, including with Disney and its Visa card. But Toys R Us, which works with MasterCard, and Bloomingdale’s and its owner Macy’s, which work with American Express, remain off-limits.

Apple didn’t not respond to questions about why certain retailers were left out of Apple Pay, nor did Toys R Us and Bloomingdale’s. Veras, the Macy’s spokesman, said the department store is “working with Apple on adding this functionality in the future, however, there is no current timeline set for when it will be available.”

Giving mobile pay a boost

Mobile point-of-sale payments remain a relatively small market, totaling 11.1 million users last year in the U.S., according to research firm eMarketer. But Apple’s arrival is expected to make them more popular. Already under pressure from credit card companies to install new readers that scan chip-enabled credit cards, many retailers will probably upgrade their payment systems to include near-field communication technology as well, analysts predict.

The release last week was met with typical Apple buzz. Some Apple fans wrote of visiting McDonald’s simply to use the new service. Customers at Whole Foods have welcomed Apple Pay — mainly because it shortens lines — said Angela Lorenzen, vice president of operations of the grocery’s Northern California region.

Security concerns

Still, industry experts warned it will take time before mobile payments become the norm. Only 27 percent of customers said they feel “somewhat or very comfortable” using a smartphone or tablet to pay at a brick-and-mortar store, according to a National Retail Federation survey.

Vital to its adoption will be the success of Apple and its partners in convincing consumers that the technology is safe and secure — and whether store employees can easily explain how it works, analysts said. This week, when The Chronicle called several participating retail stores to ask whether branded credit cards can be uploaded to Apple Pay, some employees didn’t know what Apple Pay was.

Risk of alienation

Not having branded credit cards as part of the initial opening could also make that transition even more difficult, said Britt Beemer, CEO of America’s Research Group. For department stores, it could wind up alienating the very shoppers they are desperate to keep — those who choose to make purchases in person, not online.

“It’s a terrible strategy,” he added.

Jermaine Mills, a 27-year-old technology consultant who says he spends thousands a month at Macy’s, was disappointed when Apple Pay rejected his store-branded card.

“It didn’t make sense at all to me,” said Mills.

For now, the Los Angeles resident says he will keep shopping at Macy’s — the old-fashioned way.

“Why would I go to Macy’s with a different card, when I have a Macy’s card where I get benefits and discounts?”

Wendy Lee is a San Francisco Chronicle staff writer. E-mail: wlee@sfchronicle.com. Twitter: @thewendylee