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Apple Pay! Now What?

Lee Wetherington
Oct 1, 2014

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Author: Lee Wetherington, Director of Strategic Insight,

In the beginning (of September), mobile payments were without form, chaos covered the face of the deep, and the spirit of Steve Jobs hovered over Cupertino, California.

Tim Cook said, “Let there be bigger screens,” and there was the iPhone 6. “No, even bigger screens,” he said, and there was the iPhone 6 Plus. “Wait, how about a tiny screen on your wrist?” and there was the Apple Watch.

“One more thing,” he said, and there was Apple Pay. And Bono did sing, and the people did rejoice.

That Apple’s “September Event” was a media spectacle of biblical proportions goes without saying.

For community financial institutions, however, the biggest news wasn’t the new iPhones nor the Apple Watch. It was Apple Pay—Apple’s foray into mobile NFC tokenized payments at the point of sale.

So What?

Apple has broken the chicken-or-egg stasis of mobile payments in the U.S. The mobile payment technology wars are over for now. NFC wins. Both mobile phone and POS terminal manufacturers have a compelling reason to integrate NFC into all of their devices from here on.

And though the impact of Apple Pay will continue to be the subject of a lot of speculation, community financial institutions already have some good news to celebrate and some wildcards to worry about.

The Good News

First, mobile reinforces issuers’ card franchises. While big-box merchants are still trying to bypass the card networks altogether with mobile checkout apps like MCX’s CurrentC, Apple Pay’s reliance on card credentials secures the future of card payments in the U.S.—even when no physical card is present.

Second, Apple is not going after issuers’ payments data. Unlike Google Wallet and PayPal, Apple Pay isn’t staging transactions to disintermediate issuers and remove their visibility into the final merchant of record.

Eddy Cue, Apple’s Senior Vice President of Internet Software and Services, was emphatic: “Apple is not in the business of gathering your data. With Apple Pay, Apple doesn’t know what you bought, where you bought it, or how much you paid for it.” That information, he said, “is between the consumer, the merchant, and the bank.”

Apple Pay’s tokenization of card data reduces fraud risk and issuer liability. Apple worked with the card brands and the 11 largest card issuers in the U.S. to replace card account numbers with device tokens, dramatically reducing the risk of merchant card data breaches, counterfeit card fraud, and resulting issuer liability. Smaller issuers will also have to enroll in tokenization in order to participate in Apple Pay.

The Wildcards

While tokenization in the U.S. will dramatically reduce card-not-present fraud rates, it ain’t free. In addition to one-time fees for enrollment, onboarding, and token provisioning, the card networks will also charge issuers ongoing monthly fees for token maintenance and management.

Moreover, Apple will collect a $.005 fee for each Apple Pay debit-card transaction and 15 basis points for each Apple Pay credit-card transaction. The wildcard is whether lower fraud rates and fewer losses with Apple Pay will offset issuers’ new tokenization costs and lower interchange fee income (due to Apple’s transaction fees).

Other wildcards:

  • When will Apple open enrollment to all issuers, and is there a material disadvantage to enrolling later? Probably not.
  • When will card brands, processors and debit networks all be ready to fully support the tokenization enrollment and onboarding required for Apple Pay? Probably by or before end of the year.
  • Will consumers use your card to fund Apple Pay transactions? What will persuade a consumer to make your card “top of wallet” in the iPhone 6 Passbook? To be determined.
  • Will customers defect if you don’t enable Apple Pay? No.

Since only 2.5% of existing U.S. POS terminals are NFC enabled, Apple Pay won’t command a significant footprint in payments anytime soon.

Even as merchants deploy more EMV/NFC-capable POS terminals in the ramp up to the EMV fraud-liability shift next October, merchants must still turn on NFC and agree to accept Apple Pay—something MCX members, WalMart and BestBuy, say they don’t plan to do.

What Now?

Right now, issuers have plenty of time to decide whether and when to participate in Apple Pay. Most analysts don’t expect Apple Pay to achieve meaningful volumes for at least 2-3 years. 

But something bigger and much more urgent haunts the interim: Apple Pay will ultimately reduce issuers to commodity providers of passive funding sources. In short, Apple controls Apple Pay. 

So, to remain relevant long term, smaller issuers must prioritize putting their own mobile apps at the center of purchase decisions by leveraging the best piece of data issuers have: the balance. 

Banking and shopping are converging. Consumers want to know whether they have the money to buy the things they want. The sooner issuers awaken to the power of their data (and the indispensable context it provides), the better off they will be…no matter what Apple does next.


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