Our Blog

Apple Pay: six months since launch

In less than six months Apple Pay has evolved into a potential mobile payments messiah.

The U.S.-only service was revealed back in September 9, 2014, and officially launched on October 20 last year. It has already made significant inroads in the U.S. payments industry and has banking executives across the globe worried as to what the Cupertino giant’s real intentions are – Apple Bank anyone?

Apple Pay

Apple Pay can be categorised as a success, after six months it is now accepted in over 200 U.S. financial institutions (here’s a continuously updated list from Apple’s own website). In late January it was revealed that Apple Pay accounts for $2 out of every $3 spent via contactless Visa, MasterCard, or American Express payments in the U.S. More than a million payment cards were registered within three days of launch. That’s a pretty good start.

Apple Pay has truly kickstarted a nascent mobile payments industry State-side (even igniting interest in other mobile payment options, such as Google Wallet and the soon-to-be-launched Samsung Pay), but what about the rest of the world?

This is where things get a little bit tricky for Apple: just as we predicted back in September 2014.

Issues over Apple Pay’s international launch plans

Europe – launch date still unknown, initial prediction: April 2015

When first revealed in the U.S. it was predicted that Europe consumers would be using Apple Pay by April 2015. That’s not going to happen, but Visa recently laid the foundations for its introduction with the planned April launch of tokenization in Europe.

So what’s holding up Apple Pay’s European introduction?

Well, quite simply, the major stumbling block is money, or how a bank’s revenue from a card payment – the interchange fee – is sliced up. This, as already stated, will be no surprise to regular readers of this blog post, we flagged this issue back in September 2014 just before Apple Pay was officially launched in the U.S.

When the issuer sends a payment to the acquirer, it deducts a small fee for the privilege: this is the interchange fee. These fees vary from country-to-country; depending on what type of card is used, and on risks associated with transactions i.e. are they card-present or card-not-present transactions.

The Apple Pay deal with American banks gave Apple a healthy portion of this interchange fee, believed to be between 0.15 and 0.25 of a percentage point.

Back in September 2014 we stated the following: “Interchange fees in Europe are soon to be capped at 0.3% on credit card transactions and 0.2% on debit card transactions. As of May 2014 Visa’s interchange fee for a contactless consumer credit card transaction (under €20) is 0.23% of the transaction amount + €0.02 . . . Apple now wants a slice of a European interchange fee pie that has already been handed out . . . It will be nigh impossible for Apple to cut a similar deal in Europe: different regulatory models will bring different problems.”

The maths are quite simple, taking between 0.15% or 0.2% of an interchange fee when the regulatory body has capped these fees at 0.2% for debit and 0.3% for credit card transaction will leave European banks with next to nothing for the privilege of offering Apple Pay to their customers.

There was also a recent report in Ireland’s Sunday Independent that Apple was in talks to find an Irish partner for the launch of Apple Pay. “They’ve been talking to all the banks,” said Stephen White, COO of Ireland’s AIB. “It’s not for us to say when that might be adopted by us or other banks as we still have a watching brief on it.”

On April 7 Wired.co.uk reported that Tim Cook confided to an employee at Apple’s Kurstendamm store in Berlin that Apple Pay was coming to Europe ‘by the end of the year’ – again changing the initial April predictions.

Another issue was flagged in December when the Telegraph reported that one of the UK’s biggest banks had a problem with the amount of personal and financial data collected by Apple from its customers.

Apple’s Eddie Cue quoted in The Verge two days after the Telegraph article appeared stated that: “We are not in the business of collecting your data. So when you go to a physical business and use Apple Pay, Apple doesn’t know what you bought, where you bought it, or how much you paid for it. The transaction is between you, the merchant, and your bank.”

Banks aren’t so sure, there’s a nervousness among the silk suits ilk.

Canada – launch date prediction: November 2015

According to the Wall Street Journal, Apple is in discussions with six of the largest Canadian banks for a November 2015 launch of Apple Pay in Canada. The six banks (Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada) account for 90% of retail bank accounts in Canada so it would give Apple an incredible launch platform.

There are problems though, similar to the issues already detected in Europe: interchange and customer data protection. On the topic of interchange fees one of the people close to the Canadian negotiations told the Wall Street Journal that: “a base case for Canadian banks could be in the range of 15 to 25 basis points on credit card transactions to Apple.” That’s a high price to pay for the benefit of offering Apple Pay to their customers, no doubt bank executives are asking: why aren’t Apple paying us for access to our customers?

The Canadian banks were also taken a back by recent problems with the provisioning of cards to the Apple Pay system. This is ironic as the issues were in the verification methods deployed by certain U.S. banks, some even verified stolen credit cards. This fraud issue was not an Apple Pay problem, but it did point to weaknesses in the system. The weakness was on the banks’ provisioning process.

China – launch date unknown

In UnionPay – the State payment card monopoly – China is well-placed to play hardball with Apple in relation to interchange fees: and it is doing just that. As in Europe and Canada, UnionPay and eight other China-based banks have baulked at the thought of handing over between 0.15% and 0.25% of every 2% interchange fee. However, as Business Insider points out Tencent’s TenPay (akin to PayPal) has 650 million registered users, 100m using its mobile payments – but it doesn’t take any cut of these transactions.

As UnionPay controls the entire Chinese mobile payments system Apple desperately needs them to be involved – and, right now, they’re miles apart.

Apple’s ability to disrupt and control

The question is why would Apple play hardball in all these international negotiations for revenue that is dwarfed when it comes to their own balance sheet? The answer is control.

Apple has built its empire on disrupting the music and tech industries. It all started with the humble iPod and then iTunes. The App Store has revolutionised how we pay for things, it’s launch paved the way for mobile payments. With Apple Pay the target is the entire payment process, and by extension banking.

But is banking as easily disrupted as the music and tech industries?

The banking system goes to the core of how societies function: deposits, loans, and savings. It is an intriguing drama that we observing. Apple, though, has shown that any battle for control is one that they usually win. They do so as consumers demand their products. Here’s a great Stratechery post on how Apple creates leverage through their user experience and – as a result – consumer demand.

It’s a marketing, and business, nirvana. Apple can wait – but can the banks?

Banks nervous about Apple’s endgame

The following comment sums up one significant roadblock to the introduction of Apple Pay in Europe. Senior UK banking executives – reported by the Telegraph – are worried that Apple Pay is just a beachhead* for Apple’s invasion of the banking industry. Banking executives have good reason to be suspicious.

* A beachhead: a position in a market that a company achieves and hopes to strengthen in the future. Perhaps, as a platform for cross-selling other financial services.

It all boils down to Apple Pay v the banking system, a theory expanded upon by an August 2014 McKinsey report titled: ‘The digital battle that banks must win’.

Watch: Marc Andreessen, co-founder of venture capital firm Andreessen Horowitz – ‘Apple Pay Is Freaking Out Financial Services’

Following on from the ‘beachhead’ theme in the Telegraph article, the McKinsey report states that: “Payments represent the beachhead for the entire banking relationship, and this beachhead is under attack. Offering a strong payments plan as part of a comprehensive strategy for digital banking is therefore an imperative for banks.”

The report goes on to highlight three key trends as banks – and the traditional banking system – come under attack.

  • 1. Attackers are targeting banking revenue sweet spots

“For now, the payments business remains squarely within the core bank franchise, but attackers such as Google, Apple, and PayPal threaten critical sources of revenue.”

  • 2. Emerging non-bank competitors operate at a higher level of operational productivity.

“Banks will succeed only if they can match the solutions, operational efficiency, and client-service skills of attackers.”

  • 3. Banks can adopt one of three strategic postures in digital payments

Leader: Taking the lead in providing innovative solutions: Barclays, BBVA

Catalyst: Enable innovators to develop solutions: Credit Agricole, Danske Bank

Fast follower: Enable solutions only if concept is stable: most European banks

The McKinsey report’s conclusion makes for interesting reading: “Banks are the natural owners of the payments space, as payments are the gateway into the financial relationship. However, attackers are developing payments-service capabilities and operational skills superior to those of banks.

“They are not smarter, just more focused. Banks’ customer relationships, structural security, multichannel capabilities, and stability should ultimately combine to win the game . . [but] they must get there quickly.

“In the digital world, tomorrow is already too late.”

The question – as negotiations for Apple Pay’s international launch continue – is: who will blink first, and who will retain control? It’s a fascinating payments turf war.

Contact us

For more information on our products and services contact us at info@aviso.io, or follow us on Twitter and LinkedIn.

Related posts