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Technical issues for Apple Pay in Europe

Apple’s ongoing negotiations with major European banks – re: Apple Pay – should be interesting. Given the tight margins on interchange fees in Europe it will be an arduous process – much tougher than the equivalent discussion with their US counterparts.

Why? Well, Apple must sign up a sufficient number of banks in Europe before it can launch Apple Pay. There was no mention of a European launch when Apple Pay was revealed in early September, however, the recent announcement that Apple has hired Visa Europe’s Director of Mobile, Mary Carol Harris is a serious statement of intent.

Apple Pay


Here at Aviso we feel that there are a number of technical barriers that could delay the introduction of Apple Pay to the European market, even though contactless payments are proving to be extremely popular in Europe: the perfect breeding ground for Apple Pay. The prime barrier is the issue of what fraction of interchange fees – already significantly lower in Europe than in the US – will Apple receive?

Contactless payments in Europe

Europe should be fertile ground for Apple Pay. Indeed industry analysts recently told FT.com that it was ironic there was a delay in the roll-out of Apple Pay in Europe, a more advanced mobile payments/contactless marketplace than the US.

Contactless payments has been a way of life in Europe for quite some time. There’s a reason American visitors have had such a hard time with card payments when on holiday there. Europe abandoned mag stripe cards a few years ago and have since upgraded to chip-and-pin cards meeting EMV standards.

The US is on track to upgrade existing terminals to accept EMV chip cards by October 2015 due to a mandate from EMVCo. Chip cards are considered safer and less vulnerable to being hacked. It is a hot topic in the US where a series of merchants (Target, Home Depot) have suffered from a spate of major hacking incidents within the past year.

Consumers in Europe use chip-and-pin cards – many of which can also be used for contactless transactions. These types of payments are becoming more and more popular among consumers there. In the UK contactless payments have more than doubled between June 2013 and June 2014 and are set for a further jump with contactless cards now being accepted by Transport for London alongside the popular Oyster branded transit card.

Here are some interesting figures that illustrate the UK’s growing fondness for contactless payments:

  • In Europe there are 1.5 million contactless terminals, the first ones were rolled out by Visa in 2007. Of these, some 200,000 are located in the UK.
  • There are 100m contactless cards in circulation in Europe, 48.3m of which are UK issued.
  • Contactless payment volumes in the UK more than doubled from four million in July 2013 to 10.9 million in July 2014, according to Worldpay. London represents 42.1 percent of its contactless transactions made since January 2012.
  • However, within one year (June 2014) there were 23.8m contactless transactions in the UK – a 118% year-on-year jump. The June 2014 figures reflected a 7.1% rise from May 2014.
  • In June 2014 there were transactions worth £158.5 m, the average spend per transaction was £6.65. The maximum allowed contactless transaction value in the UK is £20 ($32), in the EU the maximum value is €20 ($25).
  • In July 2014 there were 996 million payment card transactions in the UK.
  • It’s estimated that more than 500 million contactless payments will be made in the UK in 2015.

Moves are afoot to streamline this growing marketplace. MasterCard wants a standard for contactless payments by 2020. By this time Visa Europe has predicted that half of the transactions that cross its network will be via a mobile device. Indeed, the number of NFC-enabled mobile phones in circulation is tipped to increase fourfold between 2013 and 2018: by then there will be an estimated 1.2 billion NFC-enabled phones.

Initially Apple Pay will be available in 220,000 bricks-and-mortar stores in the US from October (and for many more online) but there has been no definite time for the implementation of this new payment method in Europe and beyond. Analysts believe that it will be 2015 before Apple Pay appears in Europe.

Visa Europe’s Steve Perry, chief digital officer, confirmed Apple’s European plans in a recent press release: “Today there are more than 1.5 million Visa contactless terminals in stores across Europe – all ready to take mobile payments. Apple’s decision to enter the market reflects the scale of opportunity that exists in digital payments today. We are working closely with Apple and with our member banks to bring this new service to market in Europe.”

The foundation is in place but what problems could Apple face ahead of the roll-out of Apple Pay in Europe?

Apple Pay and interchange fees

So, the conditions are there – Europe seems like fertile ground for an industry giant to test its new payment service. What could be the problem? For one thing, the slice of the payment processing pie may not be available. This is because of the serious squeeze on existing margins in the European credit card processing system.

What are interchange fees? The credit card schemes (Visa, MasterCard) charge merchants these fees based on the process of getting funds to the acquirer and obtaining the customer’s billing details from the issuer. These fees also 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.

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.

In this marketplace we must also factor in that MasterCard recently lost a European Court of Justice (ECJ) case. The case was brought on appeal after the European Commission ruled in 2007 that MasterCard’s multilateral cross-border interchange fees were uncompetitive. This ECJ ruling cannot be appealed. To complicate matters further some large European banks (for example Barclays) operate as both issuers and acquirers.

Apple now wants a slice of a European interchange fee pie that has already been handed out. After the launch of Apple Pay in the US it was revealed that Apple had negotiated a deal with five major US banks (Bank of America, Capital One, Citi, Wells Fargo, and Chase) to give it between 0.15 to 0.25 of a percentage point of the interchange fees in return for being allowed onto Apple Pay.

It will be nigh impossible for Apple to cut a similar deal in Europe: different regulatory models will bring different problems. So, what to do.

Fraud is also less frequent in Europe, as the chip-and-PIN cards are a lot more secure than the magnetic strip cards currently used in the U.S. In France, fraud represents 0.045% of the sums paid by cards, some 30% less than in the U.S. Also, as pointed out in our previous blog on the issue, we should not view Apple’s tokenization as a panacea for card fraud. It will reduce the possibility of Target/Home Depot style attacks, yes: but EMV already significantly reduces the attack vector for card present transactions in Europe.

Technical issues for acquirers

However, Aviso has worked on projects in the UK for large acquirers, and such acquirers don’t go online for contactless payments today. Contactless transactions in these cases are presented as what are known as ‘post event advices’, where the settlement information is transmitted at the end of the day, but no authorisation is received in real-time by the acquirer. This is – typically – for speed and convenience, as most POS devices in the world today are still dial-up.

Fancy waiting for a modem connection while paying with your swish new iPhone 6? Thought not.

It’s not clear how the Apple Pay specifications will play with EMV in Europe. In Europe there are two types of contactless transaction formats supported in different market segments: the contactless mag stripe and the contactless chip. Shoehorning Apple Pay into this ecosystem, while keeping the lights on for the huge volume already processed, is going to take several years, at which time perhaps something more compelling will come along.

Next post

We ask who is going to take the fraud risk when Apple Pay enters the European market – what happens to hot card lists?

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