On Tuesday Apple rolled out its iPhone-based payment system called Apple Pay. This allows customers to pay with their credit card by simply swiping their iPhone (6 or 6 Plus only) or Apple Watch at the cash register and approving the transaction. Never once do you have to open your wallet, and Apple has built a system it says keeps your card data—and personal information—private and secure throughout. This sounds like a great thing, and that could very well prove true.
There are several questions about this: how many merchants will accept it at launch? (220,000, according to Apple). How quickly will it be adopted by other merchants? (ask Google, Square and ISIS/Softcard about that). Where does Apple make money? (Bloomberg says Apple will earn fees from participating banks—yes, that's right, only cards from participating banks will work with Apple Pay). And, most importantly, who will pay?
Let's assume Bloomberg is right and Apple will be earning fees from participating banks. That sounds plausible enough. The next question, then, is how quickly – and how transparently – will those fees be passed along to merchants and, ultimately, customers?
There is certainly some incentive for banks to eat those fees in the name of reduced fraud expenses, just so long as the cost to accept these new Apple Pay payments is less than the cost of the fraud from which they're being saved. Remember, banks – especially US banks – have intentionally kept credit cards insecure thus far, having declined multiple technological advances over the years in the name of convenience (smart cards have been around for decades and were declined by banks over and over again before finally gaining some ground recently).
Security vs. Convenience
Credit Cards weren't ever meant to be secure. Banks long ago decided it's cheaper to pay the fraud costs associated with credit card insecurity than it is to inconvenience their customers with security measures and risk people not using credit cards at all. Banks love their "discount rate" fees (typically between 1 and 3 percent) that they get for every transaction, and they earn those fees by selling convenience to merchants (and customers). Credit cards offer convenience at the cost of fraud expenses.
Apple Pay offers convenience to customers at the cost of a fee banks will pay to Apple (we don't yet know how much). But that convenience only comes after the merchant has upgraded all of its systems to support NFC (or Near Field Communication, the technology behind Apple Pay). To support this new payment method merchants will have to pay (with at least time, and likely money) to upgrade their systems, and then offer their customers this added convenience. Once merchants do this then their banks will happily pay Apple's fees so merchants can continue to offer their customers this new convenience. Right?
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The reality is that banks are pretty adept at passing those types of fees along to the merchant. Let's look at rewards or points-based credit cards. When you pay $100 for dinner and use your airline-miles-based credit card, you get 100 miles added to your account. That's great, but it's not the bank that pays for those miles. It's the merchant, and it's detailed on the merchant's monthly statement from their credit card processor.
That's right, the merchant pays the percentage fee to the processor and bank for your transaction PLUS any extra fee that might be imposed because of the type of card you used. Merchants must accept these cards (and their resulting fees) because that's how their payment agreements work. Choose to accept Visa and MasterCard and you agree to pay all those fees. American Express, curiously enough, doesn't typically charge an extra fee for these types of transactions, though their discount rate percentage is usually higher. At TMO, for instance, we've found it's cheaper to accept AmEx than it is Visa and MasterCard because everyone uses rewards cards these days.
Who Will Pay?
Factoring that in it's fair to ask the question: how long will it be before merchants start seeing an "Apple Pay processing fee" line item on their statements. If and when that happens, how much incentive will there be for other merchants to go through the cost and process of upgrading their systems to support this new method?
Unlike the agreement merchants make to accept all Visa/MasterCard/AmEx cards, there is nothing requiring those merchants to accept NFC transactions. As long as that remains voluntary, it's a weakness that Apple must overcome to make Apple Pay a success.
The bottom line is that Apple (along with its banking partners) needs to prove not only convenience with Apple Pay, but also value. That value could come by way of a reduced discount rate for Apple Pay transactions if it can be proven that fraud costs are less. That could effectively offset the Apple Pay transaction fee (assuming the banks will agree to that). It could also be done by adding loyalty-program-style benefits for customers using Apple Pay, encouraging repeat business for the merchants paying those fees. Whatever happens, it will take something extra on top of "pay with your shiny, new iPhone" to make Apple Pay a success.
Apple certainly has earned some blind faith from those of us that have followed them through each new market they've entered, but blind faith alone will not result in success here. Something tangibly different from those who have attempted previously will be required.
Image courtesy of Shutterstock.