“Apple has the tech expertise, brand recognition and the devices. A token system protects personal data and is expected to make mobile transactions safer than cards. Lower fraud expenses would help the banks offset the Apple discounts.”
In Australia there was an analogous situation when eftpos was first launched in the 80s. Facing the classic chicken and egg dilemma, where consumers wouldn’t use the system if merchants didn’t accept it, the banks agreed to pay Woolworths, Coles Myer and the largest petrol chains a share of the interchange fee – much more than 15 basis points – to accept eftpos and build critical mass.
This so-called 'negative interchange' remains an anomaly of the Australian system.
Media coverage outside the US has focussed on when the payments capability will be switched on in local markets, but there are particular characteristics of this deal and the US market which mean it is not universal.
The Apple share of US smart phones is about 40 per cent of the total and just under 20 per cent of total mobile phones - much higher than most other markets. Therefore, partnering with Apple delivers more bang for US institutions. In most other markets though the Apple smart phone share is closer to 10 per cent.
Moreover, analysis of the share price of other payments-related stocks after the announcement suggests investors don’t see Apple as eating their lunch. Both Visa and MasterCard for example, who have teamed up with Apple, saw a rising trend in their share price.
That leads analysts to argue Apple has concluded it can’t take on the banks and networks by itself. With a handset market share around 10 per cent setting up a 'closed loop' – where Apple does everything itself – wouldn’t have critical mass. And it would mean being regulated like a bank.
Payments insiders also believe that Apple’s lower penetration coupled with lower overall interchange fees in other geographies mean it will face more opposition to this sort of deal offshore.
Australia, New Zealand and many Asian markets are also different to the US in that banks act on both sides of a transaction – as issuers of payment vehicles and processors or 'acquirers' of merchant transactions. In the US different institutions play on the two sides.
In China, while the Chinese payment scheme UnionPay is likely to be a network partner, one would expect this interchange sharing arrangement to have to be negotiated differently.
As Steve McLaughlin of Financial Technology Partners wrote in an excellent piece of analysis, “Apple’s entrance into the payments space has the potential to be highly disruptive however, the structure of Apple Pay preserves the role of the incumbent players in the payments value chain”.
That’s not to say revolution is not afoot in payments. Potentially more disruptive for incumbent players is MasterCard’s far lower profile deal with Facebook. MasterCard will access Facebook Asia Pacific user data to generate insight into online consumer behaviour – and sell these insights to banks. It will also work with banks to tailor specific offers.
Macquarie Research noted “what is interesting about this partnership is that should MasterCard successfully utilise the Facebook user data, this could be a catalyst for Facebook to become more of a digital disruptor with the goal of driving a wedge between the banks and their customers”.
Macquarie reckons data analysis and packaging could just be the “tip of the iceberg for these new world competitors” with payments, merchant acquiring and lending all in the crosshairs "with around 25 per cent of system revenue the ultimate target”.
And that wouldn’t be offset by extra volumes. But as the demise of tipping revenues makes clear, it is difficult to determine what will cause what.