Apple Pay Fees (Short Blog)

Thought I would give more detail on whats going on with V/MA, Issuers and Apple

Thought I would give more detail on whats going on with V/MA, Issuers and Apple (from WSJ article yesterday Apple Pay Fees Vex Issuers). Perhaps I’ll collect a fee from the WSJ.. odd that I mention Apple Pay fees on Monday to have it come up in the WSJ on Tuesday. Oh well..

Correction 8 October 2021 – BellID is owned by Visa (not Mastercard)

This blog is an update to my much more detailed 2016 blog outlining bank efforts to control tokenization (and mobile payments): Payments Civil War

There are 2 topics I’d like to cover (briefly)

  1. Apple Pay’s Agreement with Banks
  2. Tokenization – A Core Battle for Monetizing Mobile Payments

Apple’s Agreement with Banks

As far as I know in the 1000 year+ history of banking, there has never been a non-governmental 3rd party show up with a standard agreement and sent it to multiple banks with a “take it or leave it” sales approach. Apple approached all 6 of the top US banks Issuers with an ApplePay “deal” back in 2012 (my blog called in project mercury).

The terms were shocking 15bps on all credit card transactions would be charged (collected by Visa/MA in VTS/MDES). When one bank signed (likely Wells or BAC) the other banks had no choice for fear of missing out (FOMO). Everyone knows Apple leads the planet in the ability to change consumer behavior, and a card in the phone meant more card usage (or so they thought). Of course they probably didn’t realize Apple was going to create a competing product (with Goldman Sachs).

An inventory of multi billion dollar efforts by MNOs, Retailers and Banks wanted to play here, and were investing heavily.

  1. 27 Banks and the TCH (2010) working to create a new mobile payment scheme that was outside of V/MA and the mobile operators with Paydiant (complete failure). This led to TCH Tokenization and RTP services which are both now operational.
  2. Mobile Operators (yes they won the branding award calling it ISIS). When they saw not progress in ISIS they fell back to their typical to rent seeking, asking Google for $1B, to which Google developed HCE (amongst other things).
  3. Retailers launched MCX. Which enabled WMT and Target to obtain ridiculously good pricing (see JPMC/WMT).
  4. Verifone. If you can believe it another hand tried to get rent as their CEO (Doug) also asked for $1B to support contactless acceptance.

While everyone saw the clear potential of mobile in changing “everything” few could bring together parties needed (see Battle of the Cloud). These failed efforts clearly shows that “control” is not a value proposition.

From a contract perspective, VTS/MDES services have bank portals where any issuer can register their BINs for ApplePay after accepting the standard Apple/Network Terms. The WSJ discussed V/MA’s “unusual concession” to Apple

Apple would be able to choose which issuers it would allow onto Apple Pay and which of those issuers’ cards it would accept

WSJ Apple Pay Fees Vex Credit Card Issuers, 5 Oct 2021

This is not an unusual concession. Given that issuers could choose to register their BINs with Apple, Apple wanted the ability to choose which Issuers would be accepted. There is no “accept all cards” rule for wallet registration. It is an Apple service to store an Issuer’s card in wallet, and it also gave Apple control over user experience in case an issuer wasn’t performing (ex card provisioning)

The establishment of a common V/MA tokenization services was a masterstroke. Given the 13 yrs of bank effort to create a mobile payment scheme they were absolutely furious. No one likes a “take it or leave it” and banks consider themselves “the big guy” in any discussion.

Tokenization

From a payment infrastructure perspective, the core innovation to enable ApplePay was tokenization (Tokens and the Trojan Horse). A common mechanism to provision cards and reestablish control over routing. Routing control defeats all those special network agreements (ex On-us ChasePay) AND all “on we” routing efforts (ex merchant dual channel debit routing). VTS/MDES also established a “toll” model and integrated fraud/provisioning. These services became the key control point for tying cards to mobile. (see detailed discussion in Business Implications of Tokens). The ONLY companies to influence Apple’s design were V/MA. Without the payment network efforts, Apple would have had to work with each issuer individually.

Are the networks controlling tokens today? Not really. As I outlined yesterday, Google wanted the same access that Apple had to VTS/MDES but was denied. The banks were furious with the networks for creating the VTS/MDES and didn’t want to let anyone else in. Their control point was “we wont provision cards to Google wallet”.

The Bank’s objective in 2014 was to “push” Google in to a new “TBD” token service from TCH. When TCH showed up (2014) they had nothing. Google had no choice but to build their own tokenization scheme (built on encrypted FPAN) with each acquirer. Another control point gone.. in the Google model no longer were issuers OR the networks in control of provisioning to a mobile wallet. (See Rules/Wrapping and HCE/Tokenization for more detail). It is odd that SamsungPay is using VTS/MDES, and Google is not.. but that is another story.

In 2018, TCH finally got its tokenization vault up and running (Bell ID now owned by Visa). The banks pushed for V/MA to update their tokenization schemes to allow for vaulting of tokens with the Banks. Mastercard quickly gave them what they wanted. Visa held off, realizing how critical the control point was. Eventually TCH joined EMVCo, they updated the EMVCo spec (Oct 2020) after which V then also allowed TCH to vault tokens (with V/MA remaining in the issuance role in VTS/MDES). Vaulting is the system of record for tokens, giving issuers the ability to approve transactions or the mobile wallet the card sits in.

What was the result of all of this effort and intrigue?

1) Very poor ApplePay adoption at POS (94% of consumers don’t use), fantastic ApplePay adoption inApp and in mobile browser. With mobile subscriptions as the core US revenue driver (of ApplePay).. the very thing Banks want a discount from.

2) Apple Launch a competing card – Apple Card

3) Apple Cash card replacing debit usage

4) Apple as the most hated bank “partner”

I see the Apple Pay fee dust up as a bank revolt against both Apple and the Networks. The banks were taken to the cleaners by Apple and the agreement stinks. I don’t believe in Apple’s rent seeking behavior, particularly if they are creating a competing product. They can’t have it both ways.

However, it is critical for V/MA to keep the structure of VTS/MDES in tokenization and also spend the time in correcting the mistake of pushing Google to TCH.

9 thoughts on “Apple Pay Fees (Short Blog)”

  1. Tom – great article as always. As someone based in Europe where contactless is far more the norm it feels like the bank battle for “control” is already lost and it will be fascinating to watch the battle on your side of the pond – I suspect it will take far longer in the US than here but the end result will probably be the same. I also think the difference in Apple pay adoption for cloud vs physical transactions is stark but may accelerate the drive to more cloud-based acceptance – once the networks lose the physical device as the primary entry point for customer-present transactions, the bank and network control is significantly undermined.

  2. Well, this is how I know I am an unrepresentative consumer! I use ApplePay NFC every chance I get, especially now that I have an Apple Watch. I have no idea why other people don’t; it’s so much more convenient than pulling a card out of my wallet. My solution to everything is rewards, so I wonder if part of the problem is that Apple Wallet never delivered any rewards functionality. It only works with their own white label card, and I also have that, so it’s great. However, you get 2% on online vs. 1% on POS, and that’s just not good enough to compete with bank cards these days. I hope Apple will open up the wallet so that banks can push stuff through it, but as long as they are getting 15bps, why should they care? The obsession with control is why we waste so much time and money on suboptimal solutions.

    1. Great points. Plus, I can securely store my debit card in ApplePay and worry less about it being compromised when passed to merchants. I’m not sure the gen pop understands the risks of using debit online given the +55% increase we’ve seen in 2021 according to Carat.

  3. Hi Tom – as always, great analysis from a payments perspective. I see Apple’s strategy differently. The 15bp is not even a rounding error to Apple, but it created a framework for banks to prioritize it due to the high cost. It could not be seen as a rounding error to the banks, because to them it isn’t.

    Apple’s goal is to create a “better than everyone else (Google)” ecosystem that they control and drive consumers to for future purchases. That reliance has expanded beyond hardware and app stores, and to another facet of their core consumers’s lives. Now that Apple Pay is older but still struggling for adoption at POS, this dust up may force Apple to release some of its financial grip on banks but they will find another way to enforce compliance. A parallel could be made to the app ecosystem.

  4. Great job Tom. I don’t see a tremendous number of merchants accepting recurring payments online via Apple or Google Pay. Take music and video streaming services as an example. Neither Netflix or Spotify allow me to sign up using the “Pays”. Also, when I sign up for an in-app recurring subscription using my Apple ID Apple Pay is not at play–just my COF credentials. So, I wonder how impactful Visa’s restrictions will be?

    Of course their will be some impact. Do you see this rule motivating Apple and Google to negotiate a carve out for ECI 2 / MIT payments with the banks and bypass their 15 bps cut on that tranche of transactions?

    P.S. was just referred to this blog…amazing!

      1. Tom – I’m hearing a different story now. So, what if the problem trying to be addressed by this rule was not issuer fees but token lifecycle. When a merchant collects the “blob” of info from a d-wallet they get a DPAN and static crypto which is submitted with each billing interval. However, anytime that card is unbound from a device (get new phone / lost-stolen card) reprovisioning must take place and the stored DPAN is essentially “dead”. There are no lifecycle management calls available unless that merchant also has their own separate TRID–which most don’t have yet.

        Could Visa be trying to solve a problem experienced by recurring merchants accepting D-wallets while at the same time motivating merchant acceptance of network tokens? Or, maybe that’s BS and the banks just don’t want to pay up :).

        1. It seems logical that Banks would want to avoid the fees. Given the new token vault operated by TCH within the VTS/MDES schemes banks can re-issue tokens at will.. I don’t think fraud loss in recurring payments is a thing.. I do think sharing revenue with Apple is.

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