PaymentsJournal
SUBSCRIBE
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
  • Analysts Coverage
  • Truth In Data
  • Podcasts
  • Videos
  • Industry Opinions
  • News
  • Resources
No Result
View All Result
PaymentsJournal
No Result
View All Result

Apple Pay: Good for the Card Networks

Michael Misasi by Michael Misasi
September 19, 2014
in Uncategorized
0
0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

It’s still unclear whether Apple or the card networks initiated the discussions that led to Apple Pay. More than likely it was a highly collaborative process as the product creates opportunities for both entities. This blog provides my initial take on how Apple Pay, and the card networks’ tokenization services more broadly, might impact key stakeholders: the card networks, processors, issuers, acquirers, merchants, and of course, Apple.


Networks

Apple Pay and similar implementations of the card networks’ tokenization services will help payment cards make the transition to the digital world. The added security and flexibility of tokens are necessary to stave off competition from alternative payment types and digital currencies and to alleviate consumers’ and merchants’ increasing security concerns. The tokenization services that the networks have developed to support services like Apple Pay also open up new revenue streams that previously belonged to processors. Visa and MasterCard give up little, if anything, with their support while gaining new revenue opportunities.

Processors
My colleague Tim Sloane recently blogged (“Will Issuing Processors Be Marginalized as MasterCard and Visa Deploy Token Services?”) about how Apple Pay is potentially disruptive for issuer processors. Although the table (copied below) which he created to compare processes is framed from the debit issuer perspective, many of the process elements, perhaps with the exception of PIN assignment, apply to credit issuer processors as well. Processors, it seems, could very well find themselves shut out of several revenue-generating services.

process chart

Credit Card Issuers
Much of the Apple Pay business model has not been revealed. However, media outlets have published some information regarding the fees associated with MasterCard’s Digital Enablement Service (see Digital Transactions article “As Card-Industry Use of Tokens Increases, MasterCard Plans ‘Digital Enablement’ Fees,” August 14, 2014, written by Jim Daly). Issuers, it appears, will need to pay MasterCard a fee for each token the network provisions on a mobile device — a requirement for supporting Apple Pay. It’s also safe to assume Visa will impose similar fees for its comparable offering, Visa Digital Solutions.

Additionally, it is rumored that Apple has negotiated to receive a cut of 15 to 25 basis points on the value of each transaction. If this rumor is correct, as we assume it is, this fee will decrease the profitability of credit card products by about 10%, assuming standard 2% interchange. Issuers that become Apple Pay’s default card (the top-of-wallet equivalent for the digital age) might benefit from participation, but for many issuers, Apple Pay will merely raise the ante for credit issuing. Without a mobile payment app of their own to offer cardholders, banks don’t have much of a choice other than to support Apple’s service. Networks will have to be very careful in positioning Apple Pay to issuers. They have previously done a good job aligning their success with the success of their issuers. Perceptions that this is starting to shift could create conflict.

Expanded use of Touch ID in-app purchases could also put pressure on card-not-present rates, which would be very detrimental to issuers. I explored this possibility in a recent Mercator Advisory Group Viewpoint titled Credit Interchange Under Pressure from Industry Trends. And my colleague Nikhil Joseph has offered his thoughts in a recent Mercator blog.

Lacking a plastic form factor, issuers will also be challenged to keep their brands relevant in the digital world. (Mercator Advisory Group opined on these challenges in the Viewpoint titled Marketing Card Products to a Cardless Customer Base). It is interesting that Apple has deviated from its familiar “i-Product” branding. The “i,” in my opinion, has always reflected the emphasis Apple puts on the consumer experience (i.e., user interface, ease of navigation, simplicity of design, etc.) when creating new products. And it is this focus that has garnered so much praise for the iMac, iPod, iPad, and iPhone. In contrast, Apple Pay more clearly communicates who it is that is behind the service—Apple. Intentional or not, it sends a strong message to credit card issuers. Apple wants to be a payments brand that consumers recognize.

Apple
Apple Pay is not about payments. Even if we were to assume that Apple will earn 20 basis points (the rumored midrange) on each transaction conducted through Apple Pay (a plausible assumption), and that Apple Pay will drive 50% of general purpose credit transactions (an unreasonable estimate), that would generate only $2.4 billion of revenue. In comparison, Apple earned more than 170 billion in revenue in its 2013 fiscal year. The opportunity for Apple in the near and intermediate term is to leverage Apple Pay to sell more hardware — phones and watches. This strategy appears to be working. Apple recently announced record-setting preorders for its latest iPhone model. For the longer term, we can only speculate how Apple might expand into other aspects of commerce. Rewards and loyalty, marketing, P2P payments, POS hardware, and a merchant-oriented App store are all possibilities. iBeacons will almost certainly be part of the mix.

Acquirers
Acquirers have been promoting their own tokenization and encryption services to merchants in recent years as offerings complementary to EMV. Widespread adoption of mobile payments that leverage one of the network’s issuer-facing tokenization solutions could impact demand for analogous services offered by merchant acquirers. Acquirers’ account updater solutions could be similarly impacted.

Merchants
Apply Pay seems like a positive development for merchants. It allows merchants to benefit from planned investments in contactless readers, avoid some PCI-compliance costs, and potentially defray some expenses related to tokenization. Any pressure Touch ID puts on credit interchange is also a positive.

Tags: Banking ChannelsCreditDebitMercator InsightsMerchant AcquiringMobile PaymentsPrepaid
0
SHARES
0
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

    Analyst Coverage, Payments Data, and News Delivered Daily

    Sign up for the PaymentsJournal Newsletter to get exclusive insight and data from Mercator Advisory Group analysts and industry professionals.

    Must Reads

    digital payments

    Navigating the Future: Top Digital Payment Trends to Watch

    March 31, 2023
    scams

    As Scams Become Omnipresent, New Tools Can Help FIs Fight Back

    March 30, 2023
    item clearing

    As Check Volumes Decrease, Financial Institutions Need to Consider Alternative Clearing Options

    March 29, 2023
    payments friction

    Too Much Payments Friction Can Lead to Customer Chafing

    March 28, 2023
    online fraud

    Understanding the Cost of Online Fraud and How to Prevent It

    March 27, 2023
    live shopping, ebay

    Q&A: eBay Exec on Live Shopping and the Future of Payments

    March 24, 2023
    AI and Biometrics in Regulatory Compliance in Finance

    The Importance of AI and Biometrics in Regulatory Compliance in Finance

    March 23, 2023
    Everyone Benefits from the Real-Time Payment Networks  

    Everyone Benefits from the Real-Time Payment Networks  

    March 22, 2023

    Linkedin-in Twitter

    Advertise With Us | About Us | Terms of Use | Privacy Policy | Subscribe
    ©2023 PaymentsJournal.com

    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Videos
    Menu
    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Videos
    • Industry Opinions
    • Recent News
    • Resources
    Menu
    • Industry Opinions
    • Recent News
    • Resources
    • Analysts Coverage
    • Truth In Data
    • Podcasts
    • Industry Opinions
    • Faster Payments
    • News
    • Jobs
    • Events
    No Result
    View All Result