Apple Tap to Pay on iPhone has prompted comparisons with Square, but the two offerings address different parts of the merchant payments process. Apple’s technology essentially turns a compatible iPhone into a contactless card terminal, allowing it to capture payment credentials through NFC without requiring merchants to attach a separate card reader.
That capability alone does not provide the merchant account and payment processing services businesses need to accept card payments. Payment facilitators such as Square combine acceptance technology with access to payment processing, while Apple’s approach relies on payment providers and applications to handle those functions. Companies such as Stripe and Shopify could therefore use Tap to Pay to add in-person acceptance to their existing merchant relationships, potentially extending their reach beyond e-commerce.
The headlines on this are a little misleading, as are the comparisons with Square. What Apple has announced is purely a hardware solution: the capability for the iPhone to function as a card terminal for payments. In contrast, Square is also a Payfac, so when you sign up with Square you get both a merchant account and a card acceptance technology. Apple has no plans (or at least it hasn’t announced any yet) to become a Payfac and offer merchant accounts to iPhone users. While the hardware solution would seem to be a good fit for a micro-merchant, the merchant still needs to source a merchant account from a bank or acquiring processor. The reason that Square become so successful is that its Payfac model equipped micro-merchants with a low-cost sub-merchant account that didn’t carry the monthly fees and minimums that most merchant accounts have. So without a Payfac solution, I don’t see the iPhone being of much use to a micro-merchant on its own.
We do see this working well in an omni-channel environment. Most big box merchants equip their employees with mobile devices that run a suite of apps that let employees locate products on shelves and determine inventory levels. Adding payment capabilities right to the device without needing extra hardware enables payments to be accepted outside at tent sales, at curbside, and anywhere in the store where there is a need
There has been no mention of pricing, because what are they selling? There are no processing services, only the ability for the iPhone to act as a terminal, and pricing for the iPhone is already well established. The iPhone can read the card credentials using NFC, but the only thing it can do is pass the data to another app. Stripe and Shopify were two to come out in front and say that they were building iOS apps to use this card reading capability, enabling their merchants to add in-person card acceptance to their existing e-commerce merchant accounts. This product offering also enables Stripe and Shopify to expand their target market beyond e-commerce and effectively compete with Square in the micro-merchant markets if they choose to.
Apple Tap to Pay on iPhone may ultimately have its greatest impact as an enabling technology rather than as a standalone competitor to Square. Without merchant accounts or processing services, Apple provides the acceptance interface while payment providers supply the infrastructure required to complete transactions and settle funds.
The technology could be especially valuable in omnichannel retail environments, where employees already use mobile devices for inventory, customer service, and order management. Adding payment acceptance to those same devices could enable checkout virtually anywhere while also giving payment providers new opportunities to expand their in-person merchant services.
Overview by Don Apgar, Director, Merchant Services Advisory Practice at Mercator Advisory Group
