The intimate involvement of the nation's largest credit card issuers in Apple Pay is sparking concern that smaller banks will be left behind in the mobile payments revolution.
Citigroup, Bank of America, Wells Fargo, JPMorgan Chase and Capital One Financial all played a role in building Apple's much-ballyhooed mobile wallet, and the product's launch has ignited fear that the card giants will find ways to drive more consumer spending to their own cards.
"Apple Inc. has potentially handed a major competitive advantage to the largest U.S. banks at the expense of their smaller counterparts," Chris Stulpin, an analyst at Merion Capital Group, wrote in a research note Sept. 16.
Apple Pay, which relies on Near Field Communication to enable contactless mobile payments, is eventually expected to be open to both large banks and small ones, as long as they issue debit or credit cards on the Visa, MasterCard or American Express networks. But there are various ways in which the system could be tilted to aid the biggest banks.
One worrisome scenario for smaller institutions is that Apple will offer them less favorable financial terms than it has negotiated with the biggest banks, because a relatively small percentage of payments gets processed on smaller banks' cards. That could partially erode the advantage banks with less than $10 billion in assets currently have over larger competitors that are subject to a statutory price cap on debit card swipe fees.
Another possibility is that the Cupertino, Calif., tech giant and the biggest banks will find ways to encourage the use of credit cards, rather than debit cards. Credit cards carry higher swipe fees than debit cards, so it's in the interest of both Apple and the big banks to foster their use.
That could spell bad news for smaller banks. The five largest card issuers account for 83% of U.S. credit card purchase volume, as Apple pointed out in its press release last week. And most of Apple's nearly 800 million iTunes accounts already are linked to credit cards, Chief Executive Tim Cook said during the company's April earnings call.
Bob Steen, the CEO of Bridge Community Bank, an $80 million-asset institution in Mount Vernon, Iowa, said that he's concerned about Apple Pay. "Apple's got deep, deep pockets. I don't expect them to back away," he said. "And so it's just another level of pressure for those of us who are still trying to serve our market."
Patrick Frawley, the CEO of Community & Southern Bank, predicted that, in connection with Apple Pay, the big banks will spend millions of dollars to develop state-of-the-art payments technology.
"We've got to keep up with that," Frawley, whose $3.1 billion-asset bank is headquartered in Atlanta, said in remarks at an industry conference Sept. 16. "Community banks should do some coalitions. We need to be smart about it and not let the big banks take that away from us."
Many of the details about Apple Pay's structure have yet to be announced, including how customers will select which card to use. Because many consumers carry multiple cards in their wallets, banks will likely seek to persuade shoppers to make their own institution's offering the default choice at the cash register. If Apple allows banks to advertise inside the payments app, that could hand another leg up to the five largest institutions because of their big ad budgets and national reach.
"A level playing field is what everybody wants," said Matt Krogstad, head of mobile at the $69 billion-asset Bank of the West in San Francisco. He added that banks should be able to innovate, and differentiate their own offerings, on top of a neutral platform.
In order to participate in Apple Pay, the card-issuing banks reportedly had to give up a portion of their swipe fee revenue to Apple. Still, they appear to have a gotten a better deal than retailers, said Christopher Donat, an analyst at Sandler O'Neill. "From all outward signs, the balance of power is tilted in favor of issuers," he said.
Banks of all sizes have a lot of reasons to consider working with Apple. Among them are the promise of lower fraud losses as a result of Apple Pay's improved security, the upscale demographics of iPhone users, the chance to associate themselves with a beloved technology brand and the fear of being left behind in the rapidly changing realm of mobile payments.
Cary Whaley, vice president of payments and technology policy at the Independent Community Bankers of America, expressed optimism about the steps Apple has taken to improve security and protect consumers' data.
But he also expressed some concern about the big banks' involvement. "We never like a press release that mentions some banks at the expense of others," Whaley said.
Already, the biggest banks are looking to leverage their brands. They have a head start, and they're moving fast.
Visitors to citi.com on Sept. 16 were greeted by the Apple Pay logo. Capital One has been touting the Apple partnership in emails to its customers. And just a week after Apple's big announcement, JPMorgan Chase's merchant-acquiring business was already hosting webinars designed to educate retailers about the tools it has developed to allow e-commerce sites to implement Apple Pay.
"We've been involved with this from the beginning," said Marc Massar, a senior vice president at Chase Paymentech. "We have a great relationship with Apple."
Andy Peters contributed to this story.