Apple Pay Preparations Stir Payment Provider Rivalries in U.K.

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Sibling rivalry can be fierce. While Visa Europe pushes its own technology for online and mobile commerce — setting the stage for Apple Pay in the U.K. — its brother VocaLink is readying the launch of Zapp, a payment system that cuts the card networks out of the equation by directing purchases through bank accounts.

Many of the banks that own VocaLink are the same ones that own Visa Europe, said Paul Stoddart, managing director at VocaLink. The company runs the U.K.'s BACS direct debit system, the LINK interbank network of ATMs and the Faster Payments System. Its 18 owners include Barclays Bank plc, Royal Bank of Scotland group, Lloyds Banking Group, HSBC and Santander.

As VocaLink is trying to decrease the friction of paying online, another behemoth, Apple, is attacking the same problem. While Apple Pay hasn't launched in the U.K. yet, it has hinted at its plans through a job posting for an intern in London.

Apple Pay takes several steps out of the mobile commerce process without disrupting the card networks.

Zapp, which will launch in the summer, allows consumers to check out through a multi-channel authentication process that involves clicking the "Pay with Zapp" button on a retailer's website, receiving a one-time passcode through the website, and then inputting that code into their bank's mobile app.

While there are more steps and devices involved in this process than in a system like Visa Checkout, the move seems in line with what retailers are seeking. Merchant groups, such as the Merchant Customer Exchange in the U.S., have been especially vocal about wanting to circumvent the card networks to lower their transaction costs.

"We are a competitor to Visa and MasterCard," Stoddart said. VocaLink's Zapp "is a better, more efficient, lower cost solution for merchants and businesses and consumers...than using the card-based system."

Currently HSBC, Santander, First Direct, Nationwide and MetroBank have publicly announced they will launch with Zapp. Plus Sainsbury's and ASDA, two large U.K.-based grocery chains and a handful of other merchants have announced they'll launch with Zapp as well.

Stoddart said both Visa and MasterCard would consider Zapp a threat and "so would therefore want to prevent it from coming to market."

Visa Europe was unable to provide a spokesperson by deadline.

Given the options available, the card networks are likely more interested in pushing Apple Pay forward in the U.K. market. Visa Inc. (which is separate from Visa Europe) uses Apple Pay in the U.S. to promote its technology for tokenization. Visa Europe recently announced it'd be following suit, introducing tokenization as part of a mobile payment service it plans to launch in April.

Zapp had initially planned to launch before Christmas last year, but some of VocaLink's bank partners and one of its merchant partners weren't ready to deploy, Stoddart said. "The timing around the launch of Zapp relates to the ability to schedule a combination of banks and merchant acquirers and merchants to go live at the same time," he said.

Zapp's summer launch will only include the ability to checkout with online retailers. But  VocaLink has plans to launch the capability at the physical point of sale by the end of the year. However, its process may be too cumbersome to make it past the digital realm.

"It definitely won't work at the [brick and mortar] point of sale; it's too slow," said Roy Vella, an independent consultant in London. Because of the ease of use with payment cards, consumers are unlikely to adopt a mobile payment option that lengthens the payment process, he said.

The financial services industry has had a hard enough time getting consumers to use Near Field Communication (NFC) tap-and-pay mobile solutions, which are advertised as speedier than swiping or dipping cards.

If a bank hasn't publicly announced its support or denial of Zapp, they are figuring out how and when they want to publicly announce participation, said Stoddart.

Lloyd's Bank is one of the big financial institutions in the U.K. that will not support Zapp from launch, Stoddart said.

Barclays, which hasn't yet announced its support of VocaLink's Zapp, signed on with Apple Pay in the U.S.

"Apple Pay has created interest from U.K. banks," said Vladimir Vukicevic, lead analyst at Timetric's Payments Intelligence Centre. But as the U.K. payments and financial services industry readies itself for Apple Pay's arrival, they'll have to wait for Apple to get one or two more countries under its belt.

Apple's next move is likely Canada, said Vukicevic. Many U.S. payment companies expand first into Canada because the market is close to home, both in location and in culture. Plus there's a high penetration of contactless point of sale terminals and Apple phones in Canada, said Vukicevic.

Australia also looks like a good market for Apple Pay because of the contactless payment penetration. Australia could also be easier than the U.K. for Apple to expand into because interchange isn't as squeezed, Vukicevic said. And banks on the continent are also acquirers, whereas these are separate entities in the U.K., he said.

If Apple's decision relies heavily on iOS penetration, Switzerland, Ireland and Japan are also attractive markets, said Vukicevic.

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