Banks in Australia want Apple Inc. to open its Apple Pay NFC controller to third parties, and while regulators weigh the case, U.S. banks are itemizing their own, related grievances as the mobile payments service nears its second anniversary.
Apple has maintained tight control over Apple Pay since its October 2014 launch, forcing participating U.S. banks to pay a toll of 10 to 15 basis points per transaction to access the NFC antenna, or controller, according to industry sources. Banks grumbled, but they paid up.
Many of the contracts U.S. banks initially signed to support Apple Pay are coming up for renewal, and financial institutions hoping to renegotiate terms are closely watching the Australia situation for signs of a thaw in Apple’s policy of blocking third-party access to its mobile payments solution.
“Some believe Apple has been courting conflict with the payments industry by acting monopolistically in the way it restricts access to its NFC controller, and Australia is turning out to be the most public of these collisions,” said Doug Parr, chief revenue officer at Prairie Cloudware, an Omaha-based software developer.
Apple declined to comment on the matter and U.S. banks continue to be tight-lipped about their arrangements with the tech giant.
But the issues are stirring up familiar tensions surrounding the tug-of-war over who ultimately controls mobile payments—banks, device makers or merchants—and it’s too early to predict a winner, Parr says.
So far NFC has emerged as the dominant channel for mobile wallets, because of its smooth user experience and the security it offers when combined with tokenization from payment networks like Visa and Mastercard. Plus, it’s minimally invasive to merchants by riding on existing payment infrastructure rails, Parr pointed out.
But merchants like Walmart are developing their own apps using alternative approaches like QR codes, and because consumers still have not broadly embraced NFC-based wallets, the future direction of mobile payments isn’t certain.
“At some point, consumers will vote with their feet, but the parties supporting mobile payments will need to cooperate, and that’s what’s at the heart of the goings-on in Australia,” Parr said.
Australia’s largest banks recently applied to the Australian Competition and Consumer Commission to fast-track a request for permission to collectively negotiate with Apple, claiming the company's restrictive policy around Apple Pay is stifling mobile payments innovation in the country.
The Australian Retailers Association pledged support for the banks’ request, along with the Australian Payments Clearing Association.
The regulator on Aug. 18 responded that it needs time to consult with parties and will issue a draft decision on the matter in October 2016.
U.S. banks are closely watching the outcome, Parr said, because it could provide clues to how much leverage Apple can exert over banks in various markets.
“Banks in the U.S. don’t like paying a toll to use Apple Pay, but it’s worse in other markets where interchange is skimpier,” he said.
U.S. banks typically earn about 200 basis points in interchange on each transaction, but outside the U.S. interchange often ranges between 40 and 70 basis points per transaction, Parr said. “In many countries, there isn’t much interchange left and if Apple is potentially asking banks to give up a third of it, they are going to push back.”
Third-party developers like Prairie Cloudware are busy building mobile wallets for banks that leverage host card emulation (HCE) to store payment card credentials in the cloud, but their solutions can only support mobile payments for Android devices because Apple requires banks to confine Apple Pay within an app that uses a secure element built into the handset.
As a result, banks like Capital One and Wells Fargo that have developed HCE-based mobile wallets are forced to offer Apple Pay as a separate service.
“If I’m a Wells Fargo customer with an iPhone, I don’t get the full functionality of the bank's mobile app, because I can’t use it to make an NFC payment,” Parr explained.
In backing Australia’s banks, local retailers struck a similar note. “In our view, for as long as Apple Pay remains the only app that can use the iPhone’s NFC functionality, the potential for innovation in mobile wallets and mobile payments will be limited.”
Apple shot back in its response to Australian regulators that local banks were exhibiting “cartel-like” behavior and attempting to stifle competition and create security risks.