How Apple Card widens rift with ISOs

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As if they needed another reminder that their business models might not have a place in the modern payments landscape, independent sales organizations are left wondering what role — if any — they will have in launching the Apple Card.

ISOs knew they were up against the flow of technology a decade ago, when the launch of Square undermined their business model. ISOs resolved to become tech savvy to stay relevant, and many ISOs were making that adjustment and even finding newer technology was easier to sell and provided faster ways to register merchant accounts.

And then came the Apple Card announcement which, like the mobile point of sale market, operates without regard to the role of ISOs.

"With the success and momentum of Apple Pay, we've learned a lot about credit cards," said Apple CEO Tim Cook when announcing the product. "While we all need them, there are some things about the credit card experience that could be so much better."

Cook clearly wants to convey that Apple has the experience and vision to launch this product on its own. But Apple may be hurting its prospects by ignoring the value of working directly with ISOs.

"The problem the ISO industry has, as well as Apple, is they do not understand how to work with or even approach each other," said Paul Martaus, merchant acquirer consultant and industry researcher.

Martaus said he sent a letter to Apple five years ago to introduce the technology giant to the acquiring industry and that the company needed to enlist ISOs "because they own all of the merchant relationships" needed to expand Apple Pay.

"They responded that the banks are taking care of that for them," Martaus said. "They don't understand that the banks are not the best way to go all of the time to acquire merchant contracts."

The difference with Apple Card is it fundamentally changes how merchants accept payments. The physical card is an afterthought; it exists only for the merchants that didn't get on board with the evolution of mobile and digital payments.

Apple Card isn't just about one product; it's about building an ecosystem. Cash-back rewards get funnelled into the Apple Pay Cash virtual card account, giving Apple fans a new pool of money to spend in the digital realm. They can put it toward Apple's new news, gaming and media services — or Apple could, if it so desired, allow consumers to spend those funds at other merchants.

"The ISOs say they will sell Apple Pay to merchants, but they want to be paid to do so," Martaus said. "And there's the disconnect, right there. Apple isn't interested in paying or keeping track of ISO contracts."

Apple views its Apple Card network and supporting players as a strong foundation from which to launch — and one that would likely leave traditional merchant acquiring on the sidelines.

"They will be priming the pump for merchant adoption by funding Apple Pay Cash, with every credit transaction rewarding the prepaid account," said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC. "Apple Pay Cash would be accepted by all merchants who accept Apple Pay online, in-app or in-store."

Apple Pay Cash, currently carried over the Discover network, likely would be no more expensive to a merchant than a traditional PIN-based debit transaction.

"All merchants prefer debit and this will ignite their open-arms acceptance of Apple Pay Cash," Crone said. "And debit has to have a choice of two networks for routing, and you would have to think maybe the other one is Mastercard, giving Apple major brands across all of their accounts."

Neither Apple, Discover nor Mastercard responded to inquiries about their current or future roles in the Apple Card transaction network or merchant acquiring facets.

In past years, some merchants have resisted accepting Apple Pay, either in an attempt to push their own branded wallet or because they feared the 15 basis points that Apple charges issuers per transaction could trickle down to them in other fees.

"The adoption of Apple Pay has been lackluster and I'm not sure the Apple Card is the silver bullet to adoption," said Kalpesh Kapadia, former Wall Street analyst and current CEO and founder of credit-card issuer Deserve. "Visa and Mastercard have also launched contactless products that are fast, safe and easy to use, making Apple Pay less compelling."

It will be up to Apple to drive consumer and merchant adoption on its own, Kapadia added. "I don't see Apple Pay as a merchant acquisition play, as its [focus is] entirely on the issuing side with the card."

Apple has agreements with Barclays and Citizens for in-store financing for devices at Apple stores, as well as Goldman Sachs on the card-issuing front. Apple works with Mastercard, Discover, Green Dot and Visa on its card products, including prepaid.

"All of these will have to coexist in my opinion," Kapadia added. "Apple still has not figured out payments, and ultimately, Visa and Mastercard are here to stay."

The physical Apple Card titanium card — meant for merchants that can't accept Apple Card payments through Apple Pay — answers the question about merchant adoption to a certain extent.

"Where a merchant doesn't take Apple Pay in-store, that's why there is a physical Apple Card," said Alyson Clarke, principal analyst for digital business strategy at Forrester.

It doesn't address mail order or online purchases that don't accept Apple Pay, Clarke added.

"But I expect that Apple and Mastercard are working to solve this," she said. "There has to be a way with an app or something that can generate a one-time card number for the customers to use for those purchases that need a credit card number."

It would be a mistake to assess the Apple Card as simply another new financial product, Clarke said.

"It already is more than that and has the potential to be even more," she added. "Apple brings distribution to the table with its customer base, but if they extend the relationship with Goldman Sachs and add in the power of Siri, this changes banking."

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