Apple Pay Boosts Issuer Expense, But It's a Necessary Cost

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Apple Pay represents a new cost to the issuing community. The issuers accept this because there is little choice but to operate on Apple's terms, including paying a fee to support Apple Pay.

The sentiment is yes, there is a new cost and it eats into profitability a bit. However, it is what the market and customers are demanding. Therefore, it is the cost to stay relevant in today’s payment business.

At SourceMedia's annual  Card Forum and Expo, I was on a panel that discussed Apple Pay and its impact on issuers and merchants with Jason Tinurelli, senior vice president of retail payment solutions and digital strategy & innovation, U.S. Bank; James Bell, senior vice president and director of card services at Fifth Third Bank; Fabio Garcia-Passalacqua, senior vice president of the retail lending division at Banco Popular de Puerto Rico; and Brian Backer, the director of enterprise architecture for Panera Bread.

While it is very early in the mobile payment journey, issuers and merchants are very bullish about the process in general, but understand they need to monitor client demands in order to provide customers with the best experience.

The payments industry is at the beginning of a great mobile payments journey that has seen much activity in the last six months with the launch of Apple Pay, the reenergizing of Google Wallet with the Google purchase of Softcard, and the entry of Samsung Pay as the latest player.

However, now that there is this mobile customer engagement platform, how do financial institutions and merchants leverage the technology to improve the customer experience? The customer experience after all is paramount.

For now, plastic it remains as a structure but consumer demand through positive experiences and merchant acceptance may force digital and mobile payments to replace physical credit and debit cards.

From the bank perspective, U.S. Bank was one of Apple Pay's few pre-launch partners. But Apple restrictions forced the financial institution to set up a marketing plan to cover all of its branches, without notifying any of its staff. U.S. Bank had an overwhelming mission once the shields lifted and Apple revealed its mobile wallet to everybody. Once the marketing campaign went live, branch personnel enthusiastically became involved.

Apple Pay deployment was less stealthy for the companies who began following the October 2014 launch of the Apple wallet. Fifth Third benefited from a later launch, but it was not eager to hang around too long because of a perception within the bank that it was behind its competitors. This awareness helped the project evolve quickly.

Naturally, banks want their card provisioned as the default card, the top of wallet card, within Apple Pay and other wallet programs.

While Apple Pay users can alter the default card for specific purchases, it requires an extra step in the payment process, and Apple does not reorganize the order in which its wallet displays cards.

We also discussed the merchant perspective. Apple's prelaunch merchant partners faced a similar dilemma as U.S. Bank. At Panera Bread, only eight people at the company other than senior management knew about Apple Pay before it got underway, but the merchant had to deploy compatible terminals at every store.

Marketing presented different challenges for retailers. Panera had to communicate not only that it accepts Apple Pay (and other Near Field Communication-based mobile wallets, such as Google Wallet), but also how to use it. That raised another issue: who bears responsibility for the education of the consumer base, the merchant or the issuer?

Going forward there have been some challenges around merchant acceptance because not all retailers have NFC-enabled terminals. The panel agreed more merchants would be NFC-ready over time.

When it comes to mobile payment wallet, consumers are the driving force. The big question facing financial institutions surrounds whether to support one or many mobile wallets. One panelist suggested that it could not change consumer behavior simply by endorsing a different mobile wallet.

Ali Raza is principal at CCG Catalyst, a bank consulting firm.


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