Apple Pay launched this week with more than 500 supporting financial institutions, with the largest issuers in the group accounting for more than 80% of the debit and credit transaction volume in the USA.
The business case for participating financial institutions is built on competitive marketing, not benefiting from the transactions. The reason: Apple Pay will be expensive to support.
The first hit is to interchange, which Jefferies & Company reports to be 15 bps per credit and half cent per debit. Second, issuers will also incur net new fees from Visa and MasterCard for provisioning tokens in the iPhone secure element, and charges for referencing the account credentials mid-transaction for every payment at the point of sale. Third, there will be levies from processors for the new accounting and billing systems for paying Apple for Apple Pay transactions as well as Visa and MasterCard as the Token Service Providers (TSP).
These costs may actually be dwarfed by the tier one customer support responsibilities that Apple, Visa and MasterCard require of the participating financial institutions. The financial institutions are on the front line of serving their consumers through their attended contact centers and branch personnel whenever there may be questions or issues requiring an attended customer service representive. Issuers are also bracing for calls from Android and non-iPhone 6 customers unable to access mobile payments on their preferred devices, since Apple Pay only works on the iPhone 6 and iPhone 6+ models.
At the same time, financial institutions will be giving up the primary user User Interface (UI), with its potential to inform and motivate customers to use preferred tenders and activate new products, loyalty rewards and offers, in hopes of being chosen the invisible default tender in Apple Pay (or Google Wallet, Softcard (ISIS), PayPal, Amazon or any other 3rd party intermediary).
In the end, banks want Apples buzz, not the Apple Pay transactions.
Ultimately, these forces will motivate banks and credit unions to launch their own branded wallets to avoid all the costs listed above and regain a direct branded connection with their valued customers.
Simply signing a contract to issue or accept Apple Pay is not a mobile payments strategy. Just as Intuit, Microsoft or AOL were merely bridges to a financial institutions own branded Internet banking experience in 1996, so will it be for their branded mobile banking apps. Because the one who enrolls is the one who controls, the safe bet in mobile payments is on your brand, your accounts in your own app. With mobile banking growing five times faster than Internet banking did, it will quickly become your primary user interface (UI) with bank customers and credit union members. Ceding the payment UI to Apple Pay or any other 3rd party intermediary comes with great brand, processing and marketing risk.
With that said, Apples entry into mobile payments now incents financial institutions to begin working directly with merchants, especially the Merchant Customer Exchange (MCX) to renegotiate a new set of clearing and settlement terms for the populating of private label tenders in bank wallets and the acceptance of bank wallets by merchants.
Retailers and banks have an opportunity work together to connect directly with customers without the cost and risk of using 3rd party intermediaries such as Apple Pay, Google Wallet, PayPal, Softcard, Amazon, etc. In a way, Apple Pay has now established the accounting for interchange rebates. It now becomes simply a billing issue, which accepting issuers were forced to put in place for Apple Pay acceptance outside the Visa and MasterCard clearing settlement infrastructure. Working with financial institutions directly, retailers can reduce costs and increase reach by launching their own wallets while also accepting bank wallets and cross-populating tenders between the two. This provides distribution and adoption reach for both retailers private label payment types and financial institutions open loop debit and credit accounts.
Richard Crone leads Crone Consulting LLC, an independent advisory firm specializing in mobile strategy and payments located in San Carlos, CA.