Why Apple Pay Isn’t a Trojan Horse Intent on Eating the Credit Card Industry

An article in the Innovations column of the Washington Post argues that Apple Pay represents a Trojan horse that will eat the card industry. The piece asks a fascinating question—what will the long-term impact of Apple Pay be on the banking industry?—and then draws a series of illogical and strangely generic conclusions in an attempt to answer that question. Let’s walk through a couple of them.

“Apple Pay is, however, a Trojan horse. Once Apple has established its platform, it won’t need the banks and credit cards any more. It will be able take advantage of another new technology, the blockchain, to offer an alternative payment option.” 

Wow! What an incredibly na?ve statement! There are a couple of problems here. First, Apple has shown no interest in developing an alternative payment option that bypasses the banks and the card networks. Apple is a device manufactuer. Apple makes an insane amount of profit on every device it sells (particularly the iPhone). The company’s interest in payments (or any other ancilliary market) extends only so far as it helps increase the value of Apple’s core products. It isn’t trying to make money from Apple Pay (for evidence of this, look no further than the rumored person-to-person, or P2P, payments capability coming to Apple Pay that Apple will give away for free). Apple isn’t interested in disrupting the banks or the networks. I state this because the design of Apple Pay (creating tokenized versions of existing payment accounts) specifically relies on the banks and the networks.

Second, you can’t just casually toss in the blockchain as a viable replacement to the existing payment infrastructure that Apple Pay relies on. That mistaken belief is often asserted by financial industry commenters opining, “Blockchain will replace everything!”or “Banks are no longer necessary!” Wrong. Blockchain, the distributed ledger system that currently underlies Bitcoin, is able to function as a decentralized and trusted network only because of the economic incentive provided by Bitcoin. Now that’s not to say that there aren’t other variations of the Blockchain concept being explored that don’t rely on mining virtual currency (Ripple, R3, etc.), but those variations come with trade-offs and constraints that are unlikely to be compatible with Apple’s plan for Apple Pay. Just saying “blockchain” when talking about disruption in payments is a bit like jumping into a conversation about last Sunday’s New England Patriots game by shouting “Go sports!” The Post article continues:

“Think about it: today you have a choice between American Express, MasterCard, and Visa, and they charge merchants roughly 2 percent of every transaction. If you were given another payment option, let’s call it AppleCoin, which provided you with a rebate of this fee, and the transaction was easier and more secure than with a credit card, which would you pick? I doubt many people would show loyalty to the credit card industry. After all, it extracts more than $100 billion in fees — a tax that we end up paying for — and gouges us the moment we miss a payment. Apple would dominate this industry.”

There are a couple of major assumptions in this quotation that need correcting. First and foremost, the “AppleCoin” described in the article is currently accepted at exactly zero locations. Gaining broad merchant acceptance takes decades; witness Bitcoin, MCX, EMV, NFC, and many others. The author states that merchants pay transaction fees when accepting credit cards (and debit cards). This is true. So why, in the next sentence, does the author suggest that consumers would be more likely to pick “AppleCoin” over credit cards when those transactional fees are completely hidden from the consumer? If merchants were getting a better price from Apple for “AppleCoin,” they would certainly be in favor of it (in the same way that they favored the Durbin Amendment capping debit card interchange rates), but why would consumers care? In fact, we have seen in other countries that have capped interchange rates (as Australia has) that the “tax” consumers end up paying (in the form of higher prices) doesn’t diminish when swipe fees are reduced; the merchants just pocket the difference.

Read the rest of this blog post at PaymentsJournal...