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Should Banks Be Worried About Apple Pay?

A colleague attended a conference and reported that Chase is freaked out about Apple Pay, or at least seems to be. The Chase representative sees Apple Pay as a big threat to bank payment system products and was also worried about Apple Pay making it hard for banks to develop “relationships” with millennials, Chase is working on its own product called Chase Pay.

As you see below, our payments system expert Clive doesn’t buy it.

By Clive, an investment technology professional and Japanophile

As a brand-building exercise, Apple Pay is quite effective. All those small visual cues at EPoS machines and on store doorways are good advertising and quite inexpensive considering the reach. Apple is also now reporting declining revenues from its existing product set, so it is an idea straight out of any airport departure lounge management strategy book to look for new revenue streams.

But as a disruptive payment method or as some kind of magic entry mechanism to retail banking? No way. You might even, if you were not feeling especially charitable, describe as a bit desperate, and it certainly fits into a narrative that Apple is potentially now just another ex-growth tech company with a nose-bleed inducing valuation which will look at any vaguely synergistic place to splurge some of its cash pile in the hope of producing some much-needed top line number improvement. Whatever, Apple Pay faces numerous obstacles.

For a start, card tokenisation systems such as Apply Pay hide customer information from the merchant (this is an issue with all forms of tokenised card payments such as “contactless” NFC enabled cards so this is wider than just Apple Pay).

This is probably the main reason for slow merchant adoption of Apple Pay – as at June 2015 “less than one-fourth of the top retailers currently accept it, and almost two-thirds said they would not be accepting the payment method [in 2015]. Only four retailers said they plan to accept Apple Pay in [2016]”.

In the U.S. Wal-Mart are holding out against any EPoS system that tokenises card data where they cannot see through the tokenisation back to capture the underlying customer-level information. Three of the big four UK supermarket chains are also doing likewise. If customer pressure forces the market to adopt tokenised EPoS systems near-universally, that could force the hands of the hold-outs like Wal-Mart into supporting services like Apple Pay. But then again, consumers simply are not that bothered at present. It is difficult to see what would start to change their minds.

And even of those who have used Apple Pay, they report that it did not offer anything which would keep them using it — of the relatively few who did use it (out of the eligible population of Apple phone owners), the majority didn’t use it again:

The Vast Majority Of iPhone6/6+ Users Aren’t Using Apple Pay

Though Apple is making gains in use and trial, the vast majority of those who could be using Apple Pay aren’t – 85 percent still have not made use of the app at all.

“Apple Pay is not yet salient. When it comes up, it has not registered with the [consumer] that they should use Apple Pay,” […]. “There’s something lacking there in the habit-forming action at checkout.”

By the numbers, the main reason – affirmed by 37 percent of respondents – is that they don’t have a reason to change; they like their current payment method. Almost a third – 31 percent – are not familiar with how the system works. Security is the third concern keeping people away from Apple Pay – 15 percent of respondents listed it as a serious concern, slightly more than the 11 percent who had simply never heard of Apple Pay before being given a survey on it. Inability also played a role among those who had never tried to pay the Apple way – 5 percent responded that they had tried to register with the service, but had been unable.”

Clive again…

Then we’ve got the even bigger load of questions about how Apple could somehow supplant the existing card schemes (VISA, MasterCard, AmEx etc.) to which the retort is “not in my lifetime it won’t”. Okay, perhaps not quite a lifetime, but it’s not going to happen inside of 10 years. For a start, the existing schemes are simply too well embedded. Everyone has a card from one of the established scheme providers (unless they really don’t want any sort of card at all). So all EPoS infrastructure must support the current schemes.

And the existing scheme providers offer a stable, mature product in terms of the sophistication of the silicon in the card side of the payment system and – through a variety of software vendors – excellent well-understood and supported platforms for processing card payments which the banks need to have in their back ends. If Apple wants to get the existing card schemes out of the equation, they are at least initially going to have to be backwards-compatible with them until such time as they can migrate enough legacy card users to a pure-Apple Pay solution. Banks won’t want to take a punt on untried Apple tech in their back end card payment processing. They might run a pure-Apple Pay system in parallel with the existing card schemes processing systems, but they won’t ditch the latter for the former.

It is however worth noting that, for payment systems, there is a divergence between the two big markets for non-cash payments, the U.S. and the EU. And this could result in a different fate for Apple Pay in the two geographical areas. The EU expressly forbids a card scheme (like VISA or MasterCard) acting as both a card scheme and a Merchant Services Provider (i.e. trying to lock in the retailers to their own specific EPoS hardware) or providing money transmission and banking services.

If the US competition regulators are similarly averse it is difficult to believe they’d look favourably on Apple trying to tie both end users and merchants into their own proprietary Apple Pay system.

But in the U.S. one of our sources has advised us that one of the large U.S. Too-Big-to-Fail banks seems to think that there is so much complexity and overcharging in the U.S. payment system that a service (such as Apple Pay) that cut out a lot of the providers could seriously undercut banks. And this is certainly a very valid point, a point which is much more valid in the U.S. than in the EU. In the U.S. the lack of effective enforcement of competition regulations has allowed gratuitous rent seekers to operate in the card payment systems with very few serious attempts to reign in the worst abuses. This means that the costs imposed on a per-transaction basis for non-cash, non-check payments are excessive, way beyond a fair return on investment.

If Apple wants to start something like “Apple Bank” then it could and it certainly has the capital to do it with. But the snag is, returning to our earlier point about patchy merchant adoption of Apple Pay and the reasons why merchants might not be about to relent into offering it, it would have to offer an existing card scheme payment product – if it made its retail account “Apple Pay only”, customers who had that account simply could not spend their money where they needed to. And the second it offered, say, an “Apple Bank VISA Card” it would be tantamount to admitting that Apple still needs one of the existing card schemes to offer a workable account product to retail customers.

So, no, we’re most likely going to be stuck with the existing card schemes for the foreseeable future and Apple Pay will have to as a result consign itself to piggy-backing off of them.

But one big unknown, and here is it tricky for old farts like us to get an accurate assessment of real millennial generation thinking (as opposed to what similarly old farts who would like to market to millennials and tell anyone who’ll listen what they think millennials want) is if, and to what degree, the under 20’s see legacy physical cards as hopelessly old hat.

Again, from our source, who is talking about the concerns of a large U.S. Too-Big-to-Fail bank:

They also seem worried about losing/degrading their relationship with millennials. Their big fear is millennials will regard cards as uncool and will only use phones. This may be consistent with lower credit card uptake among the young.

But our source then adds, quite rightly:

So why did they weaken the relationship by allowing them to deposit checks on their phones?

And, even more importantly:

However, they seem to miss that millennials have no money and won’t be buying houses before they are 40.

Given the high cost of entry to utilising the Apple Pay service (a recent iPhone is not a trivial expense), that alone would suggest it is destined to be a niche market. The more recent entry of Android Pay lowers the sticker shock of being able to adopt a non-traditional payment method as Android phones are a lot cheaper than Apple’s products. But that doesn’t help Apple Pay at all as Android Pay is a competitor service and will only fragment the market. And both of these suffer from the same constraint that some merchants are very loathed to provide any payment mechanism at all which is underpinned by card tokenisation.

Reader input would help our understanding of how millennials really relate to non-traditional payment services like Apple Pay, but based on our analysis, it bears more than passing resemblance to Myspace – a trendy tech fad that lacks the ability to distinguish itself through any particular Unique Selling Point.

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58 comments

  1. MikeW

    From the source (our millennial daughter, who will only use an iPhone and is an ardent Bernie supporter). I do not want to use credit cards from big banks if I don’t have to as the banks are perceived to be fundamentally evil so somehow I am getting screwed. She wants an alternative to the banks for everything.

    As to ApplePay, she gives it very little thought. If its there and she remembers she’ll use it, for small stuff she just uses cash as its easiest. She is however open to going cashless and would have to form the new habits.

    What she doesn’t want is a totally fractured system whereby she has to use/have a whole series of different apps depending on where she is spending money.

    1. Clive

      Thanks for the verbatim! This also ties in with the other research I have seen which said that for people who want to be able to use the newer forms of payment systems, one of the most important things is that they have one system to deal with rather than a multitude of not-quite-compatible overlapping systems.

      Interesting too the antipathy towards the banks; perhaps that’s what is really troubling them.

      1. Art Eclectic

        I work with a lot of millennials as well, they are agnostic on Apple Pay but ardent fans of anything that upsets the status quo. Like Mike’s daughter, they consider the big banks to be evil entities who are NOT ON THEIR SIDE.

        They use Uber or Lyft with enthusiasm because it’s easier to just do everything through the phone and it’s a continuation of the “sticking it to the man” philosophy. They order everything possible from Amazon rather than patronize major retailers.

        And, yeah, they are feeling the Bern all the way to their toes.

        1. Lexington

          They order everything possible from Amazon rather than patronize major retailers

          Amazon is certainly convenient, but ordering from them in preference to traditional retailers is definitely not “sticking it to the man”.

          Amazon is The Man.

          1. perpetualWAR

            +100
            Glad to see your response as I was also going to respond the same way.

            If the millennials want to “stick it to the man” they need to DEFY fashion and shop second hand. And shop only when they NEED it, not want it.

            1. Lexington

              And shop only when they NEED it, not want it

              The problem is most of us have trouble distinguishing the two ; ) How many people legitimately NEED an iPhone?

              I completely agree with you, but we shouldn’t judge them too harshly, when you consider they”ve been bombarded with essentially continous marketing propaganda virtually from the moment they emerged from the womb…

          2. Art Eclectic

            Yeah, but they don’t see it that way. It’s more of a continuation of being able to do everything from their phone.

            If you want to extrapolate that out, Apple is also “the man”. So is Google.

            I think it comes down to an idea that traditional retail is for old people, just like cable TV is for old people, checkbooks are for old people, big banks are for old people, etc… Amazon might be “the man” but they at least get it, they are digital first. I’d hazard a guess that it comes down to companies built for technology and phones vs old school companies who’ve added digital to keep up with the times.

            1. Lexitgton

              I should have been more clear and said that I think millenials often confuse engaging with technological novelty for meaningful social action. Embracing companies like Amazon, Apple and Google is entrenching rather than challenging the power of our new corporate overlords.

              Of course when companies like Uber hype the supposedly “transformational” nature of their businesses they are explicitly exploiting the identity in many peoples’ minds between “new” and “subversive” (which is understood to be desireable), often as a pretext to claim special priviledges like excemptions from licensing regulations.

  2. Jim A

    I suspect that Apple could speed adoption by retailers by minimizing the transaction fees charged back to them. Having to get both the sales point and machinery and support a different system of payment would be a much sweeter pill if it came with significantly lower transaction fees. There is enough gouging built into the current system that this should be possible.

    1. Clive

      Yes, I’m sure that Apple wish that too.

      Unfortunately for them, there’s no easy way to cut the existing players out of the end-to-end system thus rendering Apple (no doubt to their considerable chagrin) a mere overlay on top of what is already an ecosystem festooned with (other???) rent-seekers.

      I for one doubt Apple would, if they were somehow able to corner the market, be entirely our friends here. Benevolent despots at best I think.

      1. Skippy

        Too bad about the screwing the entire music industry and all the looting they did with their previous payment system wrt apps and stuff… most fortuitous moment to gain cash inflows…

        Disheveled Marsupial…. couple of grand they had to reimburse in my case…. sad that apps is a graveyard now…. Gates fruitlessness capitalism thingy….

    2. Art Eclectic

      Retailer adoption will mostly be driven by customer base. Starbuck’s is a natural. So are Uber and Lyft. The retailers where younger people are spending money will be the first adopters. It won’t make sense for retailers who’s customer base doesn’t include large numbers of iPhone using millennials.

      Some kind of phone pay is inevitable. If I can wave my phone under a scanner to board an airplane I ought to be able to do the same at the store.

  3. K.K.

    I’m a middle-aged woman from the Midwest with a new first-time iphone. I recently visited San Francisco and quickly set up Apple Pay out of necessity for Uber usage. It took me about 5 minutes to add a few cards (including Chase). I loved it. It’s encrypted, safer, and I didn’t have to fumble to find my rewards card. It stored my receipts for easy access all in one place. I’m no Apple fanatic, but it was a huge hassle saver. I’m the demographic they need to worry about. Busy moms will seek out time savers and teach others to do the same.

    1. Clive

      I don’t use Apple Pay but I did used to use “contactless” (conventional plastic cards with a NFC chip that you just waive at the EPoS terminal). It is very handy. But I stopped using it because I became a terrible shopper in terms of making sensible purchases and sticking to a budget. I’d just go out with the card and there’d be a coffee and a cake here, a magazine or newspaper there, a few things at the convenience store which I might have been able to live without and so on.

      I went cold turkey. I now leave my wallet at home when I’m just popping out and take nothing more than a £20 note which is good enough for any “emergency” scenario I’m likely to meet plus any walking-around type of expenses.

      I get a psychological boost when I return home with the note intact. I know exactly how much I spent and on what even if I don’t look after the receipts very well (I’m terrible at just throwing them away or telling the clerk not to bother). And there’s something very sobering about handing over twenty quid for a coffee and something to eat, having it come to maybe nearly seven pounds and getting a mere tenner and a few coins back — I much more conciously evaluate the cost of what I’m buying.

      I suspect that — especially where credit is involved — our inhibitions are lowered when we don’t handle physical cash. And I suspect too that this is one of the driving factors behind trying to make us all “cashless”. But then I do find that women are able to maintain a mental list of running totals of things in a way that men tend to just do in a done-it-and-forgotten-about-it-already way (but I am mindful of risking anecdotes-as-date and small sample sizes here!)

  4. Atul

    For this, its worth looking into what the Indian government did with launching its own competitor to visa,mastercard,etc called RuPay.

    1. Eduardo Quince

      The Indian gov’t should sign up RuPaul to be the face of RuPay. It’s a no brainer.

  5. Howard Beale IV

    Chase is so big one person may be entirely freaked out while someone else may actually see this as a good thing as once the infrastructure was laid down for Apple Pay bolting on other pay systems (Android Pay, Samsung Pay, etc.) would be extremely trivial to handle (i.e.: “Been there, done that”.) Makes me wonder which part of the Chase archipelago this individual was from to have become so unglued.

    1. Clive

      Oh, how true. At my TBTF I am actually — right now — working on a project the aim of which is diametrically opposite to another initiative in the same TBTF (but sponsored by a different profit centre). It’s tempting, when one thinks (not that one really likes to think) about mega corporations that they’re somehow like The First Order in Star Wars: The Force Awakens — ruthless, single-minded and despite their evilness at least efficient.

      But usually, they’re not like that at all. If my TBTF tried to build a planet killing super weapon, it would shoot itself in the foot. Sometimes one part of it is completely insane and this is counterbalanced by a glimmer of sanity elsewhere. Sometimes different parts of it go completely whacko, simultaneously but in different directions.

      1. jsn

        Ah yes, but shooting yourself in the foot with a planet killing super weapon still kills the planet!

      2. Socal Rhino

        Yes, and if plans for the scepter of world domination was developed on the wrong archipelago, they would be locked away in some sub-cellar behind a Do Not Disturb sign.

  6. Carolinian

    Interesting post. As a person who refuses to do banking on my computer I can’t imagine why someone would trust Apple with all their payments. From a consumer standpoint is there any remote advantage to using a smartphone rather than a card? This seemed like a dumb idea when it was first announced and sounds like even the the Apple fanboys and girls are coming to agree.

    1. washunate

      From a consumer standpoint is there any remote advantage…

      For specific consumers, there are three main advantages:

      1) Yes, the banks/Apple still have some info (obviously the payment has to be processed!), but the merchant does not. So it is relatively more private, if that matters to you.

      2) Tokenization (such as Apple Pay) is relatively more secure in the case of things like merchant systems getting hacked, again, if that matters to you.

      3) There may be use cases where the consumer has a phone but not the purse/wallet that has the card. The ‘one device to rule them all’ does not work for everyone of course, but some subset of people find it handy for their phone to be their alarm clock, their radio, their email client, their flashlight, their wallet, their boarding pass, etc. These are largely niche cases now, but the potential to not need a wallet is actually pretty large once you can do the whole event, especially where driving is not a factor since needing your driver license, especially in the US context, is one of the major causes for needing the whole purse/wallet in the first place (for example, buy a train ticket, go to a baseball game, buy a beer, take the train home…no purse/wallet to carry around or risk getting stolen).

      1. Lexington

        especially where driving is not a factor since needing your driver license, especially in the US context, is one of the major causes for needing the whole purse/wallet in the first place

        So the next logical step would be to digitize drivers licences (with integrated insurance and registration) so can carry it on your phone.

        Though when you think about it the quaint old days where you controlled access to your identity are already largely gone. Soon you won’t need to carry any kind of paperwork (whether physical or virtual) because those with a Need to Know will be able to access your information without the bother of you having to provide it.

        “Do you know how fast you were going? Also i see you”ve been spending a lot of money at liquor stores recently so I’m going to need you to blow into this brethalizer. Glad to see that tumor was benign. You know you’re paying a lot of financial charges on all that debt. Have you considered a consolidated loan? You know my brother in law is a financial advisor, i”ll give you his card…”

        1. washunate

          Though when you think about it the quaint old days where you controlled access to your identity are already largely gone.

          Right on. The government is doing it for our own good, of course.

        2. michah

          You know my brother in law is a financial advisor, i”ll give you his card…”

          You mean – “Let me share with you his contact info.”

    2. readerOfTeaLeaves

      I am an avid Apple Pay user, on my iPhone 6+.
      I hope to use it on my watch soon, but have not yet set it up on that device. (That’s on my ‘to do’ list.)

      I love, love, love Apple Pay.

      It won’t work without my very own fingerprint, and no one else’s.
      IF, and only if, my unique, individual fingerprint doesn’t ‘register’ on the phone during a transaction, then it prompts me to type in my security code. 90% of the time, the phone’s home button ‘reads’ my fingerprint correctly and says, ‘Okay, I have now confirmed your identity — you are now authorized to spend money from the account you’ve selected…’

      IOW, if some asshat steals my phone, they still won’t be able to steal my money.
      If they steal my card, they can use it in nefarious ways.
      I know that all too well, because it has happened to me (following a home burglary).

      In both 2006, and again in 2008, I was a victim of identity theft when I was a TBTF customer. My credit rating, which is one of my very few vanities, was demolished and the bank was next to useless. I can’t describe the energy suck of having to fix that mess.

      I now bank with a credit union, and I use the anti-fraud services offered by my homeowner’s insurance to keep tabs on any weird banking activity. (And yes, I love that my insurance company offers anti-fraud services as a benefit to customers!)

      Perhaps if I had not experienced the absolute hell of identity fraud, I would not be such an ardent advocate for Apple Pay.
      But anything that protects my privacy and adds a layer of security, I’m using.
      My attitude is ‘Hooray for Apple Pay!”

    3. lyman alpha blob

      I’m with you – I don’t get it. An electronic payment is an electronic payment so what’s the big deal?

      I’ll keep using cash thanks. Having worked in a bank and being able to tell exactly what any customer is up to any time I viewed an account with debit or credit card charges really put me off of using those things.

      What happens in Vegas definitely does not stay there if you pay with a card.

  7. Steve B

    Well, since Apple Pay operates using standard credit and debit systems as the back end, I don’t see the issue. But, when I have used it, it has been fast, easy and seamless. The new chip readers that have been forced on retailers offer me no benefit and are excruciatingly slow. Indeed, they are so slow that they give me ~1 minute to harangue beleaguered clerks about how much the new system sucks, every transaction, every day. If the card companies don’t fix their chip systems to match the speeds I observed in Europe, I have an incentive to switch (time) and the retailers have a motive to switch (customer frustration and lost business). When two vendors are available, I am changing habits to go with Apple Pay over chip.

  8. craazyman

    at some point these kids will wake up and realize $100/month for non-stop bullshit is a waste of money and time.

    Then they’ll start thinking and acting like geezers — using cash and dial telephones. maybe even TVs with antennas! they’ll tell themselves it’s cool.

    Apple pay? ha. How about cancelling your smart phone and having cash in your wallet and a TV with an anntenna?

    There’s no more broadcasts on earth overpowering the reception of fainter signals, so now you might be able to get space alien TV shows you couldn’t get before. That’s really crowding out. That’s not fake crowding out like the idea that govermint borrowing crowds out private borrowing, as if money were like thousands of golf balls everybody’s graabbing at the same time

    1. perpetualWAR

      I must be an old geezer. I pay with cash and have a TV with rabbit ears. Egad! Who knew?

  9. Steve B

    The advantage is straightforward – user information is tokenized, so that it cannot be pirated in transit, so that vendors don’t get my information by default whenever I buy a toothbrush, and so that my information will not be on their servers to be hacked.

    1. Clive

      NFC-enabled (plastic) cards have the same advantage for the cardholder (and disadvantage for the creepy merchant intent on tracking my purchases). These don’t need Apple or Android Pay.

  10. Paul Tioxon

    Any chance the US Government will develop an UNCLE SAM-PAY system? That would really freak out the banks. I’m talking digital dollars, with their own serial numbers and digital water marks, but never are actually printed. Dollars that are good as cash, but non-corporeal.

  11. Brian

    What may push people to tokenized payment systems are the continued data breeches that all of the players in the card business experience. Publicity for the weak systems the retailers and TBTF will push people to more secure systems.

    If my payment details are never exposed to the retailer, I am more secure as they cannot be exposed to a retailers hackers or employees (who may be hackers or thieves)

  12. pebird

    To use Apple Pay, you need to associate an existing debit or credit card. Hardly “sticking it to the man”.

    As to convenience, since the millennials who would use AP would need a payment card, some would probably tend towards a cash back rewards card and use that exclusively.

    Apple is in this business because everyone else in the tech world is. They are collectively anticipating/pushing the new “private money” disruption and they want their place at the table.

  13. washunate

    This means that the costs imposed on a per-transaction basis for non-cash, non-check payments are excessive, way beyond a fair return on investment.

    Clive I really like your writings on payments systems. I’m not sure this particular snippet is fully accurate, though, at least in the American context. If there really was a material gulf between the ROI for US merchants on accepting credit cards and the costs imposed, then merchants would refuse to accept credit cards. Or at least those with a reasonable amount of scale and market power who depend upon volume to offset tight margins, like WalMart, would refuse credit cards.

    I think the costs of retail (ie, small-value) cash and check transactions are not fully appreciated by that description. Handling and processing checks and cash is actually pretty expensive, too.

    Now that’s not to say that the fees charged by financial intermediaries do not exceed the marginal cost of providing those services. But that is a very different matter, both philosophically and practically, than an ROI comparison with checks and cash.

  14. Clive

    The EU capped interchange fees at 0.2% (debit cards) and 0.3% (credit cards). This forced fees downwards in the EU, especially for credit cards which were previously around 1% http://www.bbc.co.uk/news/business-23431543.

    In the US, fees are much higher. Some (and I stress, some) debit card fees are regulated and fixed at 0.5% http://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm which is still a lot higher than in the EU. But a fair amount of debit card transactions (the non regulated ones) and all credit card transaction fees are a lot higher than that — the rate card is complex and does capture a difference in the genuine cost base drivers between different types of card transaction but they are all in excess of 1% and some touch nearly 2% http://www.mastercard.com/us/merchant/pdf/MasterCard_Interchange_Rates_and_Criteria.pdf

    So even the regulated fees in the U.S. are higher and the unregulated fees are hugely inflated. It is really hard to justify that somehow the U.S. is such a massively higher cost country to operate a card scheme in when compared to the EU. Here is another good snapshot of how bad it is https://www.helcim.com/us/pricing/visa-mastercard-interchange-rates/

    The differentials in pricing for the U.S. compared to the EU is pure rent-seeking. The merchants and consumers pay it because the U.S. regulators refuse to adopt the same approach the EU did in forcing the card schemes to clean up their act and stop price gouging. Expecting consumers and merchants to boycott the card schemes until they reduce their fees isn’t going to do the trick. Card payments are essential in some industries (auto rental, lodging) and do indeed offer convenience to consumers and merchants. The cards schemes in the U.S. are being allowed to exploit this.

    (sorry, this was a reply to washunate above!)

    1. washunate

      Agreed, I don’t expect a boycott. Quite the opposite, retailers have embraced plastic. It used to be much harder to use credit cards in the US than it is today*. That’s my point – it isn’t that cash and checks are cheaper. Rather, it’s that credit cards are so much better than cash and checks that even with huge markups, retailers still accept them.

      That is a regulatory matter, a question of public policy, a matter of how to distribute resources when technological and social developments create gains in aggregate wealth. No matter how much people may genuinely desire to be nostalgic about checks and cash, they are rather poor payments systems themselves in many (not all) use cases.

      *Indeed, retailers created mass credit card usage as it exists today. The developments pioneered and popularized by Discover (such as no annual fees and rewards) are ubiquitous in credit cards today. Discover, of course, wasn’t a product of a tech titan or a TBTF bank. It was a product of the most powerful retailer in the US.

      1. Clive

        I think the same, largely, and I do concur that in some situations cards are much easier than cash or check (cheque for the benefit of my British reader!). The problem is that what should be something good and beneficial to society has been bastardised, the bastardisation enabled by spineless regulators and the willingness to exploit consumers’ legitimate desire for convenience. My fix for the whole sorry mess is nationalisation. Which, of course, is off the table, as Lambert says “because markets”. Sigh.

        1. washunate

          It’s funny, in the American context, words like cheque now look downright Frenchie.

          Which would go along with that whole commie pinko leftist nationalization bent you have going on there. What’s next, national highways? The slippery slope!

      2. clinical wasteman

        Serious question, Washunate, not just venting of cash-centric spleen: when you say ‘credit cards are so much better’, does this depend in part on how easy (or difficult) the urban (or non-urban) infrastructure makes it to use cash? In ‘inner’ London there are multiple ATMs a few hundred metres apart on every street where there are also retailers, and almost all of them are free to use for cash withdrawals, regardless of the underlying bank account. So there’s not much reason except personal preference (admittedly, a widely held preference) to use cards — let alone phones — other than for extra-large or online payments. But I can see how things might be different in less densely populated areas and/or where banks charge punitive fees for ATM use.
        The curious thing is that UK and European banks (collectively the owners of Visa Europe until the current buyout goes through) have been lobbying furiously (or “educating the public”) against cash — because of the handling/security costs for banks — for years, while at the same time free ATMs have multiplied everywhere. So perhaps the “educational” message isn’t getting through.

        1. washunate

          Absolutely. In the US context, cash is often not readily accessible. Or the ATM that is near charges a high fee. So that is a variable that impacts things.

          Other variables from the consumer perspective: potential of being robbed, lack of rewards from not using a card, hassle of maintaining proper change, risk of being shortchanged by merchant (either intentionally or accidentally), ally in resolving disputes with merchants, potential usage in foreign countries

          Other variables from the merchant perspective: risk of counterfeit notes (pretty low of course but still takes some amount of staff time and process engineering), costs of counting/monitoring cash, costs of depositing cash, lack of data tracking on customers, potential missed sales from people without sufficient cash, potential thefts by people who take property before paying (think a petrol station pre-authorizing a credit card vs. people saying they will pay inside then driving off)

          That’s probably not comprehensive but I’d say it covers a fair portion of the ground. I don’t think cash is going away. Rather, cash has already gone away. Credit cards are primarily replacing checks, which are even more of a pain. Nobody in the US wants to go back to the days of waiting behind the person in line fumbling with their checkbook and ID for an out of state bank.

    2. Lexington

      Whoa Clive, best reign it in a bit there.

      That kind of loose talk could give the soft headed the mistaken impression that those evil unelected EU bureaucrats actually act in the public interest once in a while.

      You know, in their spare time, between thinking up new ways to torture citizens in the southern periphery countries and making regulations on the breeds of cow that can provide milk for Pont-l’Évêque cheese.

      1. Clive

        That’s become the EU’s problem, for every welcome move like clamping down on (in this case) monopoly abuses, there’s a piece of total dreadfulness such as fighting a proxy war in the Ukraine and supporting crooks like Tymoshenko. Oh, and who can forget throwing Greece under a bus?

    3. Lev Ridge

      funny that, my card processor (chase paymentech ) had the nerve to actually tack on a extra small fee in addition the current processing fees for chipped cards on our new card machines ( which are near field ready ) can’t really switch processors as they are the ones that integrate with our Point of sale software best , apparently there is a lot of coding involved with the new machines and making them integrate with POS systems and the processors , sigh we pay more for the big rent seeking companies to take less risk ,must be nice to have a few congress critters available to do your bidding

  15. Ty Myrick

    Do I understand correctly that using Apple Pay prevents retailers from tracking my purchases and keeps my private information safe if the retailer is hacked?

    1. Yves Smith Post author

      Don’t kid yourself.

      Apple Pay backends to a bank. It’s just an overlay. You still use accounts you have with banks.

      Banks sell all your transaction data. For instance, the Democratic and Republican parties buy individual transaction data.

      I presume the difference is the merchants get for free what they’s have to pay for with Apple Pay. Remember US banks charge hefty transaction fees to merchants.

      1. Darthbobber

        He was asking about the retailers, not the banks.

        And yes, the setup does keep the MERCHANT from seeing the identifying info relating to the customer. But that’s only ONE point of concern. (Though a significant chunk of the crap that comes my way does clearly originate with the merchants.)

        It certainly isn’t enough of an advantage to sell me an iphone, and I see the gains for most end users as marginal. But then, I’m not in the target demographic.

        1. Yves Smith Post author

          The point is the merchants can still get the same info (and way more!) but with Apple Pay, they’d have to buy it from banks, not get it for free with the cost of their merchant fee.

          1. Darthbobber

            True. But there DO exist banks and credit unions that will not sell it.
            (which creates another potential point of product differentiation for banks.)

  16. JustAnObserver

    Clive: One of the many interesting things you said in your piece was that swathes of the merchant community is resisting Apple Pay because of the tokenization aspect. Hence they don’t have your details on file so they can’t sell on them off to sleazy marketing companies or targeted ad systems.

    Could this be the real reason behind the ludicrous resistance of US TBTFs to implementing and rolling out the Chip+PIN (EMV) system which, as far as I can see, is also tokenized.

    Question: Why does a Chip+PIN card need any information embossed on it at all, at least for EPOS use ?

    1. Clive

      Not quite. Chip+PIN is not tokenised by default. Mandatory tokenisation is coming but it will be a little while before all card silicon and all EPoS hardware supports tokenisation so it is not enforced at the moment. This will still cause issues for merchants trying to garner user data when tokenisation becomes mandatory (a few years down the line). The card schemes preferred solution is via things like the M/Chip Advance platform http://www.paymentsnews.com/2009/11/mastercard-launches-mchip-advance-payment-platform.html which allows secure data storage on the card itself. This would do away with the need for services like Apple Pay to aggregate customer data, merchants can store it on the card if they want to. It should all be a bit more transparent to cardholders which is a good thing as they will have to opt into having their card details tracked.

      The reason why cardholder information is embossed on the card itself is for card-not-present transactions (such as when you call a mail order company and they ask you to read off the cardholder information to them over the phone).

      Thanks for the good questions !

  17. flora

    Thanks for this post. Another enlightening look at the payments systems in detail.
    Also enjoyed the editorial asides. “… just another ex-growth tech company with a nose-bleed inducing valuation which will look at any vaguely synergistic place to splurge some of its cash pile in the hope of producing some much-needed top line number improvement.”

  18. Elliot

    Apple subsidized Square to accept Apple Pay as its NFC/Chip reader software solution, and Square thus has done its best to hide the fact that NFC/Apple Pay is not mandated for liability shift, just chip readers. The upshot is $50 apple-pay readers, splashed all over the Square site, as what vendors need to accept chipped cards, and serious digging needed to find the chipped-card reader ($30) which is sufficient to accept chipped cards and protect the vendor against liability shift.

    So some serious paradigm pushing to the small/micro vendor on the part of Square/Apple.

    I polled my customers and they were against Apple Pay for security reasons as they worry someone will NFC their card unbeknownst to them, and haven’t yet seen enough proof that that can’t happen. For us as vendors it would also mean purchasing new tech that is NFC capable, and being tied to the Apple system as well as Square.

    Chip readers, swipe readers, already are encrypted, and already don’t track customers other than “return customer”. Vendors can add mailinglist type software I believe, but it’s optional.

    My customers using cc for payments are all across the age/income spectrum, and as mentioned above, the Apple users are already dropping a bundle on their tech, and fangirling / fanboying Apple, so that’s maybe more a lifestyle choice than a banking choice, per se.

    Chip transactions don’t all take a long time, that is probably a transmission/backend problem.

    I think rather than so much should banks fear Apple, they should be waking up to card reader acceptance vs merchant accounts. Micro/new businesses don’t want to spend monthly merchant fees that banks want to charge, and also don’t enjoy being gaslighted by those banks about how “dangerous” card readers that are not from them are.

    I also think if the US economy were being run to promote health of small businesses, this sort of option (micro biz card readers VS merchant bank accounts) would be promoted as an economic good. Since in contrast the economy is run pro banks, one worries that there will be some heavy boots to come down and make it harder for Square/Payflow/Etsy/whoever to offer such competitive rates.

    I approached my bank to see if they had a competitive reader program to Square’s, and while they offer readers, they are tied to a large monthly merchant fee plus per use fees. When I explained Square’s fee structure, they just blinked and said, “Really?”

  19. Darthbobber

    Android Pay is also up and running to some extent, though the need for an NFC chip on the phone makes it spottier, since Apple made this ubiquitous on recent iphones, and on Android it depends on the maker.
    (and the price point. On Motorola’s line, eg, the lowest price phone with NFC is the MotoX)

    And then there’s Samsung Pay.

    1. Clive

      Yes indeed, apart from the brand, there really is nothing unique about Apple Pay. Hence my scepticism.

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