When Apple reportedly struck deals with Visa, MasterCard, and American Express, I pointed out that those alone weren’t enough to put the iPhone maker in the retail payments business.
Now Tom Noyes, a former Citi executive, says that Apple has struck deals with the five largest card-issuing banks—JPMorgan Chase, Citibank, Bank of America, Capital One, and American Express.
Remarkably, Apple has not only gotten these banks to agree to accept iPhone-linked payments, but it has gotten them to offer rebates of up to 0.25% of the amount of a transaction on the credit- and debit-card fees, known as “interchange,” that Apple must pay. (Those rates vary widely, but you can think of them as averaging 1.5–1.75% of a transaction.)
See also: Apple Is Walking Into Payments Naked
In return, Apple will assume some of the risk of fraudulent transactions, using its TouchID biometric sensors, NFC, and geolocation data to assure itself and its bank partners that a customer really is the one conducting a transaction.
Apple Makes The Banks Cry Uncle
Apple has done a remarkable thing here: It has overturned a longtime tax on e-commerce transactions laid by the banks and shouldered by online merchants (and thus, ultimately, consumers).
Visa, MasterCard, and the rest of the financial establishment have long treated online purchases as “card not present” transactions, just because consumers type in their credit-card numbers rather than swipe the magnetic stripe. And those transactions carry higher interchange fees than regular retail transactions, ostensibly to cover a higher risk of credit-card fraud.
That system has persisted, even as e-commerce and mobile payments are increasingly showing themselves to be more resilient against fraud than traditional retail payments, as the massive hacks of Target and Home Depot stores have shown.
Bill Ready, the CEO of Braintree, has long made the argument to me that banks should treat mobile transactions as more secure, not less secure, than retail payments. That’s particularly true given all the information you can gather about a consumer from his or her device. But that hasn’t gotten his company, now a subsidiary of eBay’s PayPal, a break on rates.
“We have a strong argument for why our rates should be lower, and the card networks have been a bit intransigent on that,” Ready recently told me.
By negotiating rebates with the big banks, as Noyes claims it has, Apple has essentially bypassed Visa and MasterCard. Or, put another way, it has found a way for Visa and MasterCard to save face and maintain the integrity of their rate structure, while cutting a side deal with their largest card issuers. (American Express, as both a bank and a payments network, has more freedom to maneuver with partners like Apple—though it usually sets even higher interchange rates.)
By getting a break on interchange, Apple at the very least won’t lose money on its payments business. It may be able to attract merchants by passing on these lower rates.
Breaking The Digital-Payments Logjam
And Apple could pull off something even bigger. By setting a precedent that the banks are willing to cut deals with mobile payments players, it may pave the way for PayPal, Google, and Amazon to strike similar rebate agreements—provided they’re willing to shoulder some of the costs of fraud, as Apple reportedly is. That may test those companies’ confidence in their fraud-detection algorithms and their software and hardware protections.
Apple may want to reflect a bit more on whether it’s really ready to shoulder that risk. Events over the past week have revealed security holes in its iCloud backup service. It may also have to take on some of the burden of customer service in exchange for the rebates it’s getting.
Apple still has to persuade thousands of other banks to go along with its iPhone payments scheme. It must also sign up merchants—and sell lots of TouchID-enabled iPhones. On that last bit, at least, it has a proven track record of success.
Photo by The Consumerist