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Does Apple Pay debut usher in new era of banking?

This story originally appeared in The Green Sheet Issue 141101 on November 10, 2014.

On Oct. 20, 2014, Apple Inc. went live with its much anticipated mobile wallet scheme, Apple Pay, in conjunction with the launch of an update to its mobile operating system, iOS 8.1. The tech giant's near field communication (NFC) -enabled mobile payment solution has been praised for its seamless consumer experience, its Touch ID biometric authentication technology, and its in-app functionality, which could render the traditional POS obsolete. But is the end game for Apple Pay that it allows Apple to become its own digital bank?

That is the contention of an Oct. 2, 2014, Deloitte Digital blog post titled "From tech giant to digital bank?" In the post, Deloitte wrote, "Banks, carriers and credit card companies have been struggling to find a solid model for mobile payments over [the] years. Apple Pay could close the puzzle as they have every ingredient to make Apple Pay the new standard for consumer payments."

At the heart of this contention is the deal Apple struck with card issuing banks. The agreement, which has not been made publicly available, rewards Apple with a lower per-transaction processing rate because of the widely believed robustness of the data security measures, such as tokenized payment data and biometric authentication, incorporated into Apple Pay transactions.

Deloitte said Apple will receive 0.15 percent of all transactions made with Apple Pay. "0.15 percent may seem a very small share, but it has great potential with an existing $390 billion [in the United States] in retail transactions and still an enormous number of replaceable offline payments," the blog said. "As Apple will take care of your transactions it can also become a risk for consumer banks as consumers will more and more loose [sic] contact and loyalty with their bank. When Apple Pay really takes off, it could be handling all your current online as well as offline payments and basically become your new digital bank!"

No 'Apple Bank' in foreseeable future

Brandes Elitch, Director of Partner Acquisition at CrossCheck Inc. and frequent contributor to The Green Sheet, does not see the logic of Deloitte's position. "The only way that Apple could 'handle all your current online' payments would be if Apple displaced First Data, or Paymentech, or Heartland, and became the merchant’s processor directly," Elitch said. "And this would be a very dramatic move indeed."

Elitch noted that Apple seems content at the present time to leverage the traditional merchant processing business model and infrastructure already in place. "The merchant has an acquirer that underwrites the merchant and processes the transaction, on the MC and Visa rails, crediting the merchant and debiting the consumer’s issuing bank," Elitch said. "Apple does nothing to change that, except charge a toll to the processor for using their fraud management software."

Elitch stated that consumers will still be using their bank-issued and network-branded credit and debit cards to facilitate Apple Pay transactions, and interchange from those transactions will still flow to the various players on the payments value chain. "How can Apple become the consumer’s bank?" Elitch said. "Are they going to open demand deposit accounts and offer FDIC insurance, and offer ancillary services that consumers need to accompany their DDA? All payments begin and end in the DDA, which is at a bank, a government regulated and inspected bank."

Apple Pay still a game changer

Whether or not Apple Pay ultimately results in the "Apple Bank," Rick Oglesby, Senior Analyst/Consultant at Double Diamond Consulting, believes Apple Pay is a game changer, especially for in-app payments, as opposed to in-store NFC-enabled payments. "Once Apple Pay becomes second nature to consumers for in-app payments, that behavior could extend to in-person purchases," Oglesby said. "But lots of NFC infrastructure needs to be installed, and lots of consumer behavioral changes need to take place before that happens. I expect in-store adoption to be gradual."

Apple Pay may eventually be the mobile payment model that renders the traditional POS obsolete, but not immediately. "We are a long way from registers becoming obsolete, but opportunities to convert in-store sales to in-app checkout solutions is growing, and Apple Pay will facilitate that growth, along with Passbook, BLE and beacons," Oglesby said. "However we can expect many cards to be in-market for a very long time, and therefore traditional checkout solutions aren’t going away any time soon."

Payments industry stalwarts were quick to announce their Apple Pay integrations to coincide with its launch and availability in 220,000 retail locations across the United States. Harbortouch unveiled the Apple Pay-enabled Perkwave app for its pay-at-the-table capability in restaurant settings.

“Pay-at-the-table is a critical component of the new EMV requirements," said Harbortouch Chief Executive Officer Jared Isaacman. "However, the only pay-at-the-table solutions currently on the market require costly equipment for the merchant and require customers to change their ingrained behavior. Now, the Perkwave app delivers a far better solution for our restaurant clients."

Isaacman believes Apple Pay will succeed where other mobile wallets have failed. “The app leverages a familiar technology – mobile phones – to limit the consumer pushback that many other solutions have faced," he said. "With Apple’s proven track record of shaping trends on a global scale, Apple Pay is likely to be the first mobile payment solution to gain mainstream adoption. Perkwave helps facilitate this shift by enabling millions of iPhone users to use Apple Pay in a setting where it might not otherwise have been utilized."

Additionally, First Data Corp. launched its Apple Pay-supported Payeezy in-app payment solution. First Data said Payeezy affords merchants and their app developers the ability to build Apple Pay-based iOS apps. "Developers begin by visiting Payeezy.com, downloading the software development kit (SDK) and supporting documentation needed to build the app," First Data stated. "This SDK also provides the tools to be able to accept Apple Pay in their iOS apps."