A Merchant Acquiring Perspective on Apple Pay

Navigator Edition: September 2014
By: Brooke Ybarra

In general, we do not think Apple Pay, in its current iteration, is that impactful to acquirers. Apple has made a concerted effort to “play nice” and fit within the existing payments ecosystem, which for the most part protects acquirers’ current role. The real news, at least for acquirers, is the payment network tokenization standard (see Figure 1 ) that Apple Pay will use, and of course, we can envision extensions and iterations to the announced version of Apple Pay that could make it more of a competitive threat in the future.

Figure 1: Payment Network TokenizationApple-Pay-Figure-1Source: First Annapolis Consulting research and analysis.

This is the first in a series of articles exploring Apple Pay’s impact on payment acceptance. This article provides preliminary observations of Apple Pay’s impact on acquirers based on what we know today. Future articles will reassess these observations as Apple Pay is actually launched in the market and explore the potential impact of future Apple Pay iterations and related technologies through a series of ‘what if’ scenarios.
So, what do we know today, and why does it matter to acquirers?

  1. The introduction of Apple Pay shouldn’t steal volume from acquirers. Transactions using Apple Pay (both in store and in app) will leverage the merchants’ existing acquirer and processor. The only exception to this would be if a merchant chooses to switch acquirers because their acquirer cannot support Apple Pay (either because it cannot support NFC-based transactions or the payment network tokenization standard).
  2. Apple appears to be maintaining its aggregator payment model for digital/virtual goods and services, called In-App Purchase. With In-App Purchase, Apple acts as a merchant aggregator, processing transactions through its own payment processor and keeping 30% of the transaction revenue. In-App Purchase is different from using Apple Pay in an app. The former applies to digital/virtual goods and services only, while the latter applies to physical goods. If Apple relaxes its stance on In-App Purchase and allows developers to use Apple Pay for digital/virtual goods and services, acquirers could benefit because transaction volume that currently flows through Apple and its acquirer would be up for grabs.
  3. Acquirers may be able to leverage the enthusiasm and interest Apple Pay has generated to cross-sell contactless EMV terminals in their merchant base. For acquirers that do not currently support or offer an NFC terminal, they may see increased merchant demand for such an offering.
  4. Apple Pay transactions should be more secure than traditional swiped transactions in the physical environment and more secure than keyed transactions in the app environment. Acquirers may realize benefits from the security features through reduced fraud and chargeback rates.
  5. Acquirers don’t need to support Apple Pay, so much as they need to support the payment network tokenization standard. From an acquirer’s perspective, Apple Pay itself is not much different from other digital wallets, but its use of the payment network tokenization standard implies some technical hurdles. Payment network tokens are supposed to look and feel like personal account numbers (PAN), even leveraging the same BIN identifiers to enable routing using existing operations. Even so, acquirers will probably need to do some development work in order to support the tokens, for example, ensuring they can send and receive new, additional data fields. Acquirers also need to be able to support NFC transactions.
  6. Apple is not charging acquirers a fee related to Apple Pay transactions, however, MasterCard is charging a ‘digital enablement’ fee for its token service. The fee will take effect on January 5th and is 1 bps of cardholder not present volume. It is unclear if this fee will apply to in store Apple Pay transactions, where a payment network token is used but the cardholder is present (and card present interchange rates apply). So far, Visa and American Express have not announced tokenization fees for acquirers, but they may follow suit. MasterCard and Visa are charging tokenization-related fees to issuers, including a monthly management fee and a token provisioning fee.
  7. Finally, payment network tokenization is a substitute for acquirer-level tokenization in mobile transactions. Many acquirers offer tokenization services to merchants, and the use of payment network tokens renders the acquirers’ service duplicative and difficult to use in the Apple Pay environment. Acquirer-level tokens should still have applicability in the physical and e-commerce worlds, though, and perhaps there is a new revenue opportunity for acquirers to identify and match payment network tokens with acquirer-level tokens, providing merchants with a more complete view of their customers’ spending habits.

For more information, please contact Brooke Ybarra, Manager, specializing in Merchant Acquiring, brooke.ybarra@firstannapolis.com.

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