Apple Pay and the smart decision to work with the credit card industry, not against it

Apple Pay, Apple’s mobile payment system available in the U.S. since fall 2014, seems to have had a fairly good start. It is still too early to conclude whether this initiative will produce a big-time success. But the early signs indicate growing interest among retailers and increasing customer adoption.

When the solution was presented a couple of months ago, one point of criticism about Apple Pay voiced by some was its reliance on the antiquated credit and debit card system. Instead of creating a completely new payment infrastructure and cutting out the existing gatekeepers, Apple decided to built on top of their system. In a time when Bitcoin and dozens of startups introduce people and retailers to new and cheaper ways of doing transactions, Apple chose to play nicely with the notoriously greedy payment establishment. I was not too enthusiastic about that either. 

But a couple of months later it looks as if Apple made a wise choice by partnering up with MasterCard, Visa and the finance industry. AdAge reports that numerous players from the U.S. banking industry have given Apple Pay significant roles in their ad campaigns. Recode claims that this happened free of charge for Apple. It is unclear whether this is a confident assumption or based on actual facts. But in any case it gets obvious that leading financial institutions are totally fine with pushing Apple Pay into the market, increasing awareness and giving their seal of approval for the technology. Considering the novelty of mobile payment which makes some customers and retailers hesitate when it comes to adopting a new system, this support from the old banking industry is of extremely high value for Apple.

And that’s why expanding Apple Pay together with the existing parties involved in retail transactions instead of without them turns out to be a clever move by Apple. The company certainly would not have received any help from the banking giants if it had come up with a solution that fully circumvents credit and debit cards, e.g. by allowing for direct bank transfers. This would have threatened the highly attractive card transaction fee business which brings Visa, MasterCard and partnering banks up to $50 billion a year in revenue.

When Apple presented the idea of its smartphone payment concept to the card and banking sector, it might have pitched it like this: “The nature of payments will eventually change. Bitcoin, lots of small FinTech players, Paypal and the industry consortium CurrentC (which wants to facilitate direct bank transfers to avoid transaction fees) all could pose a long-term risk. You know it will happen, and you know that your own industry is too complacent and inflexible to actually produce the innovation needed. If you join in on Apple Pay, accept our terms and promise us marketing support, you’ll keep your existing transaction fee revenue. If you don’t, you will most likely lose it at some point.” As we know, the other party agreed.

The most interesting question to me is whether Apple plans to keep working with its partners from the finance industry or whether it sees them as a necessary, but temporary evil on its mission to built a large-scale mobile payment system. As soon as Apple Pay has become a default and widely accepted mobile payment system, Apple could begin supporting alternative ways of charging through Apple Pay, basically becoming a bank provider itself and holding the customers’ balance. In the long run, Apple has little reason letting credit card companies and banks keep netting billions of transaction fees if all this money is being facilitated by Apple’s mobile payment service.

Nevertheless, in the short-term and considering the prime goal of increasing retailer and customer adoption of Apple Pay as fast as possible, the partnership between both parties makes sense. Especially for Apple.