Apple Pay and the rise of the five-party network

Apple’s contactless payments are far from ubiquitous, but new developments hint at a next-generation payment platform

Last week, Apple announced a massive expansion of Apple Pay, saying it’d be integrated into iMessage this fall with the launch of iOS 11. Thoughts immediately turned to the fate of peer-to-peer payments, an already notoriously tricky market. But the implications are arguably more significant for contactless payments, and for payment processing more broadly.

It’s no secret that contactless payments have gotten off to a slow start in the United States.

Contactless cards, which were introduced to the U.S. market a number of years ago, never took hold domestically. By contrast, 75 percent of face-to-face Visa transactions in Australia are conducted with a contactless card (contactless is also popular in Canada and the United Kingdom). But when the latest round of EMV, or chip, cards were issued, most U.S. card issuers elected to forego the extra expense of an NFC antenna, meaning a new round of cards would need to be issued in order for contactless card payments to be an option.

Recent contactless efforts in the United States have instead been focused on mobile payments, through the introduction of technologies like Apple Pay, Google Wallet and Samsung Pay. While they were designed to simplify the physical wallet, they can instead sometimes feel like an unnecessary step for consumers. Though consumer adoption is tricky to measure, according to a March 2017 study by, 49 percent of Apple Pay users said they don’t use the service because they’re happy with their existing payment methods. The WSJ also reported that adoption was lower due to security concerns—an area in which Apple has made considerable investment in order to mitigate—and poor merchant education. While Apple CEO Tim Cook said that Apple Pay represented 75 percent of all contactless payments made in the U.S. last year, that still doesn’t change the fact that not many people are using mobile wallets in the first place.

But Apple is no stranger to shaping consumer behavior. Just look at the way it reworked the music industry with iTunes—an effort to make the iPod, and the iPhone, even stickier.

And integrating Apple Pay, iMessage, and Apple Wallet is a sure sign that Apple is striving to create a payments ecosystem of its own. Instead of merely providing a technology vehicle, Apple is again serving as the platform that integrates existing services and applications. It’s becoming the fifth party in a long-established four-party payments processing system.

This is the result of a few clever changes that Apple made as it approached the payments industry.

  • Monetization. First, unlike other digital wallets, Apple gets a cut of the interchange for each payment made with Apple Pay. The agreements it inked three years ago with banks and card networks are set to expire this year (and future terms aren't clear yet), but it was a key differentiator at the launch of Apple Pay.
  • Balances. Second, the balances carried as part of the iMessage exchanges will live in what’s being called Apple Pay Cash, a virtual card that lives within Apple Wallet. Bank transfers will be handled separately. This move is designed to help keep funds flowing within the Apple Pay ecosystem and reduce the pain of paying. And it certainly helps that it’ll reduce its processing costs. While Apple won’t serve as a bank—Apple Pay Cash’s back-end is powered by a Green Dot-backed Visa prepaid card—it sure is turning the payments network on its head.
  • Smart suggestions. Facebook already uses its platform to broker payments exchanges based on context. iMessage could do the same, but potentially even more seamlessly, thanks to the tight integrations across the Apple ecosystem.
  • Shaping behavior. Speaking of tight integrations across products, there’s Touch ID, which has become more integral to Apple with its inclusion in the latest Macbooks. When it comes to payments, it offers a more seamless way to pay across multiple devices. It’s no surprise that Apple is fusing physical and digital functions across the board. And while surveys have shown consumers to be interested in biometric authentication, it takes a juggernaut like Apple to drive adoption—and make it mainstream.
  • NFC. Finally, much has been made of the debate around how exactly contactless payments should work. Starbucks won the early mobile payment game with a simple-to-use barcode. Apple, on the other hand, has put a stake in the ground with near-field communication(NFC), which could drive further penetration. Barcodes, on the other hand, would require merchants across the country to install a new payment system.

It’s these differentiators that make it easy to envision the future of payments Apple may be trying to create—all with Apple devices at the center. After all, it’s not hard to imagine a world in which a digital wallet becomes fully integrated into one’s day-to-day: Pay for lunch, send a friend money for coffee, book a trip online, and more. We’re not there yet, but if Apple successfully inserts itself into the four-party payment system as we know it, that’s the world we might end up in.

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