Apple’s next antitrust battle is shaping up to be over Apple Pay, the company’s digital wallet, as the Covid-19 pandemic turbocharges use of contactless payments.
The Cupertino company has spent much of 2020 fighting allegations of anti-competitive behaviour in its App Store. By contrast, its financial services business has attracted little attention in the US, meriting only a passing mention in a 450-page report by Congress’ antitrust subcommittee in October.
But Apple Pay is growing fast as consumers try not to touch buttons or handle cash because of the coronavirus. Jennifer Bailey, head of Apple Pay, said this month that contactless payments have gone from “being a convenience to a matter of public health.”
Jason Gardner, chief executive of California-based payments platform Marqeta, said: “They are really building out, within the Apple Pay team, a financial services juggernaut.”
“Apple Wallet is a killer app — more of a killer app than much of the world really understands right now. And it’s absolutely going to become a battleground for regulators in the future.”
In June, the European Commission opened a formal antitrust probe into Apple Pay and this month competition regulators in the Netherlands launched their own investigation. Australia’s central bank chief Philip Lowe recently said Apple’s approach to payments was “raising competition issues”.
Apple Pay allows users to store their payment card details on their iPhone or Apple Watch and to pay by tapping on a terminal. It is now used by 507m people, according to analysts at Loup Ventures, or roughly half of the people in the world who own an iPhone, up from just 67m four years ago.
Apple takes an estimated 0.15 per cent fee on each transaction, and analysts at Bernstein estimated, before the pandemic, that it would facilitate one in ten of the world’s credit card transactions worldwide by 2025.
In a survey, Visa found that nearly half of consumers “would not shop” at stores that fail to offer touchless checkout.
Thomas Vinje, a partner at the law firm Clifford Chance who has worked on Spotify’s competition complaint against Apple, said EU regulators are keen to put Apple Pay high on their agenda. “It is clear to me that there is a very large appetite toward pursuing antitrust cases towards Apple,” he said. “There is political momentum behind it.”
The potential competition issues for Apple Pay revolve around how Apple blocks its rivals from using the near-field communication technology (NFC) on iPhones and Apple Watches, which enables tap-and-go payments.
“Apple only giving the consumer one option in how to use that technology to pay for services is what will get the attention of regulators,” said Jonathan Osborne, a former federal prosecutor in Florida and attorney with Gunster.
Apple claims the restriction is about security. Ms Bailey told the European Commission in December that Apple wants to keep all user data private.
“We don’t store or have access to your original bank card or credit card number — and neither does the merchant,” she said. “So when you buy something using Apple Pay, Apple doesn’t know what you bought, or where you bought it.”
Rivals, she suggested, might use “a technical architecture that’s ultimately less private and less secure.” Critics point out, however, that Apple does allow carmakers, hotel companies and gym equipment makers access to its devices’ NFC chips for non-payment functions.
Another issue is that Apple Pay’s Wallet app comes pre-installed and cannot be deleted, unlike rival payment tools like PayPal, and Apple goes to some lengths to encourage its use.
“Make Apple Pay the default payment option when possible,” Apple says in an online guide for app developers. “If Apple Pay is enabled, assume the person wants to use it. Consider presenting the Apple Pay button as the first or only payment option, displaying it larger than other options, or using a line to visually separate it from other choices.”
Such tactics may be frowned on under regulations proposed by the EU this week, which state that Big Tech companies must not promote their services above those of their rivals on the platforms they operate.
If Apple can avoid regulatory pressure, its payments arm could eventually overtake the App Store in terms of revenue, predicted Arik Shtilman, chief executive of Rapyd, a London-based fintech services group.
The App Store earned Apple more than $20bn of net revenue in the past 12 months, according to Sensor Tower.
“Easily it could have a much bigger impact on revenue than the App Store,” Mr Shtilman said.
He called the opportunity “endless” given the surge in ecommerce transactions, the rise of contactless payments in-store, and Apple earning revenue from credit card transactions. “There is no reason why it can't grow at a compound rate [and] get to tens of billions of dollars in 10 years,” he said.
More modestly, analysts at Evercore ISI suggested that Apple Pay fees could amount to $6.5bn by 2024.
But Apple Pay has yet to make a dent in some big markets, most notably China, where Alipay and WeChat Pay dominate, and Mexico, where 85 per cent of people use Android smartphones. “It’s cool and it’s great but it’s not the only game in town,” said Bain consultant Thomas Olsen. “This varies significantly by geography.”
Meanwhile, in the US and Europe, Google, Samsung, Starbucks, Venmo, Zelle, Square and Amazon all offer digital wallets. Some are far larger than Apple in peer-to-peer payments and most have both Android and iOS apps, giving them a wider market.
But Apple is linking its services in ways that might expand its reach, offering rewards on its credit card, for instance, that accumulate in a user’s wallet, encouraging future peer-to-peer payments to flow out of Apple’s wallet rather than Zelle or Venmo.
Making Apple Pay stickier will help Apple expand into more “value-added services” such as Buy Now, Pay Later schemes, predicted Jaime Toplin, payments analyst at Insider Intelligence.
Alipay and WeChat Pay have already shown how companies can expand from contactless payment solutions to microloans, wealth management, insurance and paying bills.
It is unclear if Apple holds such ambitions. But when chief executive Tim Cook was asked about Apple Pay in October, his excitement was clear.
“Apple Pay is doing exceptionally well,” Mr Cook told investors. The coronavirus, he added, has put the US “on a different trajectory” when it comes to adopting contactless. “So we are very bullish about this area. There are more things that Apple can do in this space. And so it's an area of great interest to us.”
Additional reporting by Javier Espinoza in Brussels
This article has been amended since publication to add that Thomas Vinje has acted for Spotify against Apple.
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