Karen Webster

Issuers To Apple Pay: Just Say No!

Odysseus was a pretty clever fellow.

For those who might need a crash course in ancient Greek history, Odysseus was the mythical king of the island of Ithaca and star of Homer’s story, “The Odyssey.” Odysseus always seemed to be one step ahead of those who were ill-intentioned. For instance, he was the guy who decided that the only way for the Greeks to recapture the city of Troy, was to trick the Trojans — which he did via the ingenuity of the Trojan Horse. When the Cyclops took to eating some of his crew during his 10-year journey home, he concocted a scheme to blind it. And, anticipating the lure of the Sirens and the dangerous situation that would create for he and his crew, Odysseus insisted that he be strapped to the mast of his ship, be blindfolded, and have wax inserted in his ears to block out their Siren’s Song. He even gave strict orders to his crew that, under no circumstances, should he be untied from mast. He wasn’t and everyone lived happily ever after.

I was reminded of Odysseus’ and his strategic sense of gamesmanship as I let the news about Apple’s alleged entry into the P2P arena sink in.

As is now common knowledge, Apple isn’t denying rumors that it intends to launch a P2P payments service. It’s widely speculated that it’s doing so to prop up the sluggish adoption of its Apple Pay mobile payments product. Getting consumers to engage with P2P payments is one way, reports suggest, that Apple believes it can increase usage and engagement of Apple Pay – two of Apple Pay’s critical strategic failings right now.

Then, the theory goes, with an engaged and larger user base in hand, Apple has something more compelling to offer merchants who right now don’t see any reason to jump through hoops to accept Apple Pay.

Details are sketchy, naturally.

Some reports suggest that the P2P solution will be tied to Apple iMessengerOthers suggest that it includes involvement from some of the biggest banking names out there: Bank of America, Chase, Cap One, U.S. Bank, PNC. If that list sounds vaguely familiar, it should. They are also the banks that are part of the bank-owned P2P network, clearXchange that launched in 2011. It was also announced three weeks ago today that clearXchange was to be acquired by Early Warning, another bank-owned consortia that offers risk and real-time authentication solutions to 2,100 financial institutions.

It was déjà vu all over again, as the late Yogi Berra would have said, as the media went bananas over reports of yet another Apple mobile payments alleged stroke of brilliance. What better way to grow the Apple Pay base, get usage and develop network effects, it was reported, than launch P2P! Analysts said that it was a move that would create a “shockwave” throughout payments, and some even suggested that the card networks could be toast. Some of the obituaries being written last week were remarkably similar to those written last year when Apple Pay launched, namely PayPal – but now with a Venmo twist. The hysteria even caused PayPal’s stock to drop following the announcement of Apple’s P2P plans. Others were new and included Visa and MasterCard given the potential that P2P would give Apple to establish a new set of payments rails.

The banks aren’t talking, but I’m not sure they need to. Since I don’t believe that the banks will let Apple anywhere near the precious DDA accounts that serve their customers.  


This, of course, is the same Apple that a year and a half ago drove a pretty hard bargain with issuers in order to be part of their Apple Pay mobile payments scheme. Apple asked for 15 bps per transaction and for issuers to underwrite their marketing and advertising campaigns. Remember all of those TV commercials about Apple Pay? Those were paid for by the issuer whose logo appeared right next to Apple’s. There were even ads on the Super Bowl earlier this year (which I feel compelled to remind all of you that the as-yet unbeaten 9-0 New England Patriots won).

The 15 bps fee has turned into a rounding error on the banks’ balance sheets since there are so few transactions. But the millions spent on those ad campaigns sure added up.

Nevertheless, banks rushed like bees to a big honey pot to sign up, get on board and write those checks. After all, who wanted to be left out of the launch of the mobile payments game changer?  The year that Tim Cook proclaimed was the Year of Apple Pay?

Apple Pay logos were plastered all over bank homepages, proudly proclaiming Apple Pay support. Bank CEOs included Apple Pay updates in their earnings reports. Bank of America’s Brian Moynihan talked about its 1 million downloads of the mobile wallet in the first 90 days. All of the banks’ top brass wanted it to be known that they were standing shoulder-to-shoulder with the most innovative technology player in the world – a player who was redefining the future of mobile payments. And that they were making it possible for their consumers to be part of the solution that was going to change everything about the payments experience at their favorite merchants.

Except that it hasn’t.

As those of you who follow PYMNTS know, we do a quarterly survey of ~2,000 consumers with iPhone 6 and now 6s phones. We don’t ask them what they might do when it comes to using Apple Pay to pay or remembered doing, we actually see what they have done in the stores where Apple Pay is available for them to use.

And quarter after quarter, what we’ve found is that those consumers who can (have the phones and shop in stores where it is accepted), really don’t use it much at all. Usage has stalled. After looking at this for a year, 5 percent is about the extent of the usage after more than a year in the market.

That means that of the transactions where Apple Pay can be used – consumers and merchants both equipped with the right handset/app and POS environment, 5 percent of them use Apple Pay to checkout.

That also means that 95 percent of transactions are something else – and that number hasn’t changed much over the year—even when all the technology stars have aligned, which they usually don’t.

Well, at least issuers haven’t had to pay Apple a lot of transaction fees since .0015 percent of almost nothing is less than bupkus.


A year ago, banks felt as though they needed Apple Pay to remain relevant, heck, to be relevant, in the mobile payments game.

A year later, it’s a very different story.

I think that Apple now needs the big banks more than the big banks need Apple.

And at least two of them – Chase and Cap One – have no reason to want to lend them a helping hand.

Each has – or is close to launching — their own mobile wallets. Chase, in particular, has made it very clear that it has very big mobile payments ambitions of its own. At launch in mid-2016, it will auto-provision its 93 million consumers into a wallet that gives it payments privileges with a bunch of merchants, including those it has partnered with MCX to enable.

A year later, there are also a number of new mobile payments players in the mix that weren’t in market a year ago – Samsung Pay and Android Pay – all of whom have (and are getting) the big banks on board, too, and working hard to get their own traction as competing alternatives to Apple Pay.

The one thing we know about P2P via a DDA account is that to work, it has to get almost ubiquitous adoption. It is hard to persuade someone to use a P2P method to send money if the person they want to send it to can’t retrieve it. It is why none of the faster payment methods adopted by the Federal Reserve Board or FIS or others have gotten much adoption — they don’t have enough adoption.

It’s also what clearXchange has been working to achieve for the five years it’s been in existence – and is still working hard to get. There’s a reason clearXchange’s focus at the start was to get the big banks that cover the vast majority of the DDA accounts in the U.S. on board. Its recent acquisition by Early Warning gives it access to 2,100 more, potentially. But that’s about 10K shy of the number it needs for anyone with a bank account to send money to anyone else with a bank account, frictionlessly. For that sort of a P2P network to work, it has to have all of the banks, not just some or nearly all of them.

And if such a network doesn’t have, say, one of the banks that claims to have one out of every two households in the U.S. as customers, P2P via DDA accounts is absolutely positively DOA.

That bank, of course is Chase, clearXchange member and mega-mobile payments contender.

I don’t think that you’d even have to blindfold the folks at Chase, much less put wax in their ears or strap them to their cushy war room chairs, to have them tell Apple to politely take a hike when presented with a proposal to open up their DDA accounts to them. Keep in mind that these are the same folks who two years ago stared down Visa to get a sweetheart deal to use VisaNet as the transaction backbone for their own closed-loop network.

So letting Apple anywhere close to their customers’ DDA accounts just to lend a helping hand to ignite Apple Pay?

Not a snowball’s chance.

Which means that clearXchange as a network to power Apple Pay’s P2P could be nothing more than a pipe dream.


Of course, Apple doesn’t need the bank’s consent to do P2P. They could do what everyone else has done, become a money transmitter and use debit and/or credit cards to move money from person to person. But that doesn’t get Apple what it really needs the most: new, fresh customers that it doesn’t have to work very hard to get on board.

Doing what Venmo and Square and Google have done would also require that Apple incent consumers, all by themselves, to get the P2P flywheel moving. Even if they did, it’s hard to know why a consumer would want to do that. They probably have their own networks set up which they’d have to disrupt and rebuild. And when they need to transfer money today, they also have multiple other methods to choose from, including their bank — which I’ve just said gains nothing whatsoever from allowing Apple Pay access to their customer’s DDA accounts.

Apple has another option. It could also decide to align itself with a network that has money transmittal capabilities and doesn’t compete with Apple. I suppose that a Western Union or MoneyGram could decide that one clever way to monetize their own networks is to lease them to Apple for the purposes of moving money between people. That still requires Apple to do the hard work of getting consumers to play along and sets up two other potential issues.

One is the brand mismatch between the Western Union/MoneyGram and Apple customer profiles. Not only is the demographic profile different, unless Apple is going to allow money to be sent and received from outside of its own iOS ecosystem, a market of only Apple iPhone 6 and 6s (if it is tied to Apple Pay) limits the market even further. In the U.S., iOS penetration as of November 2015 is 29.5 percent – winnowing it down to the 6 and 6s reduces that share much further. Outside of the U.S. it’s an all Android world. More than 90 percent of the handsets in India run Android, 77 percent in China do, and 50 percent in the U.K. do, as well.


There’s one more reason that I don’t think that the banks will ultimately support the Apple Pay-P2P-tied-to-bank-accounts play. They really don’t want to bite the hand that feeds them.

And today and tomorrow and the next day after that, that’s the card networks.

Of course, the days of the bank-owned and operated network are long gone, but without the networks, most issuers are nowhere. The networks make the global payments system work. They set the rules and establish how issuers are paid. They do the clearing and settlement. They make it possible for cardholders to have a consistent payments experience all over the world. They invest in marketing programs that keep the brand top of mind with the consumer. They are investing in their own branded checkout options to help their issuers’ transition to digital. They are increasingly opening their networks to developers to enable more and more innovation and use cases across a variety of connected endpoints to enable commerce – cars, appliances, you name it. Their network tokenization schemes also create an enabling platform for distributing safe and secure digital payments across all of those endpoints – a scheme that few issuers, outside of the very, very large ones, could even begin to replicate.

And outside of Chase, not a single one of them has any capability to sidestep the networks and operate as their own closed loop. Even Chase is using VisaNet as its backbone.

Of course, the Apple P2P decision dynamics would be entirely different if Apple Pay had momentum and was at the table with the banks with a different story to tell. I’ve written multiple times – including at its launch - that banks and networks were both at risk longer term if Apple was successful with Apple Pay. That it wouldn’t matter that they gave it birth and that it was all wine and roses and lovey-dovey before the launch.

And that all the proof that either needed was to observe the industry dynamics of Apple in every other sector it has entered.

Apple plays nice with partners until Apple gets scale. With that scale comes power and a flip in how the dynamics work with their partners. Then, it’s Apple who makes the rules and enforces them in their closed ecosystem.

Just ask the mobile carriers how much fun they’re having these days.

Apple has turned the mobile operators into the “dumb pipes” they swore they never wanted to be. And with the new leasing program they launched with the 6s, that position is even further solidified. Apple controls the consumer and the consumer experience. The mobile operator is that expendable player in the background that can be easily swapped out for another one.

The success of the iPhone and its reputation with consumers makes it very hard now for the mobile operators to do anything but sit back and take it. Apple has become too powerful for them to rock the boat – and the mobile operators know that they have too much to lose if they do.


But that’s not where we are in payments with Apple and Apple Pay.

And why I believe that the issuers are channeling (or will) their inner Odysseus and resist the Call of Cupertino to allow access to their customer’s DDA accounts so that Apple can launch its own P2P platform. I’m sure it’s all polite banter now. After all, Apple is a massively powerful company that no one wants to alienate.

Payments and commerce is an area that Apple obviously has decided it wants to enter and own. And now they need help in getting the scale that they thought their brand name alone would generate. Apple has identified banks as a key player in helping them get there. Had Apple Pay been more successful over the course of the year, it’s quite possible that these conversations would have a different tone and outcome.

But banks have the upper hand now and with it the opportunity to open their eyes and their ears to many other options that give them a clearer and much less risky path to mobile payments success.

I hope that the news of Apple Pay and its P2P ambitions will launch – if it hasn’t already – a number of new and potentially very interesting conversations and partnerships with a variety of players around the mobile payments ecosystem who see Apple Pay’s vulnerabilities today and seize the opportunity to strengthen their own plans tomorrow.

And for those who don’t, I guess there’s always blindfolds and wax.



About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.