Apple Pay Research 1 of 2

This post has been in draft stage since last year. Needs some edit..


Mobile Wallet Players
  1. Retailers, merchants
  2. Payment processors, front-end and back-end — First Data, TSYS and Paymentech.
  3. Gateway- PayPal, Braintree, and Stripe (PayPal and Square make money by charging retailers fees in excess of what they owe to credit-card companies)
  4. Banks- card issuing bank, acquiring bank
  5. Networks, card network, card association, issuers – Visa, Mastercard, Amex, Discover


Credit Card Transaction – who pays who?
The swipe fees, also known as interchange, help card-issuing banks cover fraud costs, authentication, dispute settling and fund reward programs.


Interchange rate = percentage + fixed cost
2.9% fee split between gateway, front-end processor and banks
30c goes to Visa/MasterCard


Interchange rates are set by the card association, varying by the merchant’s industry. Acquiring bank pays merchant daily net balance.


The payments industry works on ridiculously low margins. Interchange rates are also determined by whether the transaction is card-present or card-not-present. Higher fee for card not present because of higher risk.
Mobile wallets have historically being card-not-present transactions. But Apple wanted its wallet to have same status as card-present. Touch ID, location data, NFC and secure element mitigated some risk and so is more secure (like a card present transaction). Apple gets around 10% discount on the processing rate it will pay.


Walmart has made a similar deal as Apple to lower card transaction rates in its stores.
Incentives for banks for higher discount rates
1 Apple wallet works with all 4 FIs.
2 Apple takes some risk for fraudulent transactions
3 Banks still own transaction data.
The money they save with less fraud more than makes up for any cut that Apple gets. That’s why all the major CC companies are on board and pretty much all the US banks, just at launch.


Incentives for merchants
Starting late 2015, merchants will be liable for fraudulent transactions, not credit card companies. They need to upgrade the payment equipment with an enhanced security system called EMV.


Apple Pay reduces the security requirements around storing actual card numbers (recent security breaches include those of Target Corp, Home Depot Inc, Michaels Stores Inc, Neiman Marcus and Kmart)
Card associations consider a participating merchant to be a risk if more than 1% of payments received result in a chargeback. Visa and MasterCard levy fines against acquiring banks that retain merchants with high chargeback frequency. To defray the cost of any fines received, the acquiring banks are inclined (but not required) to pass such fines on to the merchant. Costly fees are generally at the cost of the merchant.

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