Who benefits from iPhone NFC access?
Apple Pay is likely to keep its primary position despite this shift to openness
I am late to the game here because I couldn’t launch this blog until now. Why couldn’t Apple just wait 6 weeks so I would have something juicy to open with. But, my needs are clearly not on Apple’s agenda. Go figure.
In case you were not paying attention in August, Apple announced that they will make their NFC chip and Secure Element available to third parties. From the press release:
“Starting with iOS 18.1, developers will be able to offer NFC contactless transactions using the Secure Element from within their own apps on iPhone, separate from Apple Pay and Apple Wallet. Using the new NFC and SE (Secure Element) APIs, developers will be able to offer in-app contactless transactions for in-store payments, car keys, closed-loop transit, corporate badges, student IDs, home keys, hotel keys, merchant loyalty and rewards cards, and event tickets, with government IDs to be supported in the future.”
My immediate take was that this is a nice-to-have for select payments actors, but Apple will still have a big advantage in mobile wallets even if some competitors adopt these capabilities. The keys to this are economics, in-app & eCommerce acceptance, and consumer habituation.
Economics
The heart of the matter is two paragraphs into the press release. After extolling all the intellectual capital embedded in their solution, Apple get to the criteria required for a partner to gain access:
“To incorporate this new solution in their iPhone apps, developers will need to enter into a commercial agreement with Apple, request the NFC and SE entitlement, and pay the associated fees. This ensures that only authorized developers who meet certain industry and regulatory requirements, and commit to Apple’s ongoing security and privacy standards, can access the relevant APIs.”
Apple is positioning the “commercial agreement … and associated fees” as recompense for all that IC and the work it will incur to certify solutions. How widely the capability is adopted will depend on how the fees are structured and how high they are.
From a structural perspective they could include an upfront licensing fee to get access to the APIs and cover the certification costs; Apple might also charge an ongoing royalty for using all that proprietary tech.
In Europe, Apple has occasionally been ordered to open up assets that were previously closed. For example, the EU made Apple unbundle their in-app payment method from the App Store. Previously, Apple had charged 20% of all app revenue including the up-front app purchase and ongoing in-app purchases. There were special terms for subscriptions. After decoupling in-app payments, they asked for 17%. In other words, they valued the use of the embedded IC at 85% of the experience and payments at 15% (3% of app revenue). 3% is actually a generous allotment for payment services given interchange is only 30bps on credit cards in the EU and debit is only 20bps.
If they take a similar approach for NFC access, we could see the same 15bp per credit transaction and half a penny for debit on third-party wallets. They also might keep the same structure but reduce the take rate. In scenarios like this, Apple is almost indifferent financially between an Apple Pay transaction and a third-party transaction. They would rather keep the engagement, but the revenue may not take much of a hit.
The partners now get more volume via NFC, but each transaction is less profitable than when cardholders tap a physical card. Given that net interchange revenue (after rewards costs) is already low, launching a wallet like this could cost more in aggregate than the current situation — assuming more people adopt than are regular Apple Pay users. Fraud won’t be that different as EMV took most POS fraud out 10 years ago.
Any material up-front certification fees would likely limit adoption to larger entities, such as PayPal, Shopify, Paze/Zelle and a few big card issuers acting independently.
The exception here might be debit-centric issuers like Chime and Cash App. The fee for debit transactions is only a half penny and might not move the economic needle as much as the 15bps does in credit card. These fintech customers are digital-centric by definition, so adoption could be high. However, debit-centric consumers also skew Android, so the take-up rate might be lower.
So the value of opening NFC and Secure Element really depends on how commercial agreements are negotiated. Too high, and few payments partners will sign on. But even if there is no transaction fee, Apple Pay has key advantages.
In-app and eCommerce
When I was able to track this, more than half of Apple Pay transactions were In-app — and in-app was growing faster than POS. That was before the push into eCommerce where Apple Pay is outgrowing PayPal and other payment methods. I know I always use it when it is available.
But, Card Not Present (CNP) transactions don’t use NFC. The press release is silent on opening Apple’s CNP ecosystem to developers. Any competitor that doesn’t already have an eCommerce wallet would either have to build acceptance merchant by merchant, or they will have to stick to just POS/NFC transactions. Only a few competitors have the capability to build all that in-app & eCommerce connectivity.
The commentariat is most excited about PayPal. PayPal already has wide acceptance in eCommerce, so gaining access to POS transactions is mostly white space for them. Similarly, ShopPay would benefit from POS access as many of their merchants are omni-channel. Paze is building a CNP ecosystem, so having NFC access would round out its offering. Amazon could take Amazon Pay into NFC, but it is hard to see why that makes strategic sense — why make it easier to use brick-and-mortar rather than order online?
Other winners could be the online installment lenders like Affirm and Klarna. Today they solve for POS by pushing a virtual card into Apple Pay. Presumably that virtual card bears the 15bp fee. But these transactions actually start in the lenders app where the customer must be approved first, so the experience would be identical. Whether they do this or not depends on the size of any ongoing transaction fee
I cannot think of any entity that might build out CNP acceptance to balance a legacy CP acceptance footprint. The card networks have tried repeatedly to build wallets, but never gained traction. The major V/MC card issuers are backing Paze. Amex may have too limited a customer base to get much lift here, and Discover may be part of Capital One, and therefore Paze, before it needs to decide.
If they don’t work in CNP venues, other wallets are disadvantaged even if Apple offers favorable economic terms. PayPal, ShopPay & Paze are the key exceptions. But the implementation timeframes to get this up and running gives Apple another year or two to habituate its customers.
Consumer habituation
The very last line in Apple’s press release makes the point that even without NFC exclusivity, they view Apple Pay and Wallet as likely to retain most of its users:
“Developers and users will continue to have access to the easy, secure, and private experience of Apple Pay and Wallet.”
The key question competing wallets have to ask is: How can I get a consumer to use my solution rather than stick with Apple Pay & Wallet? From the press release:
“To make a contactless transaction within an app that utilizes these APIs, users can either open the app directly, or set the app as their default contactless app in iOS Settings, and double-click the side button on iPhone to initiate a transaction.”
If the payments company decides to embed NFC in their own wallet app, the consumer has to download that App. For the eCommerce specialists, the consumer may not have the app on their phone already as they are primarily browser-based solutions. That provides a source of friction to getting started.
Second, the user has to switch their default wallet in “Settings”. Yet, we know from other case studies that this often doesn’t happen. For example, how many of you substitute another search engine for Google? Google pays Apple $20B+ annually for default status for a reason. Switching is more common for Browsers, but many people, including me, just stick with Safari.
So inertia will keep most people on Apple Pay unless the competitors give them a good reason to switch. But what could that be? If Apple is charging per transaction fees, all competitors start out in an economic hole, making financial incentives hard to justify. Paze has no other source of revenue to offset any new fees. PayPal and ShopPay do, but it will shrink their margins.
Even if the NFC and Secure Elements are open, Apple still controls the iPhone experience overall and can use that as a marketing advantage. They demonstrated how powerful that was with the Apple Card. That product went from zero to the 10th biggest portfolio in the US in four years with just the iPhone as its marketing channel. Apple would similarly support Apple Pay despite open competition.
Conclusion
Opening up its infrastructure marks a sea change in Apple’s historical strategy. They are to be commended for that. But they likely realized that opening up won’t really erode their wallet share that much. Apple still has an economic advantage, a CNP acceptance advantage, an experience advantage, an installed base advantage, and a marketing advantage. That is a lot of advantages for other wallets to overcome.
Key insights
In a major development, Apple will make its NFC chip and Secure Element available for third party wallets
To use those capabilities third-party wallets must go through a certification process and pay Apple fees based on a “commercial agreement”. The size and structure of those fees will influence uptake
Apple will retain key advantages even after this technology becomes open
Competitors will pay them for using the technology
Apple Pay will still have exclusive use of their CNP acceptance network
iPhones will ship with Apple Pay as the default wallet
Apple Pay has a large installed base
The iPhone itself will be an exclusive marketing channel for Apple Pay
It still may be worthwhile for some payments companies to use the technology
CNP wallets like PayPal, Shop Pay, and Paze need a POS solution
Fintechs serving debit-centric consumers, like Chime & Cash App, may overcome the economics as Apple debit fees are lower that its credit fees
Fintech lenders may use it to reduce friction in the CP experience
Apple Pay is likely to retain it share despite opening it ecosystem and Apple Inc. may be economically indifferent, depending on the fee structure