When Apple (NASDAQ:AAPL) released its mobile wallet two years ago, something odd happened: Virtually all of the nation's biggest banks got on board, including Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). I say it's odd because Apple Pay inserts itself between a bank and its customers, thereby usurping at least some control over the relationship.
Why would Bank of America and Wells Fargo go along with this? As an initial matter, it seems safe to say that they were hedging their bets. If Apple Pay took off as a popular payment platform, major banks couldn't miss the boat.
Additionally, because the banks are presumably prohibited from working together to develop their own payment platform due to antitrust laws, they might as well get behind Apple's efforts to do so. At the very least, banks could rest easy knowing that the Cupertino, California-based company would make the payment process as seamless and secure as possible.
But there's a third reason, which executives of Bank of America and Wells Fargo addressed at a recent industry conference that's just as important as these. Namely, banks make money from so-called interchange fees when people use the credit cards that they issue. The cost of not participating in Apple Pay would thus have been to cede any interchange income that would have come from people using their credit cards, albeit by way of a third-party iPhone app, to a competitor.
Wells Fargo's president and chief operating officer, Tim Sloan, touched on this at this year's Bernstein strategic decisions conference. His remarks came in the course of explaining how the bank plans to grow its credit card business:
When you think of our deposit customers, we now have a card penetration with our deposit customers that's in the mid-40%. So we have a tremendous opportunity just to do more business with our existing customers and that's where we're primarily focused. It's about taking somebody that's got a relationship with Wells Fargo that might have one of our competitors' cards in their wallet to one want to have a card relationship with Wells Fargo.
And then two, making sure that it's the right card for that customer that we've got an appropriate and very competitive rewards program. So that that becomes their primary card. And not only to convince them to do that, but then give them the meanings or mechanism by which it's convenient for them to use that card, whether it's in the Wells Fargo Wallet or with Apple Pay or Android Pay, you name it, the way that they want to do it, we want to be able to provide that card to them.
Bank of America's chairman and CEO Brian Moynihan also addressed this point at the Bernstein conference -- albeit less directly. Instead of referencing Apple Pay, Moynihan emphasized the importance of rewards in enticing customers to use its cards as opposed to cards issued by the bank's competitors:
The work/value proposition for our card customer is that by being a Bank of America customer they get a set of rewards around their entire relationship. And it's not hard for you to figure out on our website where you can basically see that as you bring more and more of your relationship you get different types of benefits. And so the cash rewards, the balance rewards, the travel rewards are all three or four executions which really gear to that and that's what's driving the balances. And they are second to none in terms of value to the customers, and that's how we're driving the business.
From the perspective of Bank of America and Wells Fargo, then, while they would prefer that customers only use the banks' proprietary products for payment purposes, they'll settle for second best if that insulates them against a loss of interchange income. This creates a lucrative opportunity for Apple so long as it's able to capitalize on it.