Shortly after Apple (AAPL 0.27%) launched Apple Pay late last year, it was widely reported that the Mac maker had scored a sweet (and unprecedented) deal with financial institutions under which Apple would earn a 0.15% cut of all transactions. Apple earns this slice by doing much of the marketing for Apple Pay, designing the user experience, and implementing tokenization for greater security.
While 15 basis points might not sound like a lot, translating into just 15 cents per $100, it adds up pretty quickly, and it gives Apple Pay a level of economic viability that competing services typically lack. That 0.15% cut could help cover a decent chunk of operating expenses.
Meanwhile, The Wall Street Journal reported last week that Google's (GOOG 0.19%)(GOOGL 0.31%) new Android Pay service won't get the same cut that Apple grabs. Ironically, what could have been considered a weakness -- Google's propensity, nay eagerness, to share revenue is partially what turned Google Wallet into a mobile money pit -- might now be a disruptive threat to the mobile payments status quo that Apple is quickly establishing.
To tokenize or not to tokenize, that is the question
Visa (V -0.06%) and MasterCard (MA 0.14%) have now come up with tokenization standards for the industry and are beginning to offer their own tokenization services to strengthen data security. Tokenization lies at the heart of the evolving battle against credit card fraud, and it's an obvious step that Visa and MasterCard should take directly rather than leaving in the hands of a third-party platform operator such as Apple or Google.
The challenge facing the payment networks is that they have already inked deals with Apple, which are reportedly in place for three years. Naturally, they will use Google's no-fee model as leverage in an attempt to squeeze Apple out of its cut in future deals, especially if their own tokenization services are in place by then.
Who has the power?
As always, the power rests in the hands of the consumer. Apple has always relied on this philosophy, appealing directly to the masses as opposed to a relatively fewer number of "orifices" (as Steve Jobs liked to put it). If Apple can appeal to its legions of loyal customers to continue supporting and using Apple Pay, the company will retain the ultimate bargaining chip.
Think of the iPhone. For years under the subsidy model, wireless carriers balked at the device's high subsidies relative to comparable Android phones. While there was evidence to suggest iPhone users consumed more data, and therefore justified this premium to the carriers, most carriers had little choice but to offer (or want to offer) the iPhone since it was what consumers wanted. Carriers lacking the iPhone bled out subscribers in the early years to iPhone-carrying rivals. The consumer is king.
The nascent mobile payments market is a vastly different beast, though. Apple's leverage via consumer demand is noticeably weaker in this context. If a relationship with a card issuer or payment network falls apart, and that payment option becomes unavailable through Apple Pay, it's a small hurdle for the consumer to simply go back to the old-school swipe. It's also unlikely that a consumer will cancel a credit card in favor of a competing card that is supported by Apple Pay (and give up all those accumulated reward points?!). Still, Apple has a pretty decent shot at keeping its juicy deals if it can keep consumers on its side.
Apple Pay and Android Pay are almost already at feature parity, so at this point it's less about competing with each other than about catalyzing widespread adoption. To that end, both Apple Pay and Android Pay share a common goal. The only difference for now is that Apple will make a lot more money here than Google.