Apple officially unveiled Apple Pay at the launch Tuesday of its new iPhone 6 smartphone. With the mobile payment system, iPhone 6 users will be able to make payments by holding their phone within range of the Near Field Communication sensor at the point of sale.
Apple vice president Eddy Cue said the company had negotiated deals with major credit card brands American Express, MasterCard and Visa, and also with the six largest issuing banks. He did not name the banks or disclose details of the deals.
But according to Bank Innovation, the banks agreed to lower Apple’s card transaction fees by considering Apple Pay transactions as “card present” transactions, which carry a lower discount rate than “card not present” transactions, because of a lower risk of fraud.
Apple also succeeded in reducing the actual “card present” rate by 15 to 25 basis points, Bank Innovation reports, citing people with knowledge of the negotiations.
“Normal ‘card present’ discount rates, which are shared by issuers and networks but determined by the network, are about 1.5%, which means that Apple appears as though it will get around a 10% discount on the processing rate it will pay,” Bank Innovation says, estimating that Apple would save at least $27 million as a result of the deals with the banks.
The news report identified five of Apple’s bank partners as American Express, JP Morgan Chase, Citigroup, Capital One, and Bank of America. At Tuesday’s launch event, the presentation included images of JPMorgan Chase and Bank of America cards and Cue said more banks will be added in the future.
According to Bank Innovation, Apple insisted on getting the card-present rates and told issuers that it would assume some of the fraud risk inherent in every transaction by including two secure elements that will authenticate transactions — location data via the NFC chip, and biometric security.
“This is essentially a wash for the financial services industry: they lowered fees for Apple for the privilege of being included in Apple’s payments initiative, but managed to put some of the transaction risk to Apple,” Bank Innovation says.