Apple Said to Reap Fees From Banks in New Payment System

Apple iPhone 6 and 6 Plus
An attendee displays the new Apple Inc. iPhone 6, left, and iPhone 6 Plus after the product announcement at Flint Center in Cupertino, California, on Sept. 9, 2014. Photographer: David Paul Morris/Bloomberg

Apple Inc. will reap fees from banks when consumers use an iPhone in place of credit and debit cards for purchases, a deal that gives the handset maker a cut of the growing market for mobile payments, according to three people with knowledge of the arrangement.

The iPhone 6 and iPhone 6 Plus, unveiled yesterday, include a new service called Apple Pay that lets users shop with the tap of a finger on a phone, instead of swiping a card. Banks including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. agreed to integrate their cards into the system.

Under deals reached with banks individually, Cupertino, California-based Apple will collect a fee for each transaction, said one of the people, who requested anonymity because terms aren’t public. While that gives the tech company a share of the more than $40 billion that banks generate annually from so-called swipe fees, lenders expect to benefit as consumers spend more of their money via mobile phones and other digital devices, the person said.

“The timing is right with customer behavior, the customer experience is right, and elements have come together around how the ecosystem is evolving for this to be a game changer,” Gavin Michael, JPMorgan’s digital chief, said in an interview. “We’ve seen -- certainly in our customer base -- a drive to the mobile channel.”

Growing Market

The mobile-payments market will probably more than quadruple to about $90 billion by 2017, according to Forrester Research. The people familiar with Apple Pay didn’t specify the size of the fee, which they said could vary, or whether it’s tied to the value of purchases.

The arrangement builds on the existing fee structure for credit and debit cards in the U.S., according to the people. Merchants there typically pay fees totaling about 2 percent of the purchase price for credit-card transactions. The swipe fees, also known as interchange, help card-issuing banks cover fraud costs and fund reward programs.

Trudy Muller, a spokeswoman for Apple, didn’t return a call seeking comment. In an online introduction to Apple Pay, the company said it won’t charge users, merchants or developers for transactions. Spokesmen for JPMorgan, Bank of America and Citigroup declined to comment on the terms of their deals.

Apple Pay relies on partnerships with the three biggest card networks, Visa Inc., MasterCard Inc. and American Express Co., to process payments. Visa and MasterCard handled 63.4 billion purchase transactions in the U.S. last year valued at $3.32 trillion, according to the companies’ data. U.S. card spending at American Express, which is a network and also the biggest credit-card issuer by purchases, totaled $637 billion last year.

Big Firms

Apple’s partnerships give it access to a fully developed payment infrastructure, while ensuring big financial firms have a role in mobile payments.

“It just underscores how incredibly complex it is to disintermediate or sidestep the payments ecosystem,” Josh Beck, an analyst at Pacific Crest Securities LLC, said in a phone interview. “From an investor perspective, there’s a lot of fear about disintermediation, and I think this should help massage some of those fears.”

Apple Pay will use the iPhones’ fingerprint scanners to verify users and near-field communication, a radio-based technology, to exchange data between devices that are held or swiped within a few inches of each other. The mobile devices will add another layer of security by using a dynamic security code, replacing the static data on the magnetic strip of a typical card, Apple said.

Fraud Protection

The one-time codes eliminate the need for merchants to receive sensitive customer account information. That makes the system less susceptible to fraud and hacker attacks. Visa, MasterCard and AmEx previously introduced industry standards for implementing the technology.

“Having a partner like Apple really was like catching lightning in a bottle,” Jim McCarthy, head of innovation at Visa, said in a phone interview. “Given their ability to effectively manage their platform, and get folks across multiple industries, merchants, banks and networks to cooperate really was the thing that catalyzed the whole thing.”

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