Will Google's Free Android Pay Muddy The Waters For Apple Pay?

  • Google's new mobile payment service, Android Pay, will not charge any transaction fee from card-issuing banks.
  • This follows a move by Visa and MasterCard to standardize their card security service by making it free.
  • Will this impact Apple pay and its expansion plans, as it continues to charge transaction fees to card issuers?
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News is out that Google’s (NASDAQ:GOOGL) new mobile payment service, Android Pay, will not charge any transaction fee for the service. This follows a move by leading payment processors Visa (NYSE:V) and MasterCard (NYSE:MA) both of which recently standardized their card security service by making it free and preventing payment services from charging issuers any fees. How will these moves affect Apple's (NASDAQ:AAPL) Apple Pay, which charges credit card issuers 0.15% and debit card issuers 0.5% of transaction amount as transaction fee? What will be its impact on Apple Pay expansion efforts as the platform plans to soon launch in major international markets such as the U.K.?

Putting the Clamps on Apple Pay

The question that begs for an answer is: if the payment providers have put the clamps on Android Pay, what would prevent them from following suit with Apple Pay? After all, the two NFC-based mobile payment services are virtually identical albeit operating on competing platforms.

To try and understand why Visa and MasterCard took the rather drastic step, it might help to start by taking a short trip down memory lane and looking at Google’s existing mobile payment platform, Google Wallet. Even though Google Wallet was launched in May 2011 while Apple Pay was much later onto the scene after being launched in October 2014, it’s perhaps safe to say that Apple Pay has achieved much more in the world of mobile payments in its eight months of existence than what Google Wallet has achieved in four years. Whereas Google claims in its blogs that the payment service is accepted by hundreds of thousands of retailers in the U.S. (the service is only available in the U.S.), Apple Pay has already garnered the support of close to 1 million retail locations, with a significant number located outside the country. So why is Apple Pay showing a clean pair of heels to Google Wallet, the fact the platform is only available on iPhone 6 notwithstanding?

There are possibly a number of reasons why more people have accepted Apple Pay more readily than they have Google Wallet, the most significant one having to do with perception. Google is the world’s most powerful search engine, and the world’s biggest ad company. The company has grown so big by developing effective ways of mining specific user data that it is able to make available to marketers who use the data to target their audiences better with their ads. Google has even had several run-ins with the EU over alleged monopolistic practices. Even though the card payment industry is highly regulated making it very unlikely for Google to mine user data as freely (though it can to some extent as we shall see later) from its payment platform the way it does with its search engine, some perceptions are hard to kill. This coupled with the fact Android OS is widely viewed as a less secure platform compared to iOS has been Google Wallet’s main undoing.

That partly explains why Google Wallet has failed to make any meaningful impact in the world of mobile payments. But it does not answer why Visa and MasterCard are not willing to play with Android Pay. The possible answer to this lies in, ironically, Google Wallet. When Google launched Google Wallet, it took a rather ham-fisted approach by becoming the issuer and wrapping users’ credit cards in its own standard credit card. From a user’s perspective, this is both a big plus and a big negative as well. The good part is that the user is free to use any credit card of their choice. The downside is that Google is able to see the transaction details and therefore learn more about its users. In sharp contrast, Apple Pay is opaque since Apple never gets to see any transaction details.

Google Wallet’s modus operandi meant that it was forced to replicate the credit card ecosystem since it had to deal with many different brands of cards. This made Google a direct competitor with networks such as Visa and MasterCard as well as card-issuing banks.

Apple Pay simply does not pose that kind of threat to networks and banks that Google Wallet does. Apple Pay is essentially nothing more than a tokenization service that merchants use to secure payment information via POS terminals then send the payment information to a payment processor such as Visa and MasterCard. The payment processors then send the payment information to card-issuing banks which charge their customer accounts. The card-issuing banks pay Apple 0.15% of transaction amount as tokenization fee. From the perspective of Visa and MasterCard, Apple Pay poses little threat to their core businesses. There would therefore be little, if any, need to place the clamps on Apple Pay the way they did with Android Pay.

Chances of Apple Pay Evolving into a Fully-Fledged Payment Network

But, what if Apple decides to go the whole hog and become a payment processor a la Visa and MasterCard? After all, the company would end up taking 2%-3% transaction fee, many times above what it currently does. While this is doable in theory, the reality, however, is a little more nuanced. Apple would need to establish relationships with thousands of card-issuing banks so as to create a closed-loop payments network the way Visa and MasterCard have done before it could be accepted by one giant bank such as Citi. Visa and MasterCard know that this is something that would take many years to accomplish, and can therefore rely on their wide moat to deter any upstarts. Moreover it’s highly doubtful that Apple would be keen to expend so much money and time to develop a tangential business that is not directly related to its core business.

Bottom Line

It appears as if Apple Pay is not likely to be negatively impinged by Visa and MasterCard’s decision regarding APay levying a transaction fee from card-issuing banks. Consequently, Apple Pay’s international expansion efforts are likely to forge ahead undeterred.


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