What Apple’s New iPhone Contactless Payments Assault Means for Banks

News that the tech giant is looking to upgrade its mobile phones to accept payments from NFC-enabled cards has many speculating that the company is looking to challenge Square in the small business payments space. But Apple has the cash and cachet to do even more if it wants.
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Apple is developing a new feature that would enable iPhone users to accept credit cards without the need for any additional hardware to be installed or connected, Bloomberg reports. As always, Apple moves, even when arising from unnamed sources, stir a storm of speculation.

Many observers believe this move will enable Apple to compete in the small business space with Square (now known as Block), or even in the much larger P2P payments space. But might it signal something even bigger?

The feature would turn the iPhone itself into a payment terminal and will let merchants accept fees with the tap of a contactless card (or possibly another iPhone) onto the back of their mobile phone, Bloomberg states. Presumably, iPhone users could also pay each other via contactless card with this new feature.

“Apple would be able to leapfrog Square’s hardware by integrating tap-to-pay terminal technology directly into the iPhone using its built-in NFC chip,” notes 9to5Mac. “This means small businesses would be able to accept tap-to-pay payments without any external hardware. The feature would also seemingly work with Apple Pay, allowing users to tap their iPhone onto the back of another iPhone to make a payment”

Not a Far-Fetched Idea

One line from the Bloomberg report drew particular scrutiny from sharp-eyed readers: “It’s also not known if Apple intends to partner with an existing payment network for the feature or launch it alone.”

“That’s the most interesting line in the story for me,” says Zach Anderson Pettet, U.S. Content Director for Money 20/20, and a former VP of fintech strategy at Kansas City-based nbkc bank.

“I think the natural reaction upon hearing this news is, ‘They are coming after Square’,” adds Anderson Pettet. “But from my perspective, if I was sitting at Visa or Mastercard right now I’d be paying very close attention to this.”

While Apple has no current stated plans to build a competing payments network, it certainly has the cash and capability to do so.

“In the financial world, you need capital to build something massive like a competing payments network, and if anybody is capable of building that, it is Apple,” Anderson Pettet says. “They have a massive amount of cash on their balance sheet.”

Grand Designs:

Apple could quite possibly create a payments network to rival that of Visa and Mastercard

It’s not such a far-fetched idea, and it’s one the card networks may have already been worried about. The Wall Street Journal noted that relationships between Apple and the major card networks, as well as several major U.S. banks, was strained due to the costs associated with Apple Pay transactions.

When Apple Pay debuted, Visa and Mastercard made a concession to Apple, giving it leeway to choose which issuers it would allow onto Apple Pay and which of those issuers’ cards it would accept. They did so in return for assurances from Apple that it wouldn’t develop its own network to compete against Visa and Mastercard, the Journal notes, meaning executives at the two companies at least pondered the possibility.

Read More: What Banks & Credit Unions Can Learn from the Apple Card Experience

It’s entirely possible Apple may not want the increased regulatory compliance burden that comes with building its own competing payments network. But the Cupertino, Calif., company has already shown an appetite to delve into financial services with its partnership with Goldman Sachs on the Apple Card.

“With the Apple Card, they’ve now taken that step and are developing the core competencies to become a financial or fintech company, and they could start to expand on that,” says Anderson Pettet. “There’s not a ton of companies on earth more trusted than Apple — at least in terms of big tech companies — because of how they handle privacy. They could become a financial behemoth in the next ten years.”

A move further into financial services could also be appealing because as a publicly traded company, Apple has a remit to increase shareholder value and thus could always be looking at new ways of growing its business, he adds.

Read More: Banks Risk Losing Critical Revenue Stream If Payment Trends Continue

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Apple vs. Square: Small Business Showdown

If Apple’s goal is indeed just to compete with Square in processing payments for small businesses and merchants, some say the company may be too late to the game.

Concerns and speculation about what Apple’s current plans are around turning the iPhone into a small business payments terminal are “overblown,” in part because it’s not obvious whether Apple would see much success in this endeavor, Barclays analyst Ramsey El-Asal, told MarketWatch.

Given that merchants can already get inexpensive plugin devices, for less than the price of an iPhone, “This likely limits the utility of an iPhone-only acceptance approach to sole proprietors and very small micro merchants,” El-Asal added.

Uphill Battle:

If Apple wants to dominate in the small business payments space, it will have to overcome some entrenched advantages Square has.

Square has also expanded its business since introducing its now-ubiquitous “dongle” and is better prepared to stave off competitors, even those as cash-rich and popular as Apple.

Square “has been gradually transitioning its value proposition for sellers from hardware acceptance tools towards its broader ecosystem,” says Wolfe Research analyst Darrin Peller, quoted by MarketWatch.

These services, such as payroll and invoicing, can also “help ward off competitive threats from Apple and others,” Peller adds.

Read More: What’s Next for Goldman’s Marcus Banking Strategy?

Cutting out the third-party component — or at least adding the ability for hardware providers to use iPhones in transactions — does bring the ecosystem ever closer to Apple, notes an analysis in PYMNTS.com

“But it’s a big, and dicey, if,” the analysis continues. “Much remains to be seen as to the range of apps (if any) that Apple lets leverage the upcoming software. But in the meantime, if the goal is to become even more entrenched in commerce, there are other ways to do it.”

For now, any prediction on what the notoriously secretive company’s plans in payments are remain in the realm of speculation. But if any company has the cash and cachet to make a big splash, Apple is surely on that short list.

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