Cheat Sheet: Understanding the CFPB’s Brief Against Apple and Google in Contactless Payments

In a September report, the Consumer Finance Protection Bureau argues that Apple and Google, through their respective operating systems and accompanying restrictions on access to NFC capabilities, inhibit both consumer choice and industry competition. In a new regular feature from The Financial Brand, we explain the report's background, notable data, key findings and next steps.

The Report: Big Tech’s Role in Contactless Payments: Analysis of Mobile Device Operating Systems and Tap-to-Pay Practices

Published: September 7, 2023

Source: The Consumer Finance Protection Bureau, an independent federal agency dedicated to ensuring consumers are treated fairly by banks and financial institutions. The CFPB was created in 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The CFPB has been the target of several controversies and lawsuits challenging its leadership, authority, and status as an independent agency. In September 2023, a federal judge ruled the CFPB does not have broad authority to tackle discriminatory banking practices. And in October, the Supreme Court heard oral arguments in a challenge to the constitutionality of the CFPB’s funding, currently provided via the Federal Reserve rather than Congressional appropriation.

Executive Summary

Apple iOS and the Google Android operating systems are the only two major mobile operating systems in the United States. The Consumer Financial Protection Bureau is concerned that as mobile wallet contactless payment use grows, both companies have an outsized role in determining consumers’ payment options.

The CFPB argues that restrictions on near-field communication (NFC is short-range wireless technology typically operating at a distance of 2 inches or less) in mobile devices can inhibit consumer choice and innovation in payments and the development of a truly open ecosystem. One particular issue is Apple iOS’ restrictions on NFC capabilities, which force consumers to use Apple Pay service and prevents them from using contactless payments with PayPal, Venmo or Cash App.

While Google’s Android system does not restrict access to NFC capabilities, it does come at a cost by collecting significant amounts of data on consumer purchases.

Quotable: “Given the growing use of contactless payments, hardware and software provider business decisions and models can have a significant impact on payment rails and the future of open banking. Policies that impose restrictions on competition and raise consumer switching costs must be carefully scrutinized.”

Read more on how NFC has played out in banking:

Key Takeaways

• Mobile wallet adoption is growing rapidly, and 60% of consumers under the age of 40 report using a mobile wallet.

• Mobile device operating systems are the gateway to mobile payments. In the U.S., Apple dominates the market with 55% of devices, compared to 23% for Samsung and 22% for all other brands.

• Since its launch in October 2014, Apple Pay has steadily grown. Today, 130 million consumers use an iPhone at least monthly, and three in four iPhone users have activated Apple Pay.

Pros: The report is well-researched, with nearly 100 sources and a comprehensive look at how the ecosystems impact innovation. Given its mandate to ensure fair and competitive markets, the CFPB analyzed payments in the context of mobile operations systems to better understand interoperability.

Cons: While the CFPB notes the well-known criticisms of Apple’s prohibition against NFC outside of Apple Pay, it only glancingly notes Google’s expansive data collection and privacy concerns.

Things That Make Us Go “Hmm”: CFPB says in a sidebar on page 3 that it is “undertaking a rulemaking required by Section 1033 of the Consumer Financial Protection Act” to clarify consumers’ personal financial data rights. CFPB director Rohit Chopra said at the Federal Reserve Bank of Philadelphia’s annual fintech conference in September 2023 that the agency may soon step in to “think about these private regulations imposed by gatekeepers.”

Back Story

Growth in Tap-to-Pay: CFPB notes the use of tap-to-pay at POS has steadily risen in the United States and that such transactions will grow over 150% from $179 billion today to $451 billion in 2028.

Market Share: Apple currently dominates the U.S. market with 55% of smartphones shipped in Q2 2023 compared to the next-closest competitor, Samsung, which accounts for 23% of shipped phones. Apple also leads in the U.S. in digital wallet users, a trend expected to continue through 2026. This is partly because mobile wallet usage is primarily driven by younger consumers who overwhelmingly prefer Apple devices.

The Differences Between iOS & Android Ecosystems: CFPB notes that as two of the largest companies in the world, both Google and Apple could leverage their market share to gain market share in payments quickly. However, there are significant differences in how the two companies operate:

• Apple is a closed ecosystem, meaning Apple manufactures all devices and provides the operating system. Issuers must enter into a bilateral agreement with Apple for a particular card to be available on Apple Pay. CFPB notes Apple currently has contracts with 5,100 card issuers who are charged 0.15% on each credit transaction and $.05 on each debit transaction. Apple also prohibits card issuers from directly passing on these fees to cardholders.

• Android iOS is available on mobile devices manufactured by Google and many other companies, such as Samsung and Motorola. Several Android apps are available for making tap-to-pay purchases, along with specialty apps developed by other companies. Card issuers pay no transaction fees, and their relationship with providers is governed by Mastercard and Visa standards, not bilateral agreements. Google does not charge a fee, but it does “collect an immense amount of consumer data when consumers use the product,” according to the CFPB.

Read more: Is CFPB’s Mobile Payments Salvo at Apple & Google Good for the Industry?

Critical Issues

The CFPB argues consumers, businesses, and the entire economy benefit when consumer finance markets are open and “fiercely competitive.” As mobile at the point of sale grows, Google and Apple will remain critical intermediaries in the ecosystem with an outsized impact on consumers’ access and significant implications for open banking.

The Problem: CFPB believes that frictions either company imposes could impede the shift towards open banking and negatively impact consumers by limiting competition, innovation, choice, and ease of access.

Access to NFC: As a closed ecosystem, any developer who wants to make an app available on Apple devices must access the iOS system through agreements and guidelines, including the Apple Developer Agreement. Apple also controls access to the NCF chip on its devices through its Core NFC Guidelines, which deny such access for payment apps. While other payment apps can be downloaded, they are limited to QR codes and bar codes and cannot be used for tap-to-pay; the only option is Apple Pay.

Google currently has no such NFC restrictions (although the CFPB notes that while it could reverse that policy in the future). As a result, Android devices are not confined to Google Pay and can access other digital wallets and specialty apps developed by other companies.

Little Leverage for Card Issuers: While card issuers have an incentive to prefer Android over Apple, they havefew options and little leverage over Apple’s policies and practices. Apple’s scale and huge network make it hard to resist. Additionally, Apple users are unlikely to pressure the company to open its ecosystem. Most prefer the devices regardless; the cost of switching is too high, and there’s no guarantee Android will keep its policies in place.

What It Means

A Call for Greater Regulation: Open banking has evolved in parallel to POS payments. While the U.S. open banking ecosystem is one of the largest in the world, the CFPB argues that a lack of regulatory structure has led to persistent disagreements between market participants. The agency is currently undertaking a rulemaking session request by Section 1033 of the Consumer Financial Protection Act to clarify consumers’ personal financial data rights and ensure that competitive interests do not constrain the potential of data portability in financial services.

Notable and Quotable: “Apple’s commitment to privacy and security does not necessarily conflict with open access to NFC payments. Specifically, Apple could mandate that a third-party payment app seeking access to the NFC chip provide at least the same level of privacy as Apple Pay.”

Extra Credit: Under the Digital Markets Act, EU industry chief Thierry Breton recently called on Apple to open up its ecosystem to rivals.

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