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Apple Pay woos credit card companies with promise of increased transactions

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Marcio Jose Sanchez/AP

(Read caption) Apple CEO Tim Cook introduces Apple Pay on Tuesday, Sept. 9, 2014, in Cupertino, Calif.

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Although mobile payments are not new, Apple is looking to make the practice mainstream.

At its keynote event earlier this week that saw the unveiling of the iPhone 6, 6 Plus, and Apple Watch, a key feature discussed was Apple Pay. The mobile payment system lets users load their credit and debit card information onto their phones and then pay for items using either the iPhone 6 or the Apple Watch. 

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Apple has also worked to assuage privacy and security concerns. For example, iPhone 6 users paying with Apple Pay never hand over their actual card information; rather, Apple gives each card a unique device account number that is encrypted and stored on the iPhone. Retailers never see the card number and no card information gets stored on Apple's servers.

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Now, credit card companies are gazing with rose-colored glasses at a payment service they believe will get consumers conducting more transactions than they would with a traditional credit card. Card companies expect this to make consumers less reliant on cash and more reliant on electronic payments. 

But because card companies will pay a fee to Apple for each transaction that occurs, they will make less money than they would with regular credit cards. Still, they're banking on more than making up for the money lost due to the increased number of transactions, according to The Wall Street Journal, citing "people familiar with the arrangement." 

So far, Apple is working with three top credit card companies – Visa, MasterCard, and American Express – six top US banks, and 220,000 shops, with businesses including McDonald's, Subway, Staples, and Nike. More merchants and banks will be partnering with Apple, according to Apple's website. 

Another attractive aspect for the card companies in the arrangement is that Apple will likely take on a degree of risk in each transaction, according to Market Watch, citing Michael Archer, a financial services expert at the global management consulting firm Kurt Salmon. 

Mr. Archer says Apple's confidence in its security system is a key reason for why it can take on some of the risk for credit card fraud that usually falls on banks and retailers. 

Retailers typically pay banks a fee of two cents for every dollar spent for customers to make purchases on credit. In this case, banks will receive their normal fees while also gaining the added benefit of Apple security that comes with Apple Pay. 

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"So the banks still get their 2 cents and they have an intermediary in the case of Apple, that will basically insure some of that risk," Archer told Market Watch.