Sunday, September 14, 2014

Apple Pay and Transaction Rates

I'm reading some conflicting information on Apple Pay and the related transaction rates. There seem to be some contradictory articles about credit card transaction fees and some hype about Apple's cut.

To better understand the fees associated with Apple Pay it might be helpful to first understand who pays what in typical credit card transaction scenario. This is glossing over some details but here is the gist of it:

A merchant that wants to accept credit cards has to get a merchant account. This is a separate bank account just for credit card processing. The merchant account is linked to the  platforms that process credit cards, that ultimately get the money for the transaction from the POS machine, phone system, e-commerce web site, iPhone, etc. into the merchant account of the merchant. Then the money gets transferred, once settled, from the merchant account to the specified checking account.

Whenever a merchant accepts a credit card, they have to pay a fee. You are all happy that you don't have to carry cash around and get to use your credit card. Every time you swipe the merchant is paying a fee, unlike when you hand over your Benjamins.

The credit card companies and banks have set up this whole convoluted pricing structure for how much it costs a merchant when you pay using a card. For example a "card not present" transaction on the Internet costs more than a "card present" transaction where you swipe your card at a point of sale machine. Like in the store at Target or Home Depot. Because "card present" transactions are more secure and less risky.


Also processing a card on a web site or alternate transaction processing system might require a "gateway fee" for linking the alternate processing device to traditional processing platforms. Some well known gateways are Cybersource,, and Verisign. PayPal lumps all those fees together. Some merchant accounts do as well - they might raise the discount rate (the fee on each transaction) and eliminate the gateway fee.

Oh and you know that card you love that let's you get cool rewards? That's great that your credit card company does that for you. So nice of them. But actually depending on the type of card being used the merchant may pay a higher rate for those too. Different card brands, vacation cards and debit cards can all have different fees associated with them. So actually you should be thanking your local coffee shop along with the credit card company for you last vacation funded by credit card rewards - or wherever you spent the most money. The coffee shop paid a higher fee for your transactions most likely.

So along comes Apple Pay and the idea is to find ways to make transactions more secure and convenient for consumers. So you get your new iPhone 6 and you are like "Sweet now I can just use my fingerprint instead of pulling out my card and it's all way more secure."

But behind the scenes the credit card companies might be making your favorite coffee shop pay more to have that added convenience. (And that is why the coffee shop offers a discount for cash or have minimum amount for credit card transactions, which might not exactly be in line with their merchant agreement but nevermind that.)

So it was kind of a big deal for Apple to negotiate a low fee for merchants to pay in all this transaction business, besides implementing all the cool new technology. They had to do the same thing when they negotiated a low price with the record labels for single songs instead of a whole higher priced album on iTunes. The price has to be one that people will pay, and although you don't see that price the merchants see it when you swipe and it eats into their profits, and ultimately things cost you more. And who wins? The people getting the fees for processing the cards obviously.

There is a cost and a risk to processing cards but Apple has said it will assume some of the risk to lower these transaction fees. If the fees to merchants are too high they won't accept Apple Pay. It sounds like they have negotiated lower "card present" rates but found conflicting reports. Merchants will want to verify with their banks what they pay for and Apple Pay transaction.

Some other articles are stewing about all the money Apple will be making on these transactions. All they are doing is taking a cut of the fees merchants will pay anyway for helping to facilitate the transaction - and if all goes according to plan - make it more secure and convenient.

Additionally, everyone wants a cut of transaction revenue. The credit card processors and banks control the game. If an alternate payment source comes along that creates competition and lowers transaction fees, that's a good thing for merchants. It should in theory make all our stuff cost less and easier for small companies to accept credit cards (or tokens) for payment. 

I don't know all the details of the Apple deal or who is paying what fees or how much each player is making. I just read some articles that didn't really explain the fee structure or were making a big deal about the fees Apple was getting, so thought would shed some light on how the fee structure typically works.