An Iowa card issuer has accused Apple of unlawfully restricting rivals’ access to tap and pay contactless technology and charging issuers “supracompetitive” fees.
Iowa-based Affinity Credit Union has instigated a lawsuit against Apple claiming that it unlawfully ties devices using iOS with the use of the Apple Pay mobile wallet. By doing so, Apple effectively compels iPhone users to use Apple Pay whenever they pay with their phones.
This, it claims, prevents potential rivals, such as PayPal, Square, banks and card networks from offering their own tap and pay solutions on iOS and enables the technology giant to charge card issuers fees that it would not charge under competitive conditions.
“Having barred all competitors from its devices, Apple charges payment card issuers fees that no other mobile wallet ventures to impose,” Affinity says in the complaint.
Apple requires card issuers to pay a 0.15 percent fee for credit card transactions whenever an Apple Pay transaction is completed on a US issuer’s card, and a flat 0.5 cent fee ($0.005) for debit transactions.
According to Affinity, these fees generated $1bn for Apple in 2019, and this revenue stream is predicted to quadruple by 2023. These fees account for most of the revenue that Apple makes from its digital wallet, the Wall Street Journal (WSJ) has previously reported.
By contrast, Google does not restrict access by rival digital wallets to the near-field communication (NFC) technology on Android devices and charges no fees to issuers.
“The upshot is that card issuers … pay a reported $1bn annually in fees on Apple Pay and $0 for accessing functionally identical Android wallets,” the complaint says.
Nonetheless, to put this in perspective, the Nilson Report estimated that US merchants paid $77.48bn in total credit card fees in 2021 and $28.06bn in debit card fees, a big portion of which was paid in interchange fees to issuers.
US interchange fees are among the highest in the developed world due to the fact that the country leaves credit card interchange fees unregulated and caps only debit card interchange fees charged by large issuers.
As a result, US merchants pay issuers on average 2.22 percent of the transaction for credit card transactions and 21 cents plus 0.05 percent of the transaction in debit card interchange.
The fees charged by Apple to the issuers are effectively syphoning off a slice of this interchange revenue that banks receive from merchants.
At the same time, Apple forbids financial institutions to pass on any Apple Pay charges to consumers, according to Affinity.
“This rule prevents issuers from using differential pricing to drive cardholders to lower cost alternative modes of payment.”
As Apple bundles its e-commerce functionality with tap and pay, issuers must pay these fees not only on point-of-sale transactions but also on e-commerce payments.
According to Affinity, these practices hinder innovation, restrict consumers’ choice and lead to “supracompetitive” fees.
In its lawsuit filed on Monday (July 18), Affinity is asking the California District Court to stop these practices and order Apple to pay redress for the harm caused.
The company seeks to represent the broad class of “issuers”, which includes banks, credit unions and other institutions offering payment cards enabled by Apple Pay, meaning that the lawsuit, if successful, could see Apple paying a hefty sum to “harmed” issuers.
Regulators and banks are unhappy
Apple’s restrictions on access to its technology and the fees it charges for Apple Pay transactions have not gone unnoticed by financial institutions in the US and regulators around the world.
In May, the European Commission preliminarily found that Apple violated European competition rules by restricting third-party developers access to NFC technology.
In a separate investigation, the commission is scrutinising Apple’s terms and conditions for integrating Apple Pay into merchant apps and websites on iPhones and iPads and alleged refusals of access to Apple Pay for specific products of rivals on iOS and iPadOS.
Last July, the Netherlands antitrust authority found that Apple’s NFC infrastructure was anti-competitive but that current regulation was unsuitable for dealing with these concerns.
The regulator said at the time that it would support the amendment of the revised Payment Services Directive (PSD2) and the introduction of the Digital Markets Act, which will “create a level playing field for payment-app providers”.
Apple is also subject to an antitrust probe in Australia that is focused on restrictions on banks to route their cards through Apple Pay and charge fees when their cards are used.
Meanwhile, last October, US banks were pressuring Visa to make changes to the way it processes recurring payments via Apple Pay, according to a WSJ report. The attempt would have seen Apple receiving a transaction fee on an initial subscription payment and not on subsequent transactions.
Previously in 2017, big banks in the US pushed Apple to lower its Apple Pay fees. Both efforts ended without success, according to the WSJ.