US Government Report Says In-App Payments Are Uncompetitive

February 10, 2023
Apple and Google rules for in-app purchases are under the spotlight in the US after the Department of Commerce said the current model is harmful to consumers and developers.

  • In-app payments fuel app store maintenance and investments
  • Report raises concerns about Apple’s NFC restrictions

Apple and Google rules for in-app purchases are under the spotlight in the US after the Department of Commerce said the current model is harmful to consumers and developers.

The United States has become the latest market to consider clamping down on in-app payment rules by Apple and Google, after the government raised the alarm over bigtech practices.

Looking at the wider mobile app store model, the Department of Commerce’s National Telecommunications and Information Administration (NTIA) concludes that the current ecosystem is not a level playing field.

Although current app store policies offer some benefits to consumers, including the potential for tighter security controls, a new commerce report says the costs far outweigh the benefits.

This is particularly the case with in-app payments, where the report notes “it is unclear how the current system benefits anyone other than Apple and Google”.

A pricing model built on in-app payment fees

Under the current rules, third-party developers that offer users in-app purchases are required to use Apple and Google’s payment mechanisms.

This requirement, also known as the anti-steering measure, can prohibit third-party developers from directing users to alternate payment methods within apps.

There are only a couple of exceptions to that rule, such as newspapers, ride-sharing apps or businesses that sell consumer goods.

However, those that are required to route payments through Apple and Google must pay a service fee of up to 30 percent of the transaction.

Apple and Google generally claim that their payment policies “have helped the mobile app ecosystem thrive”, as they allow new start-ups to grow without paying a fee and they ask for a commission only upon purchase.

The bigtechs argue their app stores provide developers with the support, security and trust necessary to grow and these payment policies are a way for developers to recoup their investments.

However, the report states that app developers often disagree with the platform holders, arguing that these features are “arbitrary and discriminatory, unpredictable, capricious and bearing no relation to the cost or value of the services the mobile app store operators provide to developers”.

The Coalition for App Fairness (CAF) further raises that the sensitive commercial data that Apple obtains as a result of in-app payments enable the bigtech to swiftly develop and launch its own apps, competing with app developers whose data helped it in the first place.

Apple’s NFC restrictions are a concern

The report also cited concerns regarding technical restrictions on Apple devices such as near-field communication (NFC), an essential feature to enable contactless payments.

This limitation typically means that although a payment company may enable its credit card to be used through Apple Wallet for purchases, it cannot develop its own standalone app to do so.

Apple justifies its refusal to permit third-party access to card emulation for security reasons.

Unlike Android, which stores payment credentials in the cloud, utilising a process called "host card emulation" (HCE), Apple stores this sensitive information in a tokenised form on the device in a physical chip called "the secure element".

When a user purchases an item using Apple Wallet, the payment terminal communicates directly with the secure element over NFC to obtain the user’s payment credentials via a token.

If Apple was ordered to allow third-party access to the secure element, it would jeopardise the security of information stored on its devices, the company argues.

Several regulators across the world have criticised this limitation.

In May, the European Commission found that Apple’s NFC restriction was unlawful and the UK Competition and Markets Authority opened a probe into the same measure in November. The issue has also been raised in Australia, while Apple is facing a class action lawsuit in Iowa.

The NTIA now recommends policymakers ban anti-steering requirements and in general prohibit the bigtechs from tying access to their platform to the use of other products that are not intrinsic to the platform itself.

“From finding directions to chatting with loved ones, apps are a critical tool for consumers and an essential part of doing business online,” said Alan Davidson, assistant secretary of commerce for communications and information.

“It is more important than ever that the market for mobile apps remains competitive. NTIA's recommendations will make the app ecosystem more fair and innovative for everyone."

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