Apple Pay’s European Biz Model Needs A Reboot

Apple Pay’s U.S. business model is based on issuers giving it a rebate on the fees they collect from merchants. But what happens when those fees are really low and headed lower? That’s Apple’s issue in Europe as it looks across the pond to find ways to ignite its payments system.

A new blog post from a Euro-based software firm makes a point that we raised several weeks ago when Apple Pay was first introduced: how in the world will Apple make money in Europe?

This post makes the following point, speculating that its recent hire of Visa Europe’s Director of NFC is a signal that they intend to make their presence known in the UK and on the continent imminently.

“Apple must sign up a sufficient number of banks in Europe before it can launch Apple Pay. There was no mention of a European launch when Apple Pay was revealed in early September. We feel that there are a number of technical barriers that could delay the introduction of Apple Pay to the European market, even though contactless payments are proving to be extremely popular in Europe: the perfect breeding ground for Apple Pay. The prime barrier is the issue of what fraction of interchange fees – already significantly lower in Europe than in the US – will Apple receive?”

In a commentary piece published on PYMNTS.com on Sept. 15,  MPD CEO Karen Webster commented that the rebate from issuers on every transaction was a key piece of the Apple business model, one that might, over time, prove to be problematic. She writes, “If Apple Pay takes off like a rocket ship, merchants may also find themselves severely bummed out since what they pay in merchant fees today could go even higher as issuers and networks look to recover the costs of paying Apple for access to the consumers that they control. It’s unlikely that issuers are going to be okay with taking a permanent haircut on Apple Pay transactions. Now, some merchants in high margin categories probably won’t care if their conversions are higher and their consumers spend more when they use Apple Pay. But lower margin categories like grocery and QSR might have more to lose, literally, as Apple Pay becomes more popular, and the traditional payments ecosystem adjusts fees to accommodate that popularity and Apple’s business model. At some point, everyone may look back fondly at today’s rates and wish for them back.  Oh, and there’s a really reason that Apple launched in the U.S. first. Interchange in a lot of European countries, especially for debit cards are very low and will drop to .2 percent for debit cards and .3 percent for credit cards if there is final approval for legislation working its way through the system in Brussels.”

Aviso’s blog post underscored this point and stated that the Apple interchange problems are the result of unavoidable math. “Interchange fees in Europe are soon to be capped at 0.3 percent on credit card transactions and 0.2 percent on debit card transactions. As of May 2014, Visa’s interchange fee for a contactless consumer credit card transaction (under €20) is 0.23 percent of the transaction amount + €0.02,” it said.  And, PYMNTS says, 15bps on .2 percent is not exactly barn-burning.

The blog further states, “Apple now wants a slice of a European interchange fee pie that has already been handed out. After the launch of Apple Pay in the U.S., it was revealed that Apple had negotiated a deal with five major U.S. banks (Bank of America, Capital One, Citi, Wells Fargo, and Chase) to give it between 0.15 to 0.25 of a percentage point of the interchange fees in return for being allowed onto Apple Pay. It will be nigh impossible for Apple to cut a similar deal in Europe: different regulatory models will bring different problems.”