Apple is propping up a fundamentally broken payments industry
tomblomfield.com
tomblomfield.com
The only argument that you can really make is that the issuer cut needs to be trimmed in which case rewards/loyalty cards would mostly go away. Good for merchants, bad for issuers and terrible for cardholders.
A payments network on the scale of V/MC that has worked near perfectly for over 50 years is far from "fundamentally broken".
I've thought the ideal (from a fairness point of view, not "let's keep the banks' profit intact" point of view) model would be to have cut fees significantly (in the 0.5% area), eliminate rewards (again, merchants in competitive markets will lower prices accordingly), and eliminate the grace period on credit cards. This will mean debit cards would be used day-to-day by most people, and credit cards only when the financing is actually required (not as it is now where many, including myself, use credit cards for everything due to the rewards and pay in full). I prefer this to the current system of merchants paying inflated fees, which are passed onto us in higher prices, and rebated back to us by credit card companies (after taking their cut of course).
Credit cards are fundamentally a 1970s business model, based on tech that paid off their sunk costs decades ago, but the barriers to entry are so high they're impossible to overcome right now.
Given you can check balances and make payments in (near)real time, at least in Europe, there's no reason to continue to use Visa/MC, other than barriers to entry. You could check balance at POS over the internet and pay from your merchant account, recovering payment within an hour or so via faster payment. Frictionless credit isn't the same as unrestricted or unregulated credit - it's about removing the tether between one bank and one cRd - disintermediation of the bank. Why can't I have a credit card linked to zopa? Or someone else, or even, within an overall limit agreed by an umbrella provider, a number of different providers. That'd be cool, and would drive channel providers to compete on costs of service delivery (the 2-3% per transaction), as well as on cost of credit. Visa and MasterCard are an absolute racket, and one of my biggest grumps is that PayPal became just like them, if not more expensive.
I believe the vast majority of retail transactions in Canada use Interact Direct Payment (over physical cash or credit cards).
First, not every payment requires credit cards or a need for financing.
Second, advocating the idea of cheap and frictionless credit is dubious at best; subprime loans didn't exactly end well.
Last but not least, it's unclear what you're advocating for instead of what Apple did.
Paypal, which you mention towards the end, does everything through cards and bank accounts, with the additional twist of you carrying a balance with Paypal. But they're a bank for all intents and purposes. And regulated as such, at least in Europe. Apple isn't in that business, and that's a good thing. Remember how GE or US car businesses ended up in the wake of the subprime crisis.
I'm separately arguing for a competitive credit market, freed from the banks.
People are confusing the issue of multiple "virtualised credit cards" leading to more competition in the consumer credit product markets. It seems like a backwards way of thinking.
A credit card is just a token that represents an intermediary that both sides trust to handle the payment. Apple Pay simply abstracts that and improves the user experience, while reducing the leakage of informaition to incidental observers.
If this were something like bitcoin, the payment could be wallet to wallet. If it were credit, some processor would have to know that they process transaction for "$Me" and find transaction #N to settle it back with the POS.
So the question really comes down to how you would implement this "payment bus". It seems like it could theoretically be something like the stock market. In fact, credit companies could be market makers and offering to settle transactions for consumers at different rates. This would have to be fast enough to be usable, but it seems like that issue is solvable with HFT solutions. But how would you get existing companies who make their own custom and profitable buses to all agree to use one generic bus and move the money making to the credit side?
Replaced by what, the likes of PayPal? No thanks.
Just because the US banking system and Wall Street behaves like some spoiled child that shits in the kitchen and is given an award for doing so, doesn't mean the solution is an even less regulated company that operates like a bank, but isn't bound by the same rules.
Oh, nice. May I ask who bears the costs and takes the credit risk? When you pay through an intermediary such as a bank, a card issuer or PayPal, all sorts of costs and risks creep in, due to infrastructure costs, chargebacks, fraud, etc. Who takes care of the bill?
Think about a smart card like a phone - you can install multiple apps on it. Credit Card companies most likely won't allow a financial institute to have their own app which will supersede the credit card app when used at the financial institutes terminals. It's possible, in Canada we have Interac and Visa on one card, but not quite the same thing.
Apple Pay is really just an implementation of the contactless schemes (I say schemes because mastercard, visa and amex have their own flavours which preceded EMV's specs) using EMV tokenization, as the author mentions.
I agree that the payment system and requiring a third and fourth party can eventually be eliminated, but how can we expect the financial institutes to replace credit cards when they have no control over the payment networks?
Edit: I know a few years ago there was a new group created by merchants to develop a "payment card" which would be free of charges. Seeing how big merchants are, it would only make sense that they collaborate to develop a free payment technology which works with the financial institutes.
It was reported by Bloomberg: http://www.bloomberg.com/news/2014-09-10/apple-said-to-reap-... (basically, in exchange for assuming some of the fraud risk).
If so, that is a straight up lie. Apple worked with Clover/First Data to develop their payment app. The rest of the back-end technology has been years in progress, especially with the likes of Google and other failed attempts of mobile payment endeavors, mainly due to the lack of a secure element that they could freely open to customers to facilitate the EMV transaction. However, Google developed HCE to get over this hurdle and keep the telecommunications companies out of it completely. Apple has some impeccable timing with the release of Apple Pay, but also should be given some credit to tie all the loose ends and bring it to fruition.
Step one requires working with the industry.
Apple Pay comes as a layer on top the existing system, bringing primarily the same level of security as the chip-based cards.
Of course, it is a solution that assumes you have an iPhone 6, which is not a cheap and accessible thing for everybody, and that the merchant has the reader. The large/high-end merchants will have no issues moving to NFC payments and it will make Apple Pay a viable solution.
Starting next October (2015), the liability of fraud will shift from the issuing bank to the merchant/card issuer. So Apple is ripe to take advantage of this because most (I assume) merchants will want customers to use Credit+chip or Mobile NFC because they will lessen the risk of someone committing fraud with a stolen CC. This will mean upgrades across the nation. Even card issuers like Walmart will want all its stores to upgrade.
How about fraud protection (on both ends)? I'm old enough to remember people being afraid to use credit cards online. It would be great if things like Dwolla were more ubiquitous, but until then...
If you look through that, you'll see that the typical fees assessed by Visa and Mastercard are on the order of 25 basis points (a quarter of a percent). The rest of that 2-3% is going to price transaction risk (in both directions). No matter what you do in technology, if you're not talking about a better risk management system, the most you're going to be able to reduce interchange is about a quarter of a percent. It may not be obvious if you don't understand finances, but Apple is actually targeting the risk issue.
At some point, someone noticed that they were accepting all of this risk money per transaction, and that they could make a tidy profit if they took only the low risk users, so that they could make profit on the risk model. Well, how do you attract the low risk users? You offer them a cut of the transaction.
Over time, as you pull more and more low risk users into the rewards pool [edit for clarity: there are only high risk users in the default pool], the cost of doing business as usual goes up, and you have to start raising your risk charges. Well, higher risk charges means more money available for rewards... and so on and so forth. Durbin should help to restore balance, but it will take some time.
When customers issue a chargeback, they almost always side with the customer, leaving with the merchant with very little recourse. As a merchant, you just lose the money.
Exactly. There's a reason I prefer using a credit card over directly depositing cash in a company's bank account.
It's all too easy to forget that fraudulent sellers are just as much of a problem as fraudulent buyers.
My belief is that bitcoin coupled with the right payment experience will disrupt the industry at some point. I would highly suggest reading Marc Andreessen view on the subject: http://blog.pmarca.com/2014/01/22/why-bitcoin-matters/
Yeah, I totally have a doubt.
For one, Apple Pay will transport more money in its first 1-2 weeks than the whole international BitCoin system will all year.
Just consider that BitCoin's total estimated market cap is 6 billion usd -- something Apple (a single company) makes in revenues in about 8 days.
BitCoin, at the moment at least, is insignificant and fringe, size wise. The 99.9% of the 800 million users Apple has credit cards of don't use BitCoin. And all those companies Apple wants to work with, and users want to buy stuff from, don't accept it anyway.
Second, Apple rejects all kinds of apps from time to time, and given the immaturity and lack of regulation and quality control of most BitCoin exchanges (think MtGox and co), it's something they would consider kicking out of the store, or at least watching very carefully which apps they allow.
And here's the kicker. Apple has allowed those BitCoin apps back in the App Store, a few months ago:
http://appleinsider.com/articles/14/06/16/apple-begins-allow...
credit company -> bank/merchant account -> seller -> user
Instead of that he proposes we cut the credit card companies (and their fees), and have payments directly from our bank accounts.
Instead of our payments going through the credit card company, banks would have to be networked between them and with the next-gen payment system, so that we can buy from a store / seller regardless of the specific bank we have an account in.
Debit cards already allow me to make payments directly from my bank account, and do so for a very low fee.
I see no advantage to this, nor why he's targeting Apple Pay as some nefarious waste of resources (other than click bait).