Finance Everywhere, Who owns the customer

Apple faces regulatory troubles and payments are at the heart of it

  • Digital wallets are central to the recent lawsuit filed against Apple.
  • Although this lawsuit by the US Justice Department is new in the US, it builds upon precedent set by the EU.

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Apple faces regulatory troubles and payments are at the heart of it

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Digital wallets are central to the recent lawsuit filed against Apple, where the US Justice Department alleges that the company has been monopolizing the market to maintain “full control over the customer and also over the stream of income generated by forcing users to use only Apple authorized products in the digital wallet,” according to the filing.

The news: The US Department of Justice (Antitrust Division), State of Michigan, State of Minnesota, State of New Hampshire, State of New York, State of North Dakota, State of Oklahoma, State of Oregon, State of Tennessee, State of Vermont and the State of Wisconsin have collectively filed this lawsuit against Apple.  These plaintiffs argue that the company has “for many years” used App Store guidelines to demand higher prices and “thwart innovation” rather than competing on lower prices for consumers and better monetization structures for developers. 

While the lawsuit is wide-ranging, digital payments and wallets are at the heart of the case. 

For example, the lawsuit alleges that since the company restricts consumers from using their banking apps as digital wallets, it is able to own the customer entirely as well as the “stream of income” that comes from using only Apple authorized products in the digital wallet. 

The lawsuit also states that given the size of iPhone users and its restrictive policies, competition in areas like digital wallets suffers because it is not favorable to put apps on the market that are inaccessible to iPhone users. 

The details: The lawsuit argues that Apple uses its “control over app creation” and API access to restrict third-parties from offering digital wallets that have tap-to-pay features. These restrictions effectively guard the monopoly of Apple Wallet and Apple Pay, the lawsuit states. 

Apple’s guidelines on digital wallets also impact transitions away from the iPhone as well as how users interact with their financial institutions. Since iPhone users are only able to use Apple’s digital wallet and payments app, friction is introduced in the process of transitioning away from the ecosystem.

Since consumers already use banking apps by their FIs, the addition of digital wallet apps by their FIs would allow them access new services without having to share their data with a third-party like Apple, states the lawsuit. By barring third-party apps from using NFC (Near Field Communication) for tap-to-pay, Apple constricts the value third-party developers have in and can offer their prospective iPhone-based consumers. 

“While Apple actively encourages banks, merchants, and other parties to participate in Apple Wallet, Apple simultaneously exerts its smartphone monopoly to block these same partners from developing better payment products and services for iPhone users,” said the lawsuit. 

The filing also adds that Apple uses these structures to “extract payments from banks”, adding that the company charges issuing banks 0.15% for each credit card transaction, in an environment where payments through Samsung and Google are free for issuing banks. The lawsuit alleges that these charges reduce the funding that banks could essentially put towards offering their customers more benefits and features. 

Context: This regulatory action comes at a time when Apple has already been making significant moves into the financial services industry. From its popular Savings accounts offered through Goldman Sachs to its increased presence in the payments space through options like Apple Pay Later, the company has been steadily increasing its presence in the financial services sector. 

But this current lawsuit is raining on Apple’s financial services parade by arguing that it monopolizes its consumer base and is effectively choking competition. Although this lawsuit is new in the US, it builds upon precedent set by the EU

The EU filed a similar antitrust lawsuit against Apple in 2022, which touched upon themes relating to the company’s prohibitive policies regarding use of NFC by third-party apps for payments. There, Apple tried to settle the case by allowing third-party wallets to access the tap-to-pay function on its phone. 

Currently the company has proposed commitments to the EU which state that Apple will also create functionality in its architecture that allows users to set and change their preferred payment application, for NFC in-store payments. 

(Possible) Consequences: This US lawsuit may end up having some serious implications for Apple. For one, a significant portion of Apple’s revenue comes from services which include the money it makes on payments. In Q4 2023, Apple made $22.3 billion from Services, and when we combine its earnings from last year, the company brought in $85.2 billion in total from this category. 

Multiple quotes in the filing suggest that Apple has constructed its policies and architecture in the way to ensure stickiness to the ecosystem and that its own apps remain unchallenged in the consumer base. If Apple is forced to make similar “commitments” in the US that it proposed in Europe, the considerably large and growing chunk of its services revenue may be in peril.

Secondly, for quite some time now, Apple has been able to keep the walls around its tech garden as high as possible by highlighting that this ensures greater security and privacy for its users. It remains to be seen however, what will happen when these values are placed on opposing sides against ideas of competition and fairness. Despite having to make compromises in the EU, Apple has not gone on record to say that its services in the region are now somehow less secure or private then they were before. 

The recent lawsuit also in part calls into question the nature of privacy Apple upholds. As stated by the plaintiffs, “if these financial institutions offered digital wallets, then users would have access to new apps and technologies without needing to share their private financial data with additional third parties, including Apple.” This statement poses the question of the accuracy of Apple’s claims about privacy. The ideal privacy in this context would essentially dictate that consumers’ financial data is only accessible to those who truly need it (banks) to make the transaction possible. 

However Apple’s contractual and technical footwork goes against this ideal and in fact hints towards a needless data grab. “When an iPhone user provisions a credit or debit card into Apple Wallet, Apple intervenes in a process that could otherwise occur directly between the user and card issuer introducing an additional point of failure for privacy and security,” said the lawsuit.

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