Unlocking the Android Pay Pricing Mystery

canstockphoto4832368Being that little about Android Pay, unveiled yesterday, was interesting, attention turns to the only real differentiator available to Google: pricing.

What was remarkable about Apple Pay was that Apple launched it with a host of partners — and extracted pricing concessions. This was a non-existent product for which Apple secured those concessions, you will recall.

What about Google? What pricing concessions has it extracted from the issuers that have agreed to process Android Pay payments?

Apple, for its part, negotiated a price cut of 15 basis points, according to our sources, on the “card present” rate it pays issuers and networks. Normal “card present” discount rates, which are shared by issuers and networks but determined by the network, are about 1.5%, which means that Apple appears as though it gets around a 10% discount on the processing rate it pays.

The card-present rate is key. Apple’s TouchID allows for the lower rate as if a card is being swiped during the transactions. Well, the new Android M operating system will allow for biometric authentication and tokenization of transactions. Check the “card present” box for Google.

What about the discount Apple received? The driver behind that, among other factors, was the huge iTunes volume Apple commands. Quarterly iTunes revenue is closing in on $5 billion. Apple deserved a volume discount for that, right?

Well, Google can boast the same kind of market penetration. As the graphic below shows, Android marketshare is around 50% of all smartphones. That’s a lot ‘o smartphones, people. Oh, and Google has made Android Pay part of Google Services Mandatory (GSM) in Android M, which means that all those smartphones are definitely getting Android Pay, full stop. No other NFC wallet will be found on Android — in the U.S., at least.


So, did Google get the 15-basis-point Apple discount from its partners? Apparently, not. Tom Noyes, the former head of channels at Citi, claims that the banks will “never again” do a deal like the one they did with Apple for Apple Pay:

The Banks hate the Apple Pay deal (NEVER AGAIN). My friends in Mountain View take a meeting with a large bank on Android Pay: “You guys can forget about the Apple Pay deal, it will never happen again; let’s start the conversation on what you will PAY for the privilege of having my card in your wallet.”

Noyes writes that the Visa Digital Enablement Service (an uninspired name and an equally uninspired acronym: VDEP) is “a VERY VERY big step” in that it allows interbank tokenization without the “need for a complex set of contractual agreements and technology integrations.” Google, while a partner on VDEP, and perhaps because of it, appears to be moving away from tokenization and NFC, even as it introduces Android Pay. Yesterday, it also made public Google Hands Free, which allows for non-NFC POS payments (see video below).

That said, there appears to be some disagreement with Noyes. Google knew Apple’s deal and reportedly argued for a similar “tokenization rate.” At least an industry insider told Bank Innovation that Google did, in fact, get that “discount,” although perhaps not the full 15 basis points Apple scored. “All I can say is I know the same people that Apple talked to, and now [talked to] Google and Facebook, and they have no issues offering some BPs,” the source said. “They see real savings in accessing the card holder and in fraud savings.”

Makes sense.


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JJ is the Executive Editor & Publisher of Bank Innovation and CEO of Royal Media, its parent company. He can be reached at hornblass@gmail.com or 212-564-8972.

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