Apple Said to Negotiate Deep Payments Discounts from Big Banks

canstockphoto4621963Apple reportedly has reached deals to lower its card transaction fees with five of the largest financial institutions in the nation as part of the Silicon Valley giant’s to-be-launched payments venture.

The financial institutions are American Express, JP Morgan Chase, Citigroup, Capital One, and Bank of America.

We’ve reached out to all parties involved and all declined to comment.

Rumors about the deals were first made public by Tom Noyes, a financial technology investor and former head of channels at Citi, and confirmed by Bank Innovation sources.

The first thing Apple has done is convince these four FIs to consider transactions from Apple’s upcoming payments venture — said to launch with its forthcoming iPhone 6 introduction — as “card present” transactions, which carry a lower discount rate than “card not present” transactions, because of lower fraud risk.

Beyond that, Apple has also managed to bump down the actual “card present” rate by 15 to 25 basis points, according to people with knowledge of the talks. 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 will get around a 10% discount on the processing rate it will pay. Last quarter, Apple generated $4.5 billion of iTunes revenue — this implies that Apple will save at least $27 million as a result of these deals with the banks. Of course, more revenue volume is expected upon launch of Apple’s payments venture.

Reports about the Apple payments platform continue to surface. Re/Code and Bloomberg reported that financial networks Visa, MasterCard, and American Express were in talks with Apple, and, on the merchant side, our report regarding discussions with Nordstrom led to a wave of reports on Apple’s retail partnerships.

But why does Apple need a deal with the banks?

By partnering with Visa, MasterCard, and American Express, Apple will be able to conduct these transactions and cut banks out of the process all together. So why partner with the issuers?

According to Noyes, while banks control the card-present/not-present rates,  the networks negotiate the rates with payments processors. The differences can be dramatic. Apple was apparently adamant about getting the card-present rates and told issuers that it would assume some of the fraud risk inherent in every transaction by providing a secure element via biometric authentication (its TouchID feature) and location data provided through an NFC chip. The Apple payments platform will work with all of their cards.

Banks offered the discounted fee for two reasons: for the Apple payments platform to accept all of the cards from the issuers, and for Apple to assume some of the liability by including two secure elements that will authenticate transactions — location data via the NFC chip, and biometric security. This is essentially a wash for the financial services industry: they lowered fees for Apple for the privilege of being included in Apple’s payments initiative, but managed to put some of the transaction risk to Apple.

This deal could also lead to issuers making similar security-focused deals to ease the risk, and accompanying compliance costs, with the tech industry. Banks own transaction data. It is  not clear whether or not Apple will have access to this extremely valuable data.

On Apple’s side, the deal with the issuers was the “polite” way of entering the financial services industry. We’ve heard of only one one other merchant that has received a price break similar to Apple’s (cough, cough Walmart). Who knows whether Apple’s deals will foster additional price reductions on card transactions for retailers.

130 thoughts on “Apple Said to Negotiate Deep Payments Discounts from Big Banks

  1. […] of course, refers to the deep discount the banks were said to have given Apple, as reported by Bank Innovation back in September, compared by some as letting the fox into the […]

  2. […] When the company launched Apple Pay, it made a strong case for security. A key feature, tokenization, generates a one-time use token instead of providing merchants with credit card numbers. Biometrics also help reduce the risk of fraud, a fact that reportedly helped Apple negotiate lower processing fees. […]

  3. […] banks are going to be squeezed on margin.  We’ve already seen this with Apple forcing lower fees  per transaction from their bank wallet players, giving Apple a slice of margin off the top […]

  4. […] Given this news, many financial institutions are asking themselves, how will Apple Pay affect our business? It’s a probing question and one that does not yet have a clear-cut answer. Apple has already partnered with some of the largest bank and credit card companies in the U.S. – Chase, Bank of America, Capital One and American Express to name a few – to launch the feature in October and has noted that others like US Bank, PNC and USAA, will come on board soon. On Friday, The New York Times covered the possible effects in the banking industry in a piece titled, “Banks Bow to Apple Pay,” in the DealBook section. The article notes that banks are eager to partner with Apple on the venture. In order to work with Apple Pay, the partnering banks will assume the immediate cost, as they offer the retailer a lower rate to process a transaction than they would to a typical credit card company (it’s reported that banks are discounting the rate by as much as 10%, according to Bank Innovation). […]

  5. […] Apple Said to Negotiate Deep Payments Discounts from Big Banks […]

  6. […] for its part, negotiated a price cut of 15 basis points, according to our sources, on the “card present” rate it pays issuers and […]

  7. […] and 25-34-year-olds. The goal will be to get these young people to use Apple Pay in stores, where Apple reportedly gets a slight cut of each transaction4, and make iPhones even more integral in their daily lives. Jan Dawson of JackDaw Research first […]

  8. […] replacement to cable TV, especially if you’re a fan of live sports. Apple Pay—which reports suggest the company receives 15 cents per $100 spent through the contactless payment system—generally […]

  9. […] Apple launched Apple Pay in 2014, it obtained advantageous terms for transactions, and banks seemed eager to be aligned with Apple’s […]

  10. […] Apple launched Apple Pay in 2014, it obtained advantageous terms for transactions, and banks seemed eager to be aligned with Apple’s […]