Tough Apple Pay deal raises question on costs to consumers
THE negotiating tensions behind Apple Inc and Singapore banks in deciding on fees for Apple Pay, as reported by The Business Times this month, show who is the giant among giants in the payments game - as competition revs up in this space. How all of these will impact business and consumer costs in time is one to watch.
Apple is expected to collect roughly S$10 million from Singapore banks and financial institutions here that now offer Apple Pay to customers, BT has learnt.
Sources said Apple charged banks and financial institutions between S$2 million and S$5 million each for what it called a "marketing fee" to support Apple Pay branding.
This is on top of relatively high transaction fees that the tech giant will earn from leeching off banks' existing payment systems. Financial institutions here will have to pay a transaction fee, said to be between 0.1 per cent and 0.2 per cent per transaction - or between 10 and 20 Singapore cents per hundred Singapore dollars.
This is hefty compared with the price that US banks are paying, at a reported 15 US cents per hundred US dollars.
On the surface, the Singapore and US rates look close enough. But the transaction fee in Singapore is heavy when one considers the age of the infrastructure system in the US, versus that of Singapore. Apple Pay offers better security for the payment space in the US. In 2014, Home Depot was hit with a hacking attack on its payment system, with over 55 million credit and debit cards compromised. The scale was even bigger than the security breach at Target that same year, which affected 40 million cards.
The US payment system is hampered by age and size. US card issuers are only just now embracing chip-embedded cards that are harder to forge.
Singapore is not the US, in that regard.
In the UK, the banks are paying just a few pence per 100 pounds. The Chinese banks are reportedly paying 0.07 yuan per hundred yuan - though this is understandably once the size of China is considered.
The Apple pie
One suspects Singapore's small size warranted a relatively high transaction fee. And Singapore banks yielded because there was pressure from competition to get into the same digital payments space. Rather than have one bank take the whole apple pie, the banks will all go in and chomp on different parts of the pie.
But Apple got the, well, apples. And banks are - for now - licking their fingers over the crust and some crumbs. About 100,000 bank-issued cards in Singapore were enabled for Apple Pay in the first two weeks of the launch in May. Checks on Apple Pay's success over time may be tough as Apple is controlling the figures. Anecdotally, take-up of Apple Pay has been slower than expected.
Of course, this may change as LTA rolls out a pilot to have contactless payments for train and bus rides. In time, Apple Pay could become a gamechanger for banks if this comes to pass.
Still, this is not just a glimpse into the hardball tactics behind the scenes, for consumers to gloat over the impact on banks, which of course, make money from charging fees too. Consumers should realise these negotiations could have an impact on the final prices that are levied on products picked up from the store.
In time, will these behind-the-scene fees filter through as costs for merchants, and if so, how will the pass-through impact prices for consumers?
No doubt, if the digital payment space widens, there is better economy of scale for recurring fees to be kept low as volumes will make up for lower margins. But Apple, one suspects, is more indifferent to recurrent fees, particularly in a small market like Singapore. It has walked away with some S$10 million from marketing fees and the question is whether there will be more "creative" fees ahead? Banks think not, but this is not set in stone.
Apple evangelists should take heed. Their church could be taking more tithes than they might imagine.
