Google says it won’t earn any transaction fees from credit-card issuers for its coming Android Pay service because of evolving ground rules for the services.
Credit-card issuers hope the changes will pressure Apple to trim or eliminate its fees, say
industry executives, highlighting the speed at which the economics are changing in the evolving mobile payments business.
Hundreds of financial institutions scrambled to work with Apple Pay, afraid of being left at a competitive disadvantage. As a result, big banks and other card issuers agreed to give Apple 0.15% of the value of each credit-card transaction. For bank debit cards, Apple collects a half-cent per purchase, according to people familiar with the service – reports the WSJ.
Google isn’t getting transaction fees from bank issuers, said people familiar with the situation. That is because Visa and MasterCard recently standardized their tokenization card-security service and made it free, preventing payments services from charging fees to issuers.
“There is one agreement with Visa and the banks can have confidence that there are no pass-through fees,” said Visa President Ryan McInerney in an interview. Banks and payment services can make other deals including fees, such as marketing arrangements, according to a person familiar with the matter.
Visa unveiled its new tokenization service on May 28 the same day that Google announced Android Pay and said it had signed on to Visa’s service. Others will likely follow, because of the combined influence of Visa and MasterCard.The rules may prompt changes in Apple’s agreements with banks. Some bank executives said they are unhappy with sharing fees and may use Google’s no-fee arrangement to try to persuade Apple to alter its deals.
One possible leverage point: As Apple Pay expands outside the US, Apple may need to negotiate terms again. The bank executives didn’t want to be identified. “This is a bold move on behalf of the banks,” said Rick Oglesby, head of research at Double Diamond Payments Research. After agreeing to Apple’s terms for Apple Pay, “they’re now taking a stand against similar deals. It could easily turn into a standoff.”
Many of Apple’s contracts are for three years, and have roughly two years to go, according to people familiar with the situation. Thomas Noyes, a payment industry consultant, wrote in a recent blog that he expected Apple’s deals with issuers to “sunset quickly” in the U.S. and not expand outside the country.Apple declined to say if the new rules would affect its deals with issuers in the future.
The new rules are a blow to Google, which had been negotiating with large banks to get the same deal as Apple, people familiar with the situation said. Mr. Noyes wrote on Thursday that Google may be trying to convert its deals with issuers into marketing agreements where banks pay Google for the right to use its logos or agree to promote the service.Google wants Android Pay to grow in the US and globally much faster than competing mobile payments services, according to a person familiar with the service.
Longer-term, the changes may hurt Google less than it first appears. Without fees, more card issuers may join Android Pay. Standardizing the rules will help mobile-payments grow, said Ed McLaughlin, chief emerging payments officer at MasterCard.
Moreover, Google plans to offer coupons, rewards and loyalty programs to consumers through Android Pay in partnership with issuers and retailers. If those initiatives succeed, they could generate more revenue than a cut of transaction fees, said Richard Crone, a payments-industry consultant.
He estimated that an enrolled mobile-payments user is worth more than $300 a year to companies such as Google, mostly from advertising and other marketing programs.The rules also will affect a planned payments service from Samsung, which will use Visa and MasterCard’s tokenization standard, according to an executive at a leading card issuer who didn’t want to be identified.
Samsung executive Injong Rhee told analysts recently that Samsung Pay is being developed to drive sales of the company’s high-end smartphones, and not as a major revenue-making opportunity.
A Samsung spokeswoman declined to comment.
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