iPhone and Apple Watch owners in Spain are probably happy to finally be able to flash their devices while paying at most stores, but merchants and ultimately customers will have to cover the cost.
With less pomp and ceremony than in other countries, Apple Pay has made its third appearance in continental Europe. While the popular app for contactless payments has been available in the UK for 18 months, shoppers on the continent have not been able to use it, until this year, first in France and Switzerland in July, and now in Spain.
Apple Pay is probably the most popular mobile app for contactless payments in the world, and Europe has the biggest number of contactless payment terminals. So, in theory, the marriage would be ideal, but Apple still has to convince banks on the continent to join. Why? Because of Apple’s hefty transaction fees.
Around 75 percent of all stores in Spain have point of sale terminals (POS) with support for contactless payments. That puts the number of contactless terminals close to 1 million, about 80 percent of the total.
Smartphone contactless payments in Spain are not something new. Many banks, including all the big names such as Sabadell, Santander, BBVA, and Caixabank, have been offering point-of-sale payment apps using Android Near-field Communication (NFC) enabled phones. But iPhone users have been blocked because Apple doesn’t allow any other payment app to access the NFC features on the iPhone.
Apple, in fact, has built itself a monopoly on iPhone POS payments, and charges a hefty fee to banks and some retailers to join their Apple Pay service (Banco Santander and American Express are partners with Apple Pay in Spain). On top of a substantial setup fee — which goes between $50,000 to $100,000 — it has been reported that Apple charges 15 basis points (or 0.15%) per transaction. That has to come from the fees banks and credit card processors charge to merchants — called the discount fee — and other businesses accepting card payments.
Here is the problem for Apple in the Euro zone: the European Commission and the European Central Bank (ECB) have been pushing for years to lower the interchange fees to encourage banks to lower their discount fee to merchants, making electronic transactions cheaper. Interchange fees are charged by the card-issuing bank to the card-processing bank when a transaction occurs. Along that line of thinking, back in 2014 the Spanish government lowered the interchange fees to 0.3% for credit cards and 0.2% for debit cards, 0.2% and 0.1% respectively for transactions under €20 (with a maximum charge of 7 eurocents). Banks still can charge the discount fee they want to merchants.
That low transaction fee means that when an iPhone user pays with Apple Pay, using a debit card, in a retailer that uses a different bank to process card transactions, the card issuing bank will lose money. Just imagine a payment of €80 in a store with Apple Pay using a debit card: Apple charges 12 cents and the issuing bank, the one that has to pay them, gets only 7 cents for the interchange fee.
So why has Santander agreed to launch Apple Pay in Spain when most of European banks are against it? Probably because Santander owns most of the payment terminals in the country. They just need to raise the discount fees to merchants to compensate for the Apple cut, and hope the overall business increase will compensate for the transactions made at retailers using other banks for payments processing.
The Apple-Santander deal will also put pressure on the other big banks to join Apple Pay, as their iPhone owning customers will demand the service. While iPhones are not as popular in Spain as in France or the UK, their number is huge, and iPhone users spend more money that the average Android user.
The arrival of Apple Pay won’t benefit merchants because banks will not lower their discount fees, they’ll try to raise them instead. If more banks are ultimately forced to join Santander offering the service, they’ll have to look for more fees to compensate what they need to pay Apple. And the Cupertino giant is not likely to open the NFC system of the iPhone to other payment apps any time soon.
Obviously, customers will be the ones finally footing the bill. Large merchants such as Zara, Carrefour, and El Corte Ingles will not be affected, but the small shops and restaurants will.
Paying with a contactless card is convenient, fast, and secure. Shoppers should stick to them instead of the mobile apps. There is no real benefit to pay with a phone, just the fun of it, and showing off with your new iPhone.