It seems to never learn. Apple Inc. that is. Or perhaps there’s nothing to learn. Maybe the endless battles over its closed and highly controlled ecosystem constitute the inevitable outcome of a corporate philosophy instilled from the very beginning, or more precisely, when Steve Jobs returned to the company in 1997. In any case, Apple’s latest battlefront in the ‘closed versus open’ war is being drawn in Europe, where the European Union (EU), for the second time in two years, has fired a warning shot across Apple’s bow for anti-competitive and exclusionary practices regarding its policy of prohibiting third-party mobile wallet applications (Google’s G-Pay, for example) from accessing its contactless payments technology – both hardware and software. Ostensibly, preventing other mobile wallet developers and their applications from using Apple’s contactless near-field-communication (NFC) technology limits iPhone users’ choice if they prefer any other mobile wallet aside from Apple Pay, Apple’s proprietary app. However, the implications of this restriction are far reaching and go well beyond the ‘consumer choice’ limitation. They range between the economic argument that open systems encourage greater competition, greater innovation, and ultimately lower costs to consumers, and the philosophical argument as it relates to the nature of payments in 2022, when payment mechanisms seek to be disintermediated, decentralized, free (costless verification) and fast (real time). Given all these considerations, it’s difficult to view Apple’s practices in the payments arena as anything other than anti-competitive, and discordant with any contemporary notion of what payments should be and how they should work.
At its core, the latest flare-up between the EU’s executive arm and Apple Inc. is consistent with Apple’s long history of anti-competitive practices that are the manifestation of a corporate philosophy that has sought unqualified control over the software applications that run on its operating system (iOS) and hardware. This extraordinary level of control has effectively ‘closed’ Apple’s ecosystem to other software developers, unless they can re-write their applications to run-on Apple’s operating system specifications and standards, pay Apple a fee to do so, and in many cases, both. This ‘closed platform’ philosophy, in its modern formulation, came to the fore most clearly and pointedly around 2010, when Steve Jobs launched a frontal attack against Google, and its then CEO, Eric Schmidt. It was articulated in the context of Apple’s lawsuit against phone manufacturer HTC which ran Google’s Android operating system. As described by Walter Isaacson in his biography of Steve Jobs,
“Underlying the dispute was an even more fundamental issue, one that had unnerving historical resonance [referring to Steve Jobs’ earlier disagreements with Bill Gates and Microsoft]. Google presented Android as an “open” platform; its open-source code was freely available for multiple hardware makers to use on whatever phones or tablets they built. Jobs, of course, had a dogmatic belief that Apple should closely integrate its operating systems with its hardware.” (Emphasis added)
Within this historical context, the May 2022 Statement of Objection from the European Commission (EC) – alleging that Apple’s practice of not allowing other mobile wallets to avail themselves of the iPhone’s NFC functionality creates an “exclusionary effect” that will have the consequence of bringing “less innovation and less choice for consumers” – stems from a two-and-a-half decade’s long policy/philosophy of keeping Apple’s ecosystem closed-off. A policy/philosophy imbued by its visionary creator and leader, Steve Jobs.
Making this latest contretemps with the EC even more egregious is the fact that it’s the second time in the past two years that Apple has been accused by the EC of anti-competitive practices involving how payments are made within its ecosystem. In April 2021 the EC issued a Statement of Objection to Apple regarding anti-competitive payments practices in reference to non-iTunes music streaming services, specifically Spotify. The complaint stated,
“The Commission takes issue with the mandatory use of Apple’s own in-app purchase mechanism imposed on music streaming app developers to distribute their apps via Apple’s App Store…The Commission is also concerned that Apple applies certain restrictions on app developers preventing them from informing iPhone and iPad users of alternative, cheaper purchasing possibilities.”
The bottom line with this 2021 complaint is that Apple didn’t allow iPhone users to purchase third-party music streaming applications outside of its App Store, forcing developers to pay a 30% revenue share to Apple for captive purchases of their applications in it. This often forced third-party developers to charge more to consumers for app purchases than they would otherwise have to.
Apple was forced to change this practice as a result of the 2021 complaint, and will likely have to submit to the European Commission on the new one. It will have no choice if it wants to continue to sell in the EU market.
Not lost on anyone should be the fantastic irony of it all – the EU giving Apple the same degree of choice in its business practices as Apple is giving to its iPhone users when it comes to preference of payment method and partner.
An apple of discord indeed.
When it comes to payments, I’m of the opinion that Apple receives an exceedingly generous amount of praise for its innovative payments technology and features, when in truth, it’s little deserved.
The mechanics of payments are complex, and arguably inscrutable to the lay person, as well as the financial technology punditry. Financial technology ‘experts’ on CNBC, for example, typically draw no distinction between payments ecosystem participants. To them, Fiserv, PayPal, Visa, Marqeta, and Affirm are all ‘payments companies’. And though true in one sense – they all facilitate the movement of money digitally – the ‘payments’ appellation ignores the fact that they all do so with different technologies and different schemes, and ultimately, contribute different value propositions within the ecosystem.
This recipe of the financial media’s ignorance of payments, plus Apple’s legitimate bona fides in hardware innovation, creates an environment wherein any Apple related payments news is received and promulgated with too much fanfare and too little scrutiny, producing an undeserved ‘halo effect’ for the actual technology, and what that technology is doing.
Take this March 30th, 2022 headline regarding Project Breakout, purportedly the internal code name for Apple’s operation to capture more of the payments value-chain. As reported by Bloomberg’s Mark Gurman,
“Apple Inc. is developing its own payment processing technology and infrastructure for future financial products, part of an ambitious effort that would reduce its reliance on outside partners over time…”
Not only did this story precipitate a cascade of additional press and commentary, it literally moved markets, sending the equity prices of Apple’s current payments partners lower. Again, according to Gurman,
“the news sent shares of CoreCard Corp. and Green Dot Corp. – two of Apple’s existing partners – down more than 10% apiece on Wednesday. Goldman Sachs Group Inc., another key partner, slipped as much as 1.2%.”
The media and market reactions are far out of proportion to the substance of the news.
In some cases, Apple’s payments technology is anything but innovative, in fact, it’s mundane.
Take P2P payments for example. While Venmo and Cash App are leveraging real payments innovation in the form of The Clearing House’s Real Time Payment’s Network, for instant, account-to-account transfers, Apple’s “real time” P2P payments utilizes a push-to-card mechanism for transferring money to a credentialed debit card in a user’s Apple Pay wallet. For account-to-account P2P payments, Apple Pay uses traditional ACH rails, which means the payments can take up to three days to settle. Why? Because even though Apple uses the media darling of investment banks, Goldman Sachs, as it’s issuing bank, and has successfully leveraged this high-profile relationship into a tremendous amount of publicity, Goldman isn’t a participating member of the RTP Network. So, Apple’s P2P payments, at least in terms of speed, isn’t comparable to those other services.
It’s objectively worse.
Apple will never be a leader in payments innovation, payments processing, or in any other aspect in the payment’s ecosystem.
Why?
Because their ‘closed ecosystem’ philosophy is antithetical to payments.
As stated above, in 2022, payments want to be disintermediated, decentralized, free and fast. In a world that’s hurtling towards instant, blockchain-based transactions and the de-platformization of Big Tech on the web (Web 3.0), there’s no room in payments for a company whose abiding philosophy dictates greater control, more intermediation, higher costs, and exclusionary business practices that stifle innovation.
Apple – AAPL – Software, Payments & Fintech Investment Bank
Article Image by Mike Nudelman / Business Insider
