Apple set to open up "Tap to Pay" - are the cards still stacked in its favour?

Recently the European Commission (EC) agreed with Apple to settle a long-running dispute over its Tap to Pay payment technology for its iPhones by opening this up to rival services in Europe. Many people are increasingly using this technology to pay in stores (take a look at this pic of my local supermarket for some Apple marketing gone mad!). If you're an iPhone user, there is only one way to do this: using Apple's own Tap to Pay application, Apple Pay.  

In this blog I explore the EC’s concerns, take a closer look at Apple’s commitments and whether these will result in any fundamental changes. I highlight five strong features of these commitments: free access, FRAND, defaults, authentication, and active monitoring with a dispute system. I also identify four key limitations – the commitments don’t cover pre-installation or wearables, need Apple approval and have technical limitations. In short, these commitments go quite far but could – and probably should – have gone further.

What is “Tap to Pay,” how is Apple restricting it and why?

Tap to Pay technology enables you to pay in stores (and online) using your phone by storing your credit card information in your “mobile wallet.” From my experience, anyone under a certain age now looks shocked by the quaint idea of using a physical card, when your phone does the job instead and is easier. While still growing in popularity, it seems inevitable that this will become the main way of paying in person.

The key to making this happen is the “Near Field Communication” (NFC) chip, which is a small piece of standard tech used in most modern phones. But at the moment only Apple Pay can access this key functionality on an iPhone, unlike on Android phones.

It won’t come as any surprise to those of us working in digital regulation that Apple has pointed to security concerns as a justification for this restriction. But this well-worn justification was quickly dismissed by the EC in no uncertain terms. Apple also likely pointed to other available methods of paying by phone. While there are some other technologies to enable phone payments, such as QR codes, none are as widespread, easy to use or as seamless.

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What are the competition concerns arising from Apple’s restrictions?

More than four years ago, the EC opened a formal antitrust investigation and in 2022 issued its Statement of Objections outlining its competition concerns that Apple’s restrictions prevent Tap to Pay mobile wallet competition. The EC is not alone in raising concerns – many other regulators have looked at this, including the US Consumer Financial Protection Bureau and the UK’s Competition and Markets Authority (buried in chapter 6 of its Mobile Ecosystems Market Study report – which I led).

Apple provides this service via Apple Pay for free to users, but charges card issuers a fee for every transaction. This means there’s no direct financial cost to consumers, but it does mean if card issuers (e.g., banks) want to offer Tap to Pay to their iPhone-using customers, it’s Apple or nothing – card issuers have no bargaining position. This adds an extra layer of fees within the current payment stack and leaves little way of negotiating these fees down. Of course, perhaps even more importantly to Apple, it is also gathering significant amounts of data about your spending habits.

But top of the list of concerns is the impact on innovation. The EC is worried that Apple’s “dominant position in mobile wallets” is preventing potentially even more innovative services from developing and limiting choice for consumers. Even the concept of a “market for mobile wallets” is a misnomer; this market doesn’t yet really exist, as there simply aren’t any incentives for other mobile wallet providers to offer services when they can’t access the Tap to Pay functionality. It’s always difficult to imagine what more innovative services might look like in these digital markets – and this is often a real challenge for regulators – but this could be reward points, cash back, or other yet-to-be-thought-about benefits that could help entice consumers to use other mobile wallets. I don’t think it should be the EC’s job to predict how/or what might develop but to make the conditions for such innovation possible.

Apple’s commitments – the good, the bad and the ugly

Apple offered various commitments to open up NFC access, which the Commission consulted on earlier this year before recently announcing the final set of agreed changes. These changes will be made available in a July iOS update in the EU and last for 10 years.

The commitments include a number of strong and important elements including:

• Free access: allowing third-party wallet providers access to the NFC free of charge – being offered for free is unsurprising given the overlap with the EC’s Digital Markets Act requirements (e.g., Article 6(7) on free-of-charge interoperability and access) but it nevertheless sets a helpful precedent.
• FRAND: fair, objective, transparent and non-discriminatory procedures and eligibility criteria – again not unexpected, though little is said about what FRAND means in practice, which is something the EC will need to grapple with in relation to app store commission fees among others.
• Defaults: enabling users to easily set another payment app as their default app for payments – this again mirrors similar concepts in the Digital Markets Act, albeit in relation to other services and shows that the EC is also thinking about the user experience and the importance of “choice architecture” changes, which complement the technical requirements.
• Authentication features: access to certain features e.g., Face/Touch ID and other short cuts that Apple Pay currently uses (e.g., double-click).
• Monitoring and dispute processes: introducing a monitoring trustee and a dispute resolution system – as experience has shown, rarely can digital remedies be “one shot” and therefore continued active oversight is a real practical benefit. If implementation problems arise (which I suspect is fairly likely), then developers have a clear, independent way of escalating concerns.

The EC also strengthened these commitments after having consulted on these by, for example, removing the onerous requirement to have a payment services license or binding agreement^[1] and shortening the deadlines for resolving any disputes.

Much of this shows that the EC has clearly thought carefully about the ways Apple could undermine the effectiveness of these changes and put in place a wider package of pre-emptive measures. But these commitments also have some potential drawbacks:

• They do not address pre-installation – the elephant in the room for digital services and not something which is directly tackled here or indeed in the DMA. We know that default effects are strong and allowing people to reset the default to another provider may not really get to the nub of the issue. Apple Pay will still be the pre- installed default on devices and it will take users time and effort to actively shift to an alternative – something that risk-averse, often inert consumers may need more active encouragement to do. But Apple is not required to alert, prompt or give users a choice of which mobile wallet they want to use.
• They do not cover Apple Watch or any wearables – so if you want to Tap to Pay using your watch then you’ll end up sticking with Apple, which seems a clear gap and could put many people off.
• Access will need to be approved by Apple – there are controls in place over how long this takes and the eligibility criteria used by Apple to judge who is or is not “suitable,” but Apple is still fundamentally in control of this process. As we’ve seen with similar approval processes for third-party app stores, Apple could still use this as a lever to slow things down – though the monitoring trustee can be on the lookout for this.
• Technical functionality may not quite be on par – Apple Pay has direct access to the “Secure Element” whereas third parties will instead only be given equivalent access via the Host Card Emulation (“HCE”), which some have claimed is not quite as effective, although this is the method used in Android

Will people really move away from Apple Pay?

More fundamentally, consumer habits may have already been formed and will be difficult to shift. Many consumers are already used to only having Apple Pay, and simply enabling other providers to offer something which Apple already does may not be sufficient incentive for people to go and install another wallet.

People are notoriously “sticky.” This isn’t the fault of the design of the agreed commitments, but an inherent challenge in opening up consumer-facing markets. The silver lining here is that the use of Tap to Pay is still emerging, which means it may not be too late to persuade people to try something different.

Only time will tell if the EC has gone far enough and moved fast enough to prevent Apple’s first mover advantage.

Its biggest limitation – only covering the EU

Frustratingly for those in the UK – despite this issue being on the radar for the CMA back in 2022 –Apple will only need to make these changes in the EU and its unlikely to voluntarily roll these out to other countries.

While the UK is on the back foot on this issue, it’s highly likely that this will be one of the many things the UK’s new digital regime will look to tackle, coming into force later in the year. But action on this won’t be quick given the various designation steps and conduct requirements that must be put in place first. This means it’ll be at least another one or two years before we see any similar changes on the horizon in the UK.

Footnote

[1] Either a license to offer payment services in the EEA or a binding agreement with a payment service provider (“PSP”) that is licensed or authorized to offer payment services.

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