In its wide-ranging antitrust lawsuit against Apple and its iPhone business, the U.S. Department of Justice is investigating how Apple's large financial operations, specifically its use of Apple Pay, to prohibit competition and reap huge profits in the process. They have set specific goals for what they are doing. Annual revenue is in the billions.
The Department of Justice says this not only stifles competition among payment services, but also that the fees banks and others pay to use Apple Pay make it difficult for other types of services that could compete with Apple. They argue that this potentially inhibits innovation, as the propensity to develop is diminished. in any case.
Apple Pay is not immune to regulatory controversy. In 2020, the European Commission launched an antitrust investigation into this. And in January 2024, perhaps in sober consideration of the other pressing regulatory battles it will face this year, Apple finally offered some concessions, allowing third parties to access its NFC and related technologies and create their own. The idea was to make it possible to build a Tap Two. A payment service that bypasses Apple Wallet and Apple Pay. (Apple's proposal is still being evaluated.)
Interestingly, while Europe has been a hotbed for Apple's antitrust violations (just earlier this month, it was fined nearly $2 billion for antitrust violations in music streaming), the nearly 90-page Department of Justice Apple Pay was the only European activity mentioned in the complaint. .
PayPal — a payments giant with substantial business in mobile transactions and point-of-sale technology — apparently contributed to the first EU complaint about Apple's payments monopoly. A PayPal spokesperson said today that the company declined to comment when asked about the U.S. Department of Justice's charges. (Of course, we are closely monitoring the progress of the case.)
Department of Justice's claim
Apple currently charges a 0.15% fee for transactions made through Apple Pay. In 2021, it reached $1 billion. It is estimated that by 2022 that amount will increase to $1.9 billion, and in 2023 it will more than double to $4 billion.
These are relatively small amounts considering the company generated over $383 billion in revenue overall in 2023.
But Apple's long-term bet is that payments are central to how people exist in today's world. “Apple recognizes that using digital wallets to pay for products and services will eventually become 'something people do every day,'” the Department of Justice said. So it's at the heart of the iPhone ecosystem, iPhone ownership and ubiquity, and the Department of Justice's complaint.
At the heart of the Justice Department's focus is the fact that Apple currently has “complete control” over how users use the iPhone's NFC functionality to make tap-to-pay payments in the United States.
The argument is that this not only prohibits other companies from building tap-to-pay functionality into their mobile wallets, but also prevents them from using the technology to do so. “Without Apple's action, cross-platform digital wallets could also be used to manage and pay for subscriptions and in-app purchases,” the Justice Department claims.
Also concerning is the fact that Apple Wallet holds all the cards, both literally and figuratively, and could effectively become a super app that offers more than just financial functions ( Another feature that Apple prohibits from being developed in iOS, the Justice Department notes (elsewhere in the complaint).
“Apple envisions Apple Wallet eventually replacing multiple functions of a physical wallet, becoming a single app for shopping, digital keys, transportation, identification, travel, entertainment, and more. are doing.”
At the heart of Apple's payment protection capabilities is the ability to “own” all customer data attached to Apple. This is something the Justice Department has identified that Apple's strategy is ultimately tied to how it sells its smartphones.
“If a third-party developer could create a cross-platform wallet, users migrating from an iPhone could continue using the same wallet using the same card, ID, payment history, peer-to-peer payment contacts, and other information. You can switch between smartphones easily.
“Also, many users already use apps created by their preferred financial institutions, so if these institutions offer digital wallets, users will be able to share their personal financial data with additional third parties, including Apple. Gain access to new apps and technologies without having to share them,” it writes. “In the short term, these improved features will make the iPhone more attractive to users and benefit Apple as well. The lack of a cross-platform digital wallet makes it difficult for iPhone users to buy another smartphone.”
For now, this is a unilateral development direction. Apple encourages banks, payment companies like PayPal, merchants, and other companies building payments-related businesses to incorporate Apple Pay functionality into their workflows; The purpose is to encourage transactions with Pay. Enabling users to add credit cards to Wallet, or incorporating payment functionality into their payment apps to receive payments, increases transaction revenue for Apple. — but it doesn't build its own payment functionality.
“Apple is simultaneously exercising its smartphone monopoly power to prevent these partners from developing better payment products and services for iPhone users,” the paper said. Meanwhile, Apple continued to develop Apple Pay, for example, launching its own “buy now, pay later” service last fall (pictured above).
The Justice Department may have its own major conflict with Google, but ironically, the complaint makes it a bit of a hero. Samsung and his Android giant are cited by him as two examples of payment app developers that do not take fees on transactions made using their payment apps.
“Apple's fees represent a significant expense for issuing banks, squeezing funding for the features and benefits banks offer to smartphone users,” the paper said.
Apple's counterargument is likely that Apple Pay removes so much friction in the purchase cycle that it actually increases transactions overall, not fewer.
That may be true, but it's not what Apple thought it would be. Apple Pay and Apple Wallet both represent a small portion of Apple's services revenue (more than $90 billion in 2023), or indeed its total revenue. But the Department of Justice, citing estimates from the U.S. Consumer Financial Protection Bureau, predicts that Apple Pay will enable nearly $200 billion in transactions in the U.S. in 2022, and that number will rise to $458 billion by 2028. It is said that it has been done.
This alone speaks to how central it is and its impact on the broader ecosystem, and is another reason why we believe the Justice Department supports its charges now.
Learn more about Apple's antitrust lawsuit here.