Credit Smart

Apple Pay fees could upset the rewards cart


Fees on banks to include their credit cards in Apple Pay could lead to rewards cutbacks someday, but so far there’s no evidence it will happen

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QuestionDear Cashing In,
In your “Not all ‘digital wallets’ give you bonus reward points” column, you mention that with Apple Pay, you will not lose any reward points since the merchant code is sent to credit card processing directly. But since Apple charges a certain amount to the credit card company, the overall cost incurred by the credit card company is higher, and therefore I believe credit card companies will start offering more meager reward programs compared with what they do today.

Is that right? Will Apple eat into the rewards pie that we enjoy right now for the convenience of not having to carry our credit cards in our pockets? — Phanendar

AnswerDear Phanendar,
Apple Pay is a hot topic right now, and rightfully so. It’s not so much that the technology is revolutionary. It’s not. Similar digital wallets have been around for a few years.

But it is a hot topic because when Apple moves into a new area, people recognize its track record of transforming entire industries, as it did with music (iPod/iTunes) and tablets (iPads).

Obviously, nobody knows what will happen in the future regarding Apple’s foray into payments with Apple Pay. A March 2015 poll by found that paying by phone is no more popular than it was at Apple Pay’s launch in the fall of 2014, although people who are interested in the concept are becoming more frequent users. Expect to hear more about this in the next few months, as the payment-capable Apple Watch becomes available.

With all the buzz around Apple Pay’s potential to revolutionize the payments industry, your question about the effect on rewards programs is timely. Let’s look under the hood at how Apple Pay works and how it might affect the banks, which now offer rewards programs that can be generous in terms of frequent flier miles, cash back and so on.

One of the main ways that banks make money from credit cards is through interchange fees, also known as “swipe fees,” which are fees of typically around 1 percent or 2 percent collected from merchants by card networks on every purchase.

A groundbreaking aspect of Apple Pay is that participating banks agreed to pay Apple whenever someone uses an iPhone (or Apple Watch) at a retailer. Remember that even with Apple Pay, credit cards are the backbone of the transactions, and the iPhone is just the channel to use a linked credit card at the register.

When Apple Pay was announced in September 2014, the Financial Times (subscription required), citing anonymous sources, reported that banks had agreed to pay Apple 0.15 percent of the amounts charged via Apple Pay transactions. A month later, the trade publication Digital Transaction News said it had obtained a contract between Apple and a bank and confirmed the 0.15 percent amount.

So yes, Phanendar, there is an added expense to banks. And we know that if banks are making less money off their cards, then they could downsize their rewards. That’s what happened a few years ago, when new regulations made debit card transactions less profitable for banks, and they scaled back rewards programs as a result.

But there are key differences. Banks could be hoping that the added security of Apple Pay will cut down on their fraud losses, and they could see an increase in revenue if Apple Pay becomes widely used. Although thieves have been uploading stolen card account information — obtained elsewhere — to the wallet, that problem is largely blamed on the issuers’ lax verification procedures when someone adds a card to Apple Pay. Once a card has been added to the wallet, Apple Pay’s tokenization security makes it nearly impossible to steal card information during an Apple Pay transaction. That’s a level of security significantly greater than existing magnetic stripe cards offer.

Analysts don’t foresee any rewards cutbacks because of Apple Pay. Rick Oglesby, senior analyst with Double Diamond Payments Research, told me, “At the moment, Apple Pay volume is far too low for that 0.15 percent to register as a priority.” And even if it did become a problem, banks have other options to recoup the money, such as pushing for higher interchange rates, cutting back on the cost of issuing cards and so on.

“Saying that they will need to cut back on rewards is an oversimplification,” Oglesby says. “Cutting back on customer value is a worst-case option if nothing else works, and it’s way too early for banks to do that significantly.”

If we know anything about rewards programs, it is that they are always in flux. But for now it seems too early to say that Apple Pay will disrupt them.

See related:5 simple ways to keep frequent flier miles from expiring, Strategies to maximize cash-back rewards


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