Digital wallets like Apple Pay are continuing to grow in popularity. Banks are worried they’re losing ground to tech companies eager to gain market share in consumer payments.

One of traditional finance’s biggest threats is Apple. Here’s how big banks are fighting back.

0:00 How digital wallets like Apple Pay work
0:43 How banks are competing against Apple Pay
3:45 Can banks succeed in creating their own digital wallets?

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#ApplePay #DigitalWallet #WSJ

When you pay for your morning coffee, do you reach for this?

This is still what most people prefer, but digital wallets like Apple Pay, Google Pay, and PayPal have become more popular over the last several years, especially for online payments.

And that's making the banks whose cards are in your physical wallet worried.

As Chase CEO Jamie Dimon said about the growth of new financial technology in 2021.

And Apple is 1 of big banks' biggest threats.

Here's how the tech company is encroaching on traditional finance's territory, and how banks are gearing up to fight back.

We've created an entirely new payment process, And we call it Apple Pay.

When Apple Pay was introduced in 2014, it wasn't the first digital wallet, but it had a big advantage over its competitors, The iPhone.

And now Apple Pay is activated on 78% of iPhones in the U.S.

If you wanna use an iPhone in-store, it's very difficult to use a different wallet, like when you tap and pay at the register, than Apple Pay.

It was also the only digital wallet that banks agreed to pay a fee for every transaction.

Banks make money on debit and credit card purchases from interchange fees, which merchants pay to the bank that issued your card when you shop with it.

Those fees are usually 1-3% of your purchase when you shop with a credit card.

So if you buy that coffee for $5 and your credit card has a roughly 2% interchange fee, the bank gets about 10 cents.

But if you use Apple Pay, the bank has to pay 3 quarters of a cent to Apple.

Rather than pocketing 10 cents on the $5 transaction, the bank would instead keep just over 9 cents.

On 1 small transaction, that doesn't seem like much.

Apple took in an estimated $782 million from Apple Pay last year.

Initially, it was like, well, you know, better to be on board with this and have our cards used in Apple Pay than be cut out completely.

Because if we don't play ball, what could happen?

Could Apple develop some other mechanism that cuts out cards?

Fees Apple collects from Apple Pay only make up about 1 percent of the company's revenue from services.

That includes things like the App Store, Apple Music and iCloud.

It's estimated that the amount Apple Pay collected nearly doubled between 2020 and 2022.

But it's not just money that banks are losing to Apple.

It's not good enough for the banks to be the underlying card that's used on 1 of these third party wallets.

Their concern is that once you lose that entire experience, it's just a slippery slope from there where eventually you'll have a tech company that is actually the lender and they don't need you behind the scenes.

And Apple Pay isn't the end of Apple's ambitions with consumer payments.

But we want to take the Apple Pay experience even further.

In 2019, it partnered with Goldman Sachs to create the Apple Card.

And in March, it began rolling out its own buy now, pay later program.

Apple's subsidiary, Apple Financing LLC, will be the lender, effectively taking over the role that many banks and other financial institutions would usually take.

And now that consumers are getting used to engaging with Apple for their payments, it doesn't seem so far-fetched, right, that consumers would be interested in engaging with Apple on a deposit account or some other type of payment mechanism.

And Apple spokeswoman declined to comment.

But banks have also introduced their own new tech in the last few years.

Many have rolled out tap-to-pay cards with similar technology to your phone that makes it just as easy to check out in-store.

Now, they're preparing to compete with Apple in online payments too, with a digital wallet of their own

This is a very clear-cut example where the banks have kind of had enough and are trying to figure out a very specific way to compete against Apple Pay and PayPal.

The new wallet will be operated by a company owned by these 7 major banks.

Pays will allow customers to access eligible debit and credit cards by entering an email, potentially speeding up the online checkout process.

Still, the banks will only succeed if people actually use it and merchants agree to accept it.

After all, this isn't the first time banks have tried to launch their own digital wallets.

Chase shut down its app, Chase Pay, in 2021, in part because of limitations with the iPhone, according to people familiar with the matter.

Talk about consumer behavior and shifting that behavior.

Right now people are very used to paying with Apple Pay, with PayPal.

There have been tons of wallets that have launched in different forms over the years and they fail.

As banks try to compete with their own digital wallet, tech companies are trying to create apps for more than just payments.

What is certain is that the battle between the banks and tech companies will continue, period, until a winner emerges.

Everybody is convinced that there will eventually be a small number of super apps that control consumer payments and financial services.

So now they're basically duking it out to figure out who it's going to be.


Speaker 0: When you pay for your morning coffee, do you reach for this? Or this? This is still what most people prefer, but digital wallets like Apple Pay, Google Pay, and PayPal have become more popular over the last several years, especially for online payments. And that's making the banks whose cards are in your physical wallet worried. As Chase CEO Jamie Dimon said about the growth of new financial technology in 2021.

Speaker 1: Absolutely. We should be scared about that.

Speaker 0: And Apple is 1 of big banks' biggest threats. Here's how the tech company is encroaching on traditional finance's territory, and how banks are gearing up to fight back.

Speaker 1: We've created an entirely new payment process, And we call it Apple Pay.

Speaker 0: When Apple Pay was introduced in 2014, it wasn't the first digital wallet, but it had a big advantage over its competitors, The iPhone.

Speaker 2: And now Apple Pay is activated on 78% of iPhones in the U.S. If you wanna use an iPhone in-store, it's very difficult to use a different wallet, like when you tap and pay at the register, than Apple Pay.

Speaker 0: It was also the only digital wallet that banks agreed to pay a fee for every transaction. Here's why. Banks make money on debit and credit card purchases from interchange fees, which merchants pay to the bank that issued your card when you shop with it. Those fees are usually 1-3% of your purchase when you shop with a credit card. So if you buy that coffee for $5 and your credit card has a roughly 2% interchange fee, the bank gets about 10 cents.

But if you use Apple Pay, the bank has to pay 3 quarters of a cent to Apple. Rather than pocketing 10 cents on the $5 transaction, the bank would instead keep just over 9 cents. On 1 small transaction, that doesn't seem like much. But it adds up. Apple took in an estimated $782 million from Apple Pay last year.

Speaker 2: Initially, it was like, well, you know, better to be on board with this and have our cards used in Apple Pay than be cut out completely. Because if we don't play ball, what could happen? Could Apple develop some other mechanism that cuts out cards?

Speaker 0: Fees Apple collects from Apple Pay only make up about 1 percent of the company's revenue from services. That includes things like the App Store, Apple Music and iCloud. But that number is growing. It's estimated that the amount Apple Pay collected nearly doubled between 2020 and 2022. But it's not just money that banks are losing to Apple.

It's name recognition.

Speaker 2: It's not good enough for the banks to be the underlying card that's used on 1 of these third party wallets. Their concern is that once you lose that entire experience, it's just a slippery slope from there where eventually you'll have a tech company that is actually the lender and they don't need you behind the scenes.

Speaker 0: And Apple Pay isn't the end of Apple's ambitions with consumer payments.

Speaker 1: But we want to take the Apple Pay experience even further.

Speaker 0: In 2019, it partnered with Goldman Sachs to create the Apple Card. And in March, it began rolling out its own buy now, pay later program. Apple's subsidiary, Apple Financing LLC, will be the lender, effectively taking over the role that many banks and other financial institutions would usually take.

Speaker 2: And now that consumers are getting used to engaging with Apple for their payments, it doesn't seem so far-fetched, right, that consumers would be interested in engaging with Apple on a deposit account or some other type of payment mechanism.

Speaker 0: And Apple spokeswoman declined to comment. But banks have also introduced their own new tech in the last few years. Many have rolled out tap-to-pay cards with similar technology to your phone that makes it just as easy to check out in-store. Now, they're preparing to compete with Apple in online payments too, with a digital wallet of their own

Speaker 2: called Pays. This is a very clear-cut example where the banks have kind of had enough and are trying to figure out a very specific way to compete against Apple Pay and PayPal.

Speaker 0: The new wallet will be operated by a company owned by these 7 major banks. Pays will allow customers to access eligible debit and credit cards by entering an email, potentially speeding up the online checkout process. Still, the banks will only succeed if people actually use it and merchants agree to accept it. After all, this isn't the first time banks have tried to launch their own digital wallets. Chase shut down its app, Chase Pay, in 2021, in part because of limitations with the iPhone, according to people familiar with the matter.

Speaker 2: Talk about consumer behavior and shifting that behavior. Right now people are very used to paying with Apple Pay, with PayPal. There have been tons of wallets that have launched in different forms over the years and they fail. They fail to gain traction.

Speaker 0: As banks try to compete with their own digital wallet, tech companies are trying to create apps for more than just payments.

Speaker 2: What is certain is that the battle between the banks and tech companies will continue, period, until a winner emerges. Everybody is convinced that there will eventually be a small number of super apps that control consumer payments and financial services. So now they're basically duking it out to figure out who it's going to be.

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Apple vs. Banks: The Digital-Wallet War, Explained | WSJ