ApplePay User Review: The Default Card process and Top of Wallet Implications.

Last week, First Annapolis Consulting released “Tracking Apple Pay: 11//13/2014. First Annapolis has been tracking Apple Pay and keeping their professional community informed. The key focus of this review is to outline how consumers enter and select payment cards; the “Default Card Process”. I was intrigued by the implications of the review. Most intriguing is how the Default Card Process alters the relationship between the consumer, their default card and “Top of Wallet” position. Top of Wallet position is one of the most significant factors when a consumer chooses a method of payment. If ApplePay impacts which method of payment a consumer chooses by virtue of the “user experience” and the “default card feature”, then many new questions arise. Perhaps the most important question is how this alters the consumer payment relationship and fees between the issuers and merchants. As importantly, since ApplePay charges the issuer and controls the user experience, could this create a new layer of competition between issuers for the Top of Wallet Position? The obvious result is higher transactions fees.

Setting out to understand how ApplePay and the User Experience might alter the consumer’s payment behavior requires actually using the product and for that I turned to one of my mist trusted associates, Mile Kuzel, Client Solutions Executive, Toth Consulting. Mike was good enough to listen to my questions. He agreed to help out on this blog, here is his review. I’ll look forward reading about your experience with ApplePay.

Mike Kuzel: My ApplePay Adventures, Part I

I’m an admitted tech geek and willingly drink the Cupertino Kool-Aid. I’m also a professional in the retail technology field with some experience in the mobile payments world. My motivation to get the iPhone 6 was in no small part because of ApplePay and the promise of a world class mobile payment / digital wallet user experience from the people who make things I love to use and want to use all the time.

Once ApplePay launched I scanned my cards into my iPhone 6’s Passbook and the first card was a Delta SkyMiles AMEX, which went in automatically as my default. Then I loaded a Citi MasterCard Credit Card and lastly my USAA MasterCard Debit Card that is tied to my checking account.

I was ready to experience the future! My first stop was Walgreens, as I needed some allergy medicine. I approached the counter; handed the item over, presented my Walgreens loyalty card (from Apple Passbook of course) and that first beep sounded a lot like “Gentlemen, start your engines!” to me. The cashier then rang up my item…beep! Now was the moment I’d been waiting for, my inaugural ApplePay transaction. I touched the phone to the pin pad and the iPhone presented the picture of my default AMEX and the prompt to hit Touch ID. Thumbprint and done! It was easy and quick and it felt as great as I imagined. Over the coming weeks I repeated this process a few more time at Walgreens, once at Office Depot and ApplePay life was good. Then came yesterday. The day I decided I wanted to pay with a different card than my default AMEX. I made this decision, quite normally, at the checkout while my items were ringing up at my local Whole Foods. My glorious happy “Apple is Awesome” song playing on loop in my head hit the proverbial record scratch moment and ApplePay fell back to earth for this user.

The cashier was almost finished scanning. Beep, beep, beep… I’d made my decision to use my checking via my USAA card loaded into my ApplePay. I hit the card in my Passbook to pick it and assumed that would do the trick.

“That will be $21.41 sir” I’m not sure when I graduated to sir but I’ll take what pleasantries I can get these days in the world of retail service.

“Sure thing let me just…” I hit the USAA card picture one more time in the Passbook app then touched the phone to the pin pad. I fully expected another awesome ApplePay transaction. Wait…“Hmmmm”… the AMEX, not the USAA card presented itself as payment on the screen. My inner voice that normally whispers seemed to yell at me “does not compute”!

I’m standing there a little confused and politely asked for just a second longer. I glance behind me and realize the woman queued up next had noticed my inability to pay quickly. You’ve all experienced the body language of judgment upon holding others up in a grocery line, no? I fumble with the phone. Home button, go to settings… let’s see…where is it? Oh yeah “Passbook & ApplePay” I’ll just hit that, pick my card and all good. Not perfect but can’t be harder than that right? I mean this is Apple, their stuff just works! Bingo! I see all the cards listed I hit the one I want and it takes me to a screen to either open my USAA app or remove the card… nope…that’s not what I need to switch payment. Tick, tick, tick… already way to long for a normal checkout. Body language lady behind me has shifted into the verbal realm, “Why don’t you just pay the old fashioned way?” I laugh at what I presume is humor and agree with her that she might be onto something there. I’m determined to do this now, if for no other reason than geek pride. My neighborhood legacy shall not remain Whole Foods ApplePay version of the Star Trek “redshirts”!

Now I’m back to settings. How do I switch cards…? Aha! “Default Card” maybe I make the choice there. Thumb of fury… tap, tap, tap and I pick the USAA card which actually changes my default card. This is different from what I expected or wanted and a seemingly extreme measure, so final, but I’m already on borrowed time. I back out of screen and hold the phone to the pin pad feeling a little like a gambler on his last bit of luck “just one last bet”. Jackpot! The USAA card picture shows on the iPhone. I Touch ID and on I’m finally on my way. Walking out I’m a little bewildered and frustrated by the user experience cooked up by the normally on point Apple folks.

I wasn’t timing the transaction yet by any measure it took way too long to pay simply because I chose to use a different card. I’m tech savvy and an early adopter; I knew intuitively what steps I should be looking to take to solve this issue but what about the general public using Apple Pay? Would they give up and pay with cash or a card from their wallet or just keep the default even though it wasn’t their desire?

My experience with switching cards for payment in ApplePay proved less than stellar, as it was too clunky and involved with too many steps. Critics might say now that I know the process it will prove faster and they’d be correct yet they’d be missing the proverbial point, it shouldn’t be that cumbersome.

If Apple has designs on Passbook as a true digital wallet, and all signs point to that, then they need to rethink how it works. I’m focused on user experience here, which doesn’t even touch the implication for who gets and how they get the coveted “top of wallet” status in the digital wallet. I believe the success (and by that I mean adoption by actual people) of mobile payments via digital wallets rides on user experience. A poor design could stunt enthusiasm as more people make the natural choice to use another card from their ApplePay wallet and wonder why it’s so much harder than the old fashioned way.

“For their return home, the Greeks dedicate this offering to Athena”. Apple Pay and increased mobile payment fees.

The Blogosphere has been alive with information on mobile payment and Apples introduction of Apple Pay. The flame-out of PayPal Off-line, Google, Amazon, ISIS (or whatever), and MCX (whenever) have the experts writing and talking about how, when and where mobile payment will become common place.

Enter Apple. While Apple may indeed be the first broad based mobile wallet to achieve consumer adoption, Retailers will remember Apple as Odysseus’ and Apple Pay as a wooden horse bearing higher payment fees. New fees may start arriving in the first statements and no doubt merchants will be asking about the tokenization, wallet storage and API fees. According to legend, “after a fruitless 10-year siege, the Greeks constructed a huge wooden horse, and hid a select force of men inside. Once inside the walls of Troy, the Greek force crept out of the horse and opened the gates to allow the Greeks to enter and destroy the city of Troy.” A fruitless siege might be a good way to describe the tug of war between retailers and banks; abetted by the technology, to describe the painful march to mobile payment. Apple brings scale and technology, but it is their Trojan Horse approach to payments fees and merchants opening the doors to Apple Pay seems eerily like the Troy opening it gates.

Apple deserves applause for devising a strategy that hides their transaction costs within the issuer as a share of interchange rather than charging the merchant directly. Herein the lies the “Trojan Horse” and the promise of higher fees in the future. Published reports indicate Apple will be paid 15 basis points by the issuer (Banks). Retailers need to ask themselves, how long before this cost is shifted to the merchant by way of a higher acceptance fees? My guess, about the same time Apple reaches 10 million Apple Pay consumers.

The big unknown is how high will fees go? The answer is as high as possible. Merchants often say there is little competition in the card fee world and therefore it’s a monopolistic business. Apple Pay can only add cost and another partner that needs to earn profit. 20 years ago banks convinced retailers to accept card based payment using low fees, the results are clear. As merchants open the gates and let Apple Pay in, they should hardly be surprised when Apple Pay is earning 100 basis points rather than 15, and it won’t be the issuer paying the bill.

Lower fees get the headlines, but might not be the story. Why multiple unaffiliated networks is the real bombshell in Judge Leon’s decision.

Groucho Marx once said that “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Judge Leon might have been better served had he considered the wisdom in Marx’s thought before his recent ruling throwing out the current Fed’s implementation of the Durbin Amendment.

When Judge Leon threw out Durbin saying “The Board has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction” he may have opened the legislation to a potential flaw that might just make implementation of Durbin impossible

In an August 13 article published in American Banker called “Damage to Banks from Debit Card Ruling Goes Beyond Lower Fee Cap”, Kevin Wack writes “Perhaps just as significant, but less discussed, the judge also ruled that retailers must be given the choice of routing each signature debit transaction, as well as each PIN debit purchase, over at least two card networks.” Kevin is correct, fees impact the economics of the transaction, but like the highs costs of implementing EMV, multi-homing has technical implementation costs far beyond the cost of the transaction. I covered this this issue in this blog, January 2011, “Who gets to choose? Durbin’s provision on “multi-homing” and the prohibition on network routing exclusivity” Here is the issue. I asked a well know expert this question: what makes multiple unaffiliated networks a complex requirement? His answer: “most retailer’s payment systems route transactions based upon the Bank Identification Number or BIN.  They do not have the ability to make different routing decisions if a PIN is present or not.  Additionally, a lot of smaller merchants do not have direct connections to networks but instead route the majority of their traffic to a merchant acquirer who then will determine how the card needs to be authorized based upon processing agreements that retailer has in place.  While the concept of allowing networks to compete for the same card traffic sounds attractive, from a practical matter it is far more complex.  And as raised in the most current legal opinion, the ability to route between non-affiliated networks needs to be at the transaction level, not the card level. “

I wanted a bit more granularity and so another source tells me that “Although most retailers do not connect directly to debit networks, there is nothing other than cost that prevents them from doing so. As EMV comes into the US domestic market and each Debit Issuer is tagged with their own network EMV AID(application identifier on the Chip), we may see more large scale retailers choosing to connect directly with their network of choice. A lot of stuff is up in the air right now. The next 10 months will be very exciting in terms of the number of changes coming to the debit networks above and beyond Judge Leon’s judgment. I doubt if the Federal Reserve or Congress will be able to keep up with everything that is happening in this space in the interim.”

So, Judge Leon concluded that the Fed must allow retailers the choice of two unaffiliated networks for each individual purchase — whether the consumer elects to make a signature or PIN debit transaction, never mind the costs or complexity of making it so. I come way feeling like Judge Leon clearly does not understand how routing actually works especially for small merchants.  He seems to believe there is a “Payments Genie” and that rubbing the lamp makes payments happen. The intuition is easy, but the way this actually works as a technical matter I think is a mystery to people.