Android Pay: Free for Credit Card Issuers, Apple Pay in Trouble

Google's new mobile phone payment service, Android Pay, will not earn any transaction fees from credit card companies. This move might put pressure on Apple Pay which has been growing steadily in the US since its launch. This move might compel Apple to drop or lower its charges, which eventually means a lower margin per transaction for Apple.

Apple Pay, the profound wallet system in the US, charges 0.15% of the transaction value from credit card companies. The company also collects half a cent per purchase on bank debit cards.

Google will not be generating any revenue from transaction fees because Visa Inc. and MasterCard Inc.—which operate the dominant payment networks—have standardized their tokenization card security services and made them free. This prevents payments services from charging fees to issuers.

There is one agreement with Visa and the banks can have confidence that there are no pass-through fees, said Visa President Ryan McInerney to The Wall Street Journal. Banks and payment services can make other deals including fees, such as marketing arrangements.

Visa unveiled its tokenization service on May 28, the same day Google announced Android Pay. The payments system from Google has already signed on to Visa’s service and the new rule is expected to bring changes in the system. Many senior executives of banks have already shown some displeasure with sharing fees with Apple. Few even went on to say that they may use Google’s no-fee arrangement to persuade Apple to alter its deals. Many of Apple’s contracts are for three years, so roughly two years are still left. The new rule has a high chance of affecting deals between Apple and banks. Moreover, Apple Pay has now planned to expand overseas and it looks like that it will have a hard time to negotiate terms with banks.

The new rules set by Visa look like a blow to Google which has been negotiating with large banks regarding the cancellation of transaction fees. Although it looks like that Google missed out the chance of earning revenue from transaction fees, if we dig deep into the matter, we find that it’s actually an advantage for Android Pay. Without fees, more card issuers may join Android Pay. Standardizing the rules will help mobile-payments grow, said Chief Emerging Payments Officer at MasterCard Ed McLaughlin to WSJ.

The payment system from Google also plans to offer coupons, rewards and loyalty programs to consumers through Android Pay in partnership with issuers and retailers. If all these initiates succeed, Google will be earning much more revenue than a cut of transaction fees.

Samsung’s payment system—which is also Apple Pay’s biggest rival— is expected to launch in September. The rules framed by Visa will also affect the payment service developed by the Korean smartphone manufacturer.