Aug 11, 2019

The Apple Card, like checks and Venmo, fails the instant payments test

Felix Salmon, author of Edge

Illustration: Aïda Amer/Axios

An ideal payment mechanism should do 2 things: It should take place in real time, and it should clear at par.

That's how cash works. If you give me $50 in cash, then I immediately become $50 richer, and you immediately become $50 poorer.

  • Checks fail the test: They clear at par (the amount you pay is the same as the amount I receive), but they can take many days to do so. Much the same thing happens when you transfer money from Venmo to your bank account.
  • Venmo Instant Transfer also fails the test: If I use it to move money from my Venmo account to my bank account, the transfer happens immediately, but the amount I receive will be 1% lower than the amount I send.

The new Apple credit card became reality this week — but, like all credit cards, it too fails the test. Getting the card onto your phone is easy, but if you pay a merchant $100, they receive significantly less than $100.

  • The Apple Card is a "World Elite" Mastercard, which carries the highest possible interchange fee in all circumstances. That fee, which can range as high as 3.25% plus 10 cents, is taken off the top of any payment before the merchant receives anything. The fee is the same whether you use the physical Apple Card or the virtual one on your phone.
  • The Apple Card is the first card without an annual fee to get World Elite status, payments consultant Richard Crone tells Axios. And it's almost certainly the first to get issued to subprime borrowers.
  • Apple controls about 2/3 of all contactless payments in the United States, estimates Crone — which means that if the Apple Card starts to dominate the Apple Pay ecosystem, contactless payments in general are going to be very expensive for merchants.

Everybody loves instant payments. As rapper A1 told the WSJ: "In this industry, you got clubs. You got bottles. You got models. You have strippers. They want to get paid right away." But the instant payments system built by some of America's largest banks, known as RTP, has struggled to gain traction. Even if banks have it, they don't tend to use it.

Driving the news: The Federal Reserve announced its own instant payments system this week, which is due to arrive in "2023 or 2024." What happens then is anyone's guess.

  • 25 countries already have instant payments, including the U.K., Switzerland, India and China. There, the fast-and-on-par ideal is already a reality. Will American banks similarly embrace a system that allows anybody to send money from any bank account to any other bank account, immediately and at par, without the recipient having to sign up for anything? I'm not holding my breath.

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