Will Apple Touch ID-enabled mobile payments reduce interchange rates?
When Apple released an SDK for the Touch ID biometric feature on the iPhone 5s in June, the company opened the door for iOS app developers to use the authentication tool where they saw fit in their products.
We'll start to see those some of those creations in a couple of weeks when Apple releases an updated mobile operating system paired with a new iPhone.
But what Apple also did with the Touch ID SDK is unintentionally start a conversation about how the card networks should consider a cheaper interchange rate for Touch ID-authenticated mobile payments. This, in turn, will convince merchants to accept the different mobile wallets on the market today. Or so argues Markiyan Malko, the director of research and development for retail services provider Merchant Warehouse.
"It's hard for the wallet provider to go to Visa and MasterCard and try to get the same rates as a swiped transaction because inherently you could fake a keyed in transaction much easier than you can track data [on the physical payment card]," Malko told Mobile Payments Today in an interview not long after Apple opened Touch ID to app developers. "With Touch ID, which is more robustly secure, these mobile wallet providers are going to go to Visa and MasterCard and fight to be considered as a card-present transaction."
Malko admits such a crusade will be difficult, but believes this outcome is inevitable if the networks want to remain relevant.
"The whole NFC/EMV push is about being more secure. It is their play to stay relevant," Malko said. "They see the LevelUps, the bitcoins, coming down the line and eventually something will change their minds."
Malko's argument is not without merit.
Apple and Visa were rumored to be in discussions about an enhanced mobile payments system that could be announced when the tech giant introduces the new iPhone Sept. 9.
"I'm sure that this (cheaper interchange rates) has come up in those discussions," Rick Oglesby, a senior analyst and consultant for Double Diamond Group, wrote to Mobile Payments Today in an email.
But Ogelsby said not to expect interchange reduction on Touch ID transactions any time soon.
While Visa and MasterCard set the interchange rates, the banks who issue payment cards are the ones who benefit from those fees.
"When they make changes to interchange, it impacts the revenue streams of their most important customers (the issuers), so they aren't in a great position to make unilateral decisions on this," Ogelsby wrote.
Banks also might not be keen to let a third party handle authentication for their cards transactions.
"In a scenario where a third party validates the consumer's input (such as when you use your PayPal password to complete a PayPal transaction or when you use Touch ID to complete a transaction in the future), the bank is not involved in the authentication of the consumer," Ogelsby wrote. "So while you could argue that the banks should take a lower interchange rate for a more secure transaction, the banks can easily argue that they will only take a lower fee if they are involved in determining the security of the transaction.
"Most risk managers would feel pretty uncomfortable with validations not in their own control. In short, it would be a huge deal if the networks were to provide a break on interchange in a case where cardholder authentication took place outside of the networks and banks."
Such discussions, if they have not already happened as Ogelsby suggests, will probably not resume as soon as the new iPhone is released. Consumers still are not making widespread mobile payments for a number of reasons, the top one being a lack of abundant merchant acceptance.
"There's no rush for them to do it right now," Malko said. "But as more payment types start popping up and they start losing a bit of market share, their way to get it back will be to lower rates.
"Theoretically, all the interchange categories are based on risk. If you can feasibly prove to them that Touch ID is more secure than a keyed transaction, they should lower the rate."
But is Touch ID more secure?
Jamie Cowper, the senior director for transaction authentication company Nok Nok Labs, believes Touch ID mobile transactions will need to be paired with another authentication mechanism to ensure as much security as possible.
"The big driver with fingerprint authentication, or any kind of biometrics, is usability as much as it is security," he told Mobile Payments Today in an interview. "I think the challenge is that the jury is still out on if [biometrics] does materially reduce fraud versus what has been done before."
Even if the interchange reduction rate conversation is not on the table at the moment, Cowper and Malko agree Touch ID should be a boon for all types of mobile transactions and not just at merchants' point-of-sale terminals.
While Visa and MasterCard are trying to reduce consumers' heartburn at the mobile checkout with their respective digital wallets, Touch ID presents a simple interface that's as easy as pressing a button without having to remember login information.
"I think what we'll absolutely see is a much higher percentage of completed transactions," Cowper said. "If you can reduce [the checkout experience] to a simple swipe, or a touch and a PIN, you're really cutting it down.
"User experience testing shows that's very attractive for people. It reduces that friction for them."
A better user experience could lead to more mobile wallet adoption from consumers, Malko said.
"Touch ID can improve the experience on the consumer side," he said. "I think we'll have that hurdle for now on the merchant side (widespread acceptance) until that [interchange] cost comes down."
Photo courtesy of Kārlis Dambrāns.
Will Hernandez Will Hernandez has 14 years of experience ranging from newspapers to wire services and trade publications. Before becoming Editor of MobilePaymentsToday.com, he spent two years as the content manager for PaymentsJournal.com, a leading payments industry news aggregator and information hub published by Mercator Advisory Group. Will spent four years covering the payments industry as an associate editor for multiple publications in SourceMedia's Payments Group based in Chicago.