Billions In Revenue: How Does Apple Pay Make Money?

Executive Summary:

Apple Pay is a contactless payment technology that allows users to pay for goods and services with their iPhone, iPad, and Apple Watch.

Apple Pay makes money by charging a percentage fee to its banking partners and by imposing fees on instant transfers.

How Apple Pay Works

Apple Pay is a contactless payment technology that allows users to pay for goods and services with their iPhone, iPad, and Apple Watch.

The service is made possible thanks to near field communication (NFC) chip that has been implanted in the iPhone 6 and newer models. Said chip then wirelessly communicates with the point-of-sale (POS) terminals used by merchants.

Apple Pay already comes pre-installed on all Apple devices. In order to access it, users need to simply link their debit, credit, and prepaid cards to Apple’s Wallet app. The first card listed in the Wallet is the user’s default payment card.

Once the card is linked, people can use it to pay for both online and offline purchases. Accessing Apple Pay is ultimately dependent on the device model. iPhone 13 users, for example, need to double-tap the Power button on the right to activate Apple Pay.

Furthermore, Apple has implemented various guardrails to secure your financial and personal information. First of all, users can only pay when they bypass Apple’s biometric authentication, whether that’s Touch ID or facial recognition.

Apple Pay also utilizes an encryption technique called tokenization. Instead of transmitting your card’s account data, merchants receive a tokenized number that can only be accessed via a dynamic security code (which changes with each transaction).

Apple, apart from its Pay feature, has introduced ancillary financial products in the past as well. For instance, it launched an Apple-branded credit card in partnership with Goldman Sachs back in 2019.

Moreover, in 2022, it introduced a Buy Now, Pay Later (BNPL) service dubbed Apple Pay Later, thus allowing customers to pay over the course of several installments.

Finally, it has to be noted that Apple Pay can only be used within iOS-compatible devices. As such, Android users are excluded from accessing the service.

Detailing Apple Pay’s History

Apple Pay was first introduced during the company’s iPhone 6 event on September 9th, 2014. However, a major change like this has obviously been in the works for much longer.

The mobile manufacturer, as early as 2007, filed patents related to Apple Pay. That year, Apple filed a patent for a product called iTunes Kiosk, utilizing a technology called Millimeter-Wave to wirelessly transmit payment and other types of data.

By 2011, the rumor mill finally began to accelerate. Various media outlets pointed out that Apple was contemplating incorporating NFC chips into its newest models. At the time, most of the world’s most popular devices had already implemented said chips into their devices.

Still, Apple, much like with other innovations, took its sweet time to see how those new technologies unfolded. Meanwhile, many merchants did not utilize NFC-enabled terminals as the cost of purchasing and maintaining them was high – while mobile adoption was still somewhat limited (but accelerating rapidly).

Simultaneously, inserting the NFC chip would also increase the iPhone’s manufacturing cost by hundreds of millions of dollars, which would either require Apple to increase the prices of the phone (thus potentially hampering adoption) or incur additional losses.

Nevertheless, Apple already wanted to get users acquainted with the thought of having a mobile wallet. Back in June 2012, it introduced a new app called Passbook as part of its iOS 6 rollout.

Passbook, which essentially acted as a digital wallet, enabled users to store gift cards, boarding passes, and so forth. Unfortunately, due to the unavailability of NFC-related hardware, credit and debit card information could not yet be stored and used for payments.

Over the coming years, Apple continued to file a variety of other patents related to the Pay feature and hire payments experts. Meanwhile, Apple began negotiating with payment providers such as Mastercard and Visa as well as major US banks to determine who gets what slice of the pie.

By the beginning of 2014, Apple CEO Tim Cook himself started to point out the possibility of integrating payments into the phone, saying that it was an idea that “intrigued” the company.

That idea finally became reality when, in September 2014, Apple president Eddy Cue introduced Apple Pay for the first time during the firm’s yearly keynote event.

Reportedly, the banks that Apple partnered with were using a code name to keep the project a secret. Many of their own employees working on the project didn’t even know it was Apple.

At launch, Apple Pay worked was only available in the United States, where it could be used at over 220,000 merchants nationwide. Around 83 percent of all card issuers in the country committed to enabling Apple Pay.

But, as previously stated, not all merchants were. Best Buy and Walmart, for example, did not accept payments using Apple Pay. The two retailers, as well as a slew of other big names, pledged their allegiance to a retailer-owned mobile commerce network called Merchant Customer Exchange, which worked on a QR-based payment system.

Luckily, the banks themselves did their best to nudge customers to adopt Apple Pay. Wells Fargo, for instance, reimbursed customers for $20 simply if they gave Apple Pay a try.

And since distribution and availability is the name of the game in payments, Apple focused on getting the payment product into as many hands as possible. Throughout 2015, it expanded into the U.K., Canada, and Australia, mostly thanks to its partnership with American Express (local banks eventually followed suit).

Unfortunately, not every bank and country seemed on board. In late 2015, reports emerged that Australia’s Big 4 banks coordinated with each other and collectively opted against a partnership with Apple. 

The phone manufacturer even accused them of acting like a “cartel” while arguing that their demands would pose a serious security risk to iPhone users. In short, the banks wanted to bypass the Apple Pay app and instead develop apps of their own that would take advantage of the phone’s NFC technology. Android Pay, now known as Google Pay, did not impose such limitations on said banks.

Finally, in November 2016, the Australian Competition and Consumer Commission ruled that the banks were prohibited from collectively negotiating with Apple, which they requested a month prior.

Banking Group, one of the Big 4 banks, already had backed out of the proposed plan and struck a separate deal with Apple, thus leaving the remaining banks with less negotiation power.

Nevertheless, the issues in Australia didn’t stop Apple from bulldozing the product into other countries. By the end of 2016, Apple Pay had been launched in over a dozen countries including China and Spain.

The expansion of Apple Pay was just a matter of time since every new phone model, plus the iPad and Watch, would have NFC technology incorporated into the device.

As a result of Apple’s growing payment business, it began to break out what it calls Service Revenue, which also entails income from the App Store, iCloud, and other offerings, in August 2017.

Months later, Apple rolled out its Cash product, thus enabling users to send each other money free of charge. The product would not only compete with the likes of the Cash App and Zelle but suck users even more into Apple’s own app ecosystem.

Nevertheless, CEO Tim Cook did not seem content with the adoption of Apple Pay. “Mobile payments have taken off slower than I personally would have thought if you asked me sitting here a few years ago,” he said as late as 2018.  

Merchants still seemed to be hesitant to adopt the technology (more on that in the next chapter) while users continued to be educated about its advantages.

Brute forcing its way into more countries while incentivizing adoption with dozens of discounts seemed to be Apple’s strategy when it came to payments. Within two years, Apple had essentially tripled the availability of Pay from around a dozen countries to almost 40.

Europe, in particular, seemed to be a key market. During the summer of 2019, for instance, Apple launched in 13 new markets including Portugal, Romania, Slovenia, and Slovakia.

Unfortunately, not everyone seemed to be pleased with that expansion. In October 2019, European antitrust regulators began questioning online retailers whether they were contractually obligated to use Apple Pay over rival services.

However, it took almost another year for those investigations to become reality. In June 2020, it was revealed that the EU’s competition commission launched two probes into Apple around anti-competitive practices regarding the App Store and Apple Pay.

The commission argued that Apple acts as a gatekeeper by limiting access to those products and refusing to open them up to outside developers. Apple itself argued that security would be severely compromised if it were to open up its ecosystem.

Other governments, such as the Netherlands’ or Australia’s, followed suit with investigations of their own.

Meanwhile, unlikely worldwide developments greatly accelerated the adoption of Apple Pay. The coronavirus pandemic led to a shift in consumer behavior as fewer people were willing to wait in long bank lines or even had temporary worries about touching cash.

“Apple Card is doing well and Apple Pay is doing exceptionally well, as you can imagine in this environment people are less [willing] to hand over a card,” Cook said during its Q3 earnings call in October 2020.

In the meantime, Apple continued to double down on what works, which was to expand into other markets. Throughout 2020 and 2021, Apple primarily launched Pay in countries across Central Asia and Latin America.

Additionally, Apple unveiled its BNPL solution during the summer of 2022, which ultimately went live in September. The firm also launched Tap To Pay, which allows merchants to turn their Apple products into payment terminals.

Today, Apple Pay is available in more than 70 countries across the globe while facilitating transactions worth trillions of dollars every year.

How Does Apple Pay Make Money?

Apple Pay makes money by charging a percentage fee to its card-issuing partners and by imposing fees on instant transfers.

The overwhelming majority of the revenue that Apple derives from payments comes in the form of the 0.15 percent fee that it charges to the issuer of the card.

On top of that, regular credit card processing fees (between 1.15 percent + $0.05 to 3.15 percent + $0.10) are applied as well and consequently paid by the merchant accepting the payment.

As previously stated, distribution is the name of the game here. The more people activate and use Apple Pay, the more the phone manufacturer will make.

Apple has done a variety of things to boost adoption in the past. First and foremost, the release of new NFC-enabled devices automatically increases user numbers as old non-NFC devices get swapped out with enabled ones.

There are currently 1.8 billion active Apple devices, most of which were likely purchased after Pay launched in 2014.

Secondly, Apple boosts adoption by expanding into new markets. It often does so with the help of local banking partners, which themselves nudge customers to try out Apple Pay (as they make money on the credit card processing fees and are thus incentivized to make it as easy as possible for customers to pay).

For example, Apple previously announced a partnership with neobank Revolut. In 2019, it was Revolut itself that brought Apple Pay to 16 additional markets that the challenger bank was operating in.

Third, Apple and its partners, whether it’s banks or retailers, often incentivize customers to join by offering various discounts – whether it’s cash for sign-ups or percentage discounts on purchases.

The biggest challenge according to CEO Cook is to raise awareness and teach customers how to use the product. By offering them different incentivizes, consumers are much more likely to give it a try.

And once they get accustomed to using Apple Pay, it is highly unlikely that they switch back to a physical card or even cash.

Another, albeit much smaller, revenue stream is the fee that Apple charges for instant transfers within its Cash product.

Cash, much like Venmo, allows you to transfer money to another user free of charge. Apple Cash is a virtual card that allows users to send and receive funds within iMessage or Wallet.

When transferring money from their Apple Cash card, users can either retrieve it from their bank account (which takes 1 to 3 days) or access Instant Transfers to immediately send funds to a partnering Mastercard or Visa debit card.

Apple consequently charges a fee of 1.5 percent to anyone using Instant Transfer. The minimum fee paid is $0.25 while the maximum is $15.

Introducing ancillary products that it can then monetize is part of Apple’s platform business model strategy.

At its helm are the devices, most notably the iPhone, it sells. Those devices then act as a quasi gateway into other products that Apple can monetize. The unit Pay falls under is now referred to as Services.

For example, Apple generates income from the App Store (charging a fee to developers), iCloud, the gaming arcade, Music, Apple TV+, and Apple Care, on top of payment fees.

Apple’s business model is thus shifting from relying less on hardware sales growth and instead squeezing out more revenue from devices that are in use. To that extent, Apple has introduced various software updates that extend the shelf life of its devices.

This shift is particularly evident when looking at its previous business practices. In 2020, Apple was fined $113 million related to throttling performance on older devices (a case known as Batterygate).

Interestingly, that ecosystem approach has been carried over to its payments division as well. Apple’s payment products not only include Pay and Cash but also Pay Later (BNPL) and Tap to Pay (turning the iPhone or iPad into a payment terminal).

Pay Later and Tap to Pay are currently not monetized in order to boost adoption. However, it is likely that Apple will turn on the dial once those become ubiquitous (i.e., customers are accustomed to using the product, leading to additional business for merchants).

For example, Apple could introduce merchant fees and interest fees to its BNPL product. After all, this is how leading BNPL firms like Affirm generate most of their revenue.

Similarly, Apple could charge merchants for its payment terminal as well. For reference, the standard processing fee of Square is 2.6 percent, plus $0.10.

The single biggest advantage for merchants is that they wouldn’t need to pay for an expensive terminal and simply could use an Apple device they already have in possession.

Questions of anti-competitive practices continue to loom over Apple’s payment and other divisions. However, it cannot be denied that payment fees have become a significant part of its revenue mix and the reason why both analysts and customers remain bullish on the company.  

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.