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Weighing mobile wallet competition as EU targets Apple Pay

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Weighing mobile wallet competition as EU targets Apple Pay

The European Commission believes Apple Inc. must change its app store practices or potentially risk heavy fines, but industry experts are unsure whether the commission's actions are needed.

The commission's competition authority issued a statement of objections May 2, claiming the consumer electronics giant illegally blocked third-party app developers from using near-field communication, or NFC, technology, for their mobile wallets. Apple Pay is the only mobile wallet that may access the necessary NFC input on iOS devices like the iPhone and iPad to enable contactless payments.

"We preliminarily found that Apple may have restricted competition, to the benefit of its own solution Apple Pay. If confirmed, such a conduct would be illegal under our competition rules," said Margrethe Vestager, head of the commission's competition policy authority, in prepared remarks.

Apple quickly denied the allegations.

"Apple Pay is only one of many options available to European consumers for making payments, and has ensured equal access to NFC while setting industry-leading standards for privacy and security," a company spokesperson told S&P Global Market Intelligence. "We will continue to engage with the Commission to ensure European consumers have access to the payment option of their choice in a safe and secure environment."

Dominance vs. competition

Though the mobile wallet marketplace remains competitive, some experts disagree on whether the European Commission's latest actions will bolster or stymie future innovation.

"The European Commission is trying to make this argument that Apple Pay or Apple is in some sort of dominant position here that it's abusing," said American Enterprise Institute senior fellow Mark Jamison. "If it's abusing it, it's not doing it very well. Some of these other companies are being quite successful."

He pointed to PayPal Holdings Inc. as the most-downloaded payment app in the world during the first half of 2021, citing data from Apptopia.

The European Commission's efforts to spur competition and innovation may end up having the opposite effect, he warned. The risk of regulation creates a disincentive to develop new features if government officials will force them to relinquish their intellectual property to their competitors, Jamison said.

"Companies build things with a business plan that makes them willing to invest in these features," Jamison said. "For the government to step in and say, 'Oh, no, I'm going to take control of this' really discourages innovation going into the future."

Opening the door

NFC is a communication tool and not a payment protocol or piece of intellectual property, said Chris Meserole, a foreign policy fellow at the Brookings Institution and director of research for the Brookings Artificial Intelligence and Emerging Technology Initiative.

He also objects to Apple's long-held argument that it limits third-party access to contactless payments in order to increase security.

"It's entirely possible for a third-party provider to write an app that also has access to NFC that also kind of addresses most any kind of security concerns," Meserole said.

Other prominent tech companies have been eager to capitalize on the digital payments realm of the fintech space. Alphabet Inc.'s Google Pay and Samsung Electronics' Samsung Pay are NFC-enabled contactless mobile payment apps that allow users to pay at public transportation turnstiles or grocery store checkout registers by hovering their Android device over a payment terminal.

Additionally, other alternative payment methods like Zelle, Venmo, PayPal, Google's Android and Samsung could utilize sideloading apps to leverage NFC technology to create a more competitive mobile payment marketplace, Meserole said. Sideloading, which Apple does not allow, gives users the option to install apps from third-party app stores.

"The more choice consumers have, the more likely it is consumer demands will be met," Meserole said.

Apple's price to pay

Following the statement of objections, Apple will have a period of time to respond and request a meeting. If the competition authority decides to issue an enforcement action, Jamison said the most likely mechanism would be large fines.

Under EU competition law, fines can reach as much of 30% of a company's relevant sales, depending on the seriousness of the infringement, In this case, that would represent the revenues from Apple's mobile wallets and related services, a Commission spokesperson told Market Intelligence. The fine is capped at 10% of the overall annual turnover of the company.

Notably, the company's battle with European regulators is being fought on multiple fronts.

The company is also facing the Digital Markets Act, a forthcoming EU law that aims to regulate online platforms. Among the law's many provisions, it would ban major online platforms from self-preferencing, where tech companies promote their own products over those of competitors. Apple would no longer be able to give preference to its own app store, and thus would have to allow sideloading.

Apple CEO Tim Cook called the practice a threat to Apple and its consumers at a privacy conference last month.

"When you start to do things like sideloading, you start to create risk of new security and vulnerabilities," said Futurum Research principal analyst Daniel Newman. He called the regulatory environment a growing threat to tech and social media companies, arguing that consumer experiences could be harmed.

"Consumers are happy with platforms. They're more secure. They're simpler to use," he said.

Wedbush analyst Dan Ives in a statement to Market Intelligence said Wall Street analysts have not weighed the latest case heavily but that its risk to Apple and other tech giants will grow over time.