Will Apple Pay Make Apple a Bank in the Eyes of the Government?
Apple unveiled several new products at its media event last week, including a 4.7-inch iPhone 6, a 5.5-inch iPhone 6 Plus, and multiple versions of the long-rumored Apple Watch. Apple also introduced Apple Pay, a mobile payments system that will enable all three of these new hardware products to function as digital wallets and allow users to pay for purchases via a contactless technology known as Near Field Communications (NFC).
As explained by Apple, credit or debit cards can be stored in the iPhone’s Passbook app by either entering the card number manually or by taking a picture of the card. After the card information has been verified, it is stored in a special Secure Element chip. For an additional layer of security, the iPhone will use a unique one-time code for each transaction. Apple Pay has already gotten backing from several major banks and financial institutions, including Bank of America, Capital One, Wells Fargo, Visa, MasterCard, and American Express.
Although it’s unknown how much Apple will make from each transaction, analysts such as Piper Jaffray’s Gene Munster have already hailed Apple Pay as “game changing” for the mobile payments industry. “I think the biggest part of today’s announcement was around payment,” Munster told Bloomberg soon after the media event. “We use it so many times a day and there’s so much friction in it and Apple’s in a unique place to take a lot of that friction out.”
While it’s possible that Apple Pay will revolutionize the way consumers make purchases, Apple’s latest business venture may also make it subject to federal financial regulations, according to at least one industry expert. In a recent post on financial news blog Credit Slips, Georgetown law professor and financial law specialist Adam Levitin argued that Apple Pay could make Apple a “service provider” as defined by the Consumer Financial Protection Bureau (CFPB). This would make Apple subject to CFPB scrutiny and unfair, deceptive or abusive acts or practices (UDAAP) statutes.
“I think there’s a reasonable case that Apple is a ‘service provider’ by virtue of Apple Pay,” wrote Levitin via Credit Slips. “A ‘service provider’ must provide ‘a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service’. Card issuers are covered persons, and Apple is providing a material service in connection with a consumer financial product — a credit card.”
So what does this mean for Apple? According to Levitin, not only would Apple Pay be subject to CFPB authority, Apple’s entire business would also be subject to UDAAP statutes. “Read literally, anything Apple does is therefore fair game for state AGs, and for private attorneys who use private rights of action under state UDAP statutes based on a predicate violation of the federal UDAAP statute (that does not contain a private right of action),” wrote Levitin.
On the other hand, Levitin noted that Apple is unlikely to face examination from the CFPB anytime soon due to “more urgent matters and limited resources.” It should also be noted that there are still many unknown technical details about Apple Pay that could make the service exempt from federal regulation. According to Apple’s website, the service won’t be activated until October.
Another reason for the uncertainty surrounding Apple’s possible status as a regulated financial institution is that the government has only recently started to scrutinize the mobile payments industry. Although mobile payments systems such as the Android-based Google Wallet have existed for years, the CFPB only launched an investigation into mobile financial services this past summer, according to The Hill. While the CFPB has not yet revealed if Apple will be subject to its authority, CFPB spokesperson Moira Vahey told The Hill that “Rules that apply to plastic card payments also apply to payments with a phone.”
While it remains to be seen if Apple Pay will spark a mobile payments revolution, the California-based company is rumored to be getting an “unprecedented” share of 15 cents per $100 transaction (or 0.15 percent), according to unnamed industry sources cited by the Financial Times. For this reason, Apple may consider the new regulations a small price to pay when compared to the overall benefit it will derive from its Apple Pay service.
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