Apple Pay under Competition Law scrutiny

In October 2019, it was reported in the press that DG COMP had opened a competition law investigation against Apple in relation to its Apple Pay service. While no information is publicly available on the exact subject-matter of that investigation, we believe that the issue of the so-called "NFC antenna" in iPhones is a part, if not a major part, of that investigation. 

In this article, we deal with some of the competition law issues that have been raised over the years in relation to Apple Pay, and discuss some of the issues that, we believe, must be discussed as part of the Apple Pay investigation. But first, we explain, in layman's words, how contactless mobile payments work, and what the technical issue around the iPhone NFC antenna is.

Mobile payments: how does it work?

One way for a mobile payment to take place consists in the buyer scanning with the phone's camera a QR code displayed by the merchant. This is, for example, how hundreds of millions of WeChat and AliPay payments take place each year in China. However, outside of China and a few other countries, mobile payments with a QR code are generally considered as sub-optimal in terms consumer experience as well as security.

Instead, in Europe, most mobile payments are based on the contactless or Near Field Communication (NFC) technology, which is the technology that is also used to make contactless payments with a plastic card. In order for a mobile contactless or mobile NFC payment to happen, we need:

  1. To turn the plastic card into a digitalised or dematerialised version of the card, called a "token", that is stored either on the phone (e.g. in the secure element (SE) on iPhone) or in the cloud; and

  2. We need that token to be able to "speak to", or exchange with, the merchant's contactless terminal through the (NFC) antenna (or chip) in the phone. 

The Apple "lock" of the iPhone's NFC antenna

To our knowledge, all main phone manufacturers have left the NFC antenna "open", meaning that a card/token stored in any e-wallet on the phone (e.g. a bank e-wallet) will be able to access that NFC antenna in order to perform mobile contactless payments... except Apple. 

Indeed, Apple has "closed" the NFC antenna in the iPhone, meaning that only a card/token stored in the Apple Pay e-wallet on an iPhone is able to access the NFC antenna and therefore communicate with a contactless terminal. A card/token stored in another e-wallet on the iPhone (e.g. a bank wallet) does not have access the NFC antenna and therefore cannot be used to make a mobile contactless payment. 

As a result, if a card issuer wants to offer to its customers the possibility to make mobile contactless payments with their iPhone, that issuer needs to enter into an Apple Pay agreement with Apple, that will allow the cards it issues to be loaded into the Apple Pay e-wallet, and can then be used to make mobile contactless payments. It is also our understanding that the Apple Pay standard agreement is pretty much imposed by Apple on card issuers on a "take it or leave it" basis. In particular, that standard agreement requires that:

  • The card issuer pays a fee to Apple in relation to each payment taking place through the Apple Pay wallet (in economic terms, and for the readers familiar with the concept of "interchange fees", this means that economically the card issuer has to share its (regulated) interchange fee revenue with Apple). 
  • The card issuer is not allowed to pass-on the fee paid to Apple to its customers, at least not on a one-for-one basis.
  • Apple is allowed to make use of the data related to Apple Pay transactions.

For a few years now, issuers have been more and more vocal about the fact that the lock applied by Apple on the NFC antenna was a measure adopted by Apple in order to monetise payments. Indeed, if Apple had not placed that lock on the NFC antenna, but was nonetheless seeking to charge a fee to card issuers, one can assume that issuers would encourage their customers to provision their card/token into another wallet on the iPhone than the Apple Pay wallet (e.g. a bank wallet), so as to allow consumers to make mobile payments with their iPhone but without the issuer having to pay any Apple Pay fees to Apple. Faced with such behaviour, one can assume that Apple would probably stop trying to charge a fee e.g. in order to get issuers and cardholders to send more transactions via the Apple Pay wallet, rather than a competing wallet on the iPhone, perhaps in order to at least collect the data related to those Apple Pay payments? However, the lock placed by Apple on the NFC antenna prevents issuers from taking this course of action. As mentioned above, because of the lock on the NFC antenna, issuers who want to offer their customers the possibility to make contactless mobile payments with their iPhone have to sign the Apple Pay agreement in order to allow their cards to be used via the Apple Pay wallet, and that comes with a fee.

In response to the above issuer criticism about the Apple lock on the NFC antenna, one could argue that no issuer is required to allow its customers to make mobile payments with an iPhone. Indeed, iPhone holders can very well continue to pay using their (contactless) plastic card. 

However, there are sometimes situations where issuers find themselves under pressure to consider, or even get connected, to Apple Pay:

  • Other competing handset manufacturers and competing mobile OS providers who also offer e-wallets (e.g. Samsung Pay wallet, Google Pay wallet) have not placed a similar lock on the NFC antenna, and are providing access to their own e-wallet free of charge. This makes it attractive for issuers to get connected to those e-wallets free-of-charge, and therefore offer their customers the possibility to make mobile contactless payments with their phone. Once an issuer offers Samsung Pay or Google Pay to its customers, that issuer may be expected by its customers who own an iPhone to also making Apple Pay available to its customers; and if that is not the case those iPhone users could sometimes feel like they are being "discriminated against" by their card issuer (e.g. their bank)? In particular in a context where iPhones are typically more expensive phone than other handsets, meaning that those customers generally expect to make maximum use of their iPhone, including for payments? And/or because iPhone owners are perhaps generally a bit "geekier" than owners of other branded phones and therefore, again, want to make maximum use of their iPhone, including for payments? 
  • Consumers are less inclined to change the brand of their phone, than to change their card issuer/bank; meaning that if one bank does allow Apple Pay, whereas another doesn't, the latter may find itself under pressure to get connected to Apple Pay in order to avoid losing customers to the former? It is for example interesting to note that when Apple Pay was launched in the UK, one of the large banks/card issuers had apparently decided not to get connected to Apple Pay (perhaps in order to avoid having to pay fees to Apple?), but faced with the fact that other large competing issuers had decided to get connected to Apple Pay, that large issuer/bank had no choice but to sign the Apple Pay agreement in order to get connected to Apple Pay in order to avoid losing customers to those large competing banks. A sort of "domino effect"… A similar phenomenon happened in Australia around 2016: American Express was the first issuer to get connected to Apple Pay, while the Australia banks issuing Visa/Mastercard had decided not to get connected to Apple Pay. Until one Mastercard/Visa issuing bank decided to get connected to Apple Pay (perhaps for fear that some of its customers would get an Amex card? And/or in order to have a first mover advantage versus its competing Visa/Mastercard issuing banks?), which triggered the other large Visa/Mastercard issuing banks in Australia to introduce competition law proceedings against Apple Pay – which those banks lost. Query by the way whether Apple would for example offer a discounted fee, or perhaps even a zero fee, for at least some period of time, to a particular issuer in order to "get traction" in a particular country, and thereby "put pressure" on competing issuers to also sign the Apple Pay agreement, but with the standard fee?

Therefore, in some cases, it would appear to be very difficult for a card issuer to say "no" to Apple Pay. 

Prior competition law challenges versus Apple Pay

It is worth noting that other competition law challenges were brought against Apple Pay over the years, before DG COMP decided to start investigating. We already mentioned above (briefly) the competition law case that a few large Australian banks have brought against Apple Pay in Australia; but in addition:

  • In Switzerland, Apple gave commitments to the Swiss competition authority to the effect that when an iPhone is placed close to a contactless terminal, the transaction will not automatically be an Apple Pay transaction, but the consumer would have the possibility to select another means of payments to be displayed as default on the iPhone screen, in particular a local payment method called TWINT.
  • In Denmark, a complaint was apparently filed with the Danish competition authority in relation to the fact when a consumer taps his contactless co-badged Dankort/Visa card on a contactless terminal, this is a typically a Dankort transaction (rather than ta Visa transaction) which is cheaper for the merchant than a Visa transaction; whereas when consumers enrol their cards into the Apple Pay wallet and tap their iPhone in order to make a payment, it is a Visa transaction which is more expensive for the merchant than a Dankort transaction. To our knowledge, the complaint was rejected by the Danish authority. 

Some speculative comments on the DG COMP investigation vs Apple Pay

Again, we are not privy to DG COMP's investigation and therefore can only speculate as to some of the issues that the DG COMP is looking into. However, we believe there is little doubt that the EC is in particular looking into the NFC antenna issue. 

In order for the EC to build a case on this topic, it would in principle need to demonstrate that Apple has a dominant position on the relevant market(s) (which is not illegal as such), and that it is abusing that dominant position in breach of Article 102 TFEU.

A dominant position is defined as "the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers"[i]. In order to demonstrate a possible dominant position, the EC would need to first define the relevant market(s). 

Based on publicly available data, it would appear that if the EC were to define the relevant market(s) on the basis of the brand of the phone used by the customer, Apple would not have a dominant position anywhere in the EU, except perhaps in a handful of EU countries, since in most countries iPhones are not the prominent brand of phones (versus e.g. Samsung or Huawei). The same would probably hold true if the EC were looking into the OS on the phones, i.e. iOS versus Android for example.

However, as mentioned above, it would appear that Apple is often in a position to impose its standard Apple Pay agreement, including the fees, on issuers even in countries where, under the above market definition, Apple would not be most prevalent brand; and therefore "to behave to an appreciable extent independently of its competitors" (who, as far as we are aware, are charging zero in relation to Samsung Pay and Google Pay) "and its customers" namely the issuers. It would therefore seem that Apple perhaps does have a dominant position, and behaves accordingly (while many factors are relevant in order to determine if a particular company has, or not, a dominant position, the fact that the company behaves like someone who thinks it is dominant is relevant to that analysis). But if Apple is indeed dominant, on which market(s) does it have dominance?

  • A market for mobile payments, where we would see that iPhone users are more inclined to use their phone to make payments that non-iPhone users, therefore giving Apple Pay the benefit of a dominant position? Or 

  • A market for Apple Pay payments, where Apple would have a 100% market share, similar to the market definition that was adopted in the telecom sector in relation to so-called "call termination"? Indeed competition authorities and telecoms regulators have considered for a very long time that, for the purposes of phone calls from telco A be able to terminate on the network of telco B, telco B is the market, and therefore telco B has a 100% market share on that market, and therefore dominance on that market. Query whether the EC could seek to apply a similar market definition in the case of Apple Pay in order to explain the fact that, as mentioned above, Apple seems to have the ability to behave to an appreciable extent independently of its competitors and customers; and seems to believe it has that power? 

Assuming that the EC would come to the conclusion that Apple does have a dominant position in one or more relevant markets, the EC would then need to assess whether the lock placed by Apple on the NFC antenna does constitute an abuse, or not, which has the object or effect (to use Article 101 TFEU terminology) of:

  • Restricting competition between competing wallets on iPhones (exclusionary abuse). At the moment, as mentioned above, such competition doesn't exist due to the lock on the antenna: only mobile contactless payments through the Apple Pay wallet, as opposed to any other wallet, are allowed with an iPhone; and/or of 
  • Extracting abusive fees from card issuers and ultimately consumers (exploitative abuse). In particular given the fact that, under the standard Apple Pay agreements, issuers are not allowed to pass-on the fees one-for-one to the consumer making an Apple Pay payment. This means that issuers need to pass-on the Apple Pay fees more generally across their customer base, including customers who do not have an iPhone, or who do have an iPhone but do not use the Apple Pay service, potentially paying fees in relation to a service that they are not using .[ii] 

Against potential allegation of abuse, no doubt that Apple will put forward objective justifications (and possibly efficiency defences) to justify the lock on the NFC antenna, such as for example the fact that the lock is required in order to preserve or enhance the security of the device. The EC will have to assess those justifications and defences before reaching a conclusion on the existence of an abuse of dominance. 

Another potential avenue than Article 102 TFEU above, or in addition to it, could be for the EC to seek to use Article 101 TFEU against Apple Pay, in relation to the clause in the standard agreement preventing the issuer from passing-on the Apple Pay fee to its customers, at least on a one-to-one basis. Indeed, the EC may perhaps seek to argue that Apple being the supplier, and the issuer being the distributor of the Apple Pay service to its customers, both parties are in a vertical relationship, with Apple imposing resale price maintenance (RPM) on the card issuer, in breach of Article 101 TFEU. Indeed, the EC may argue that the above clause de facto amounts to an imposed resale price of zero that Apple requires the issuer to charge to its customers. 

The benefit for the EC of Article 101 (rather than 102) TFEU against Apple would be that it wouldn't need to demonstrate the Apple has a dominant position. But the downside is that it would only target a clause in the standard agreement rather than the technical lock in the phone and therefore wouldn’t solve that issue. Although if Apple was forced to stop enforcing the above clause against issuers, issuers would be in a position to "threaten" Apple to start passing-on the Apple Pay fee to their customers, who may force Apple to accept to charge a lower fee to issuers? 

Recent German legislation forcing access to the iPhone NFC antenna

We will have to wait and see how the above DG COMP investigation will evolve. However, in the meantime the German legislator has decided to adopt legislation forcing Apple to grant access to the NFC antenna to card issuers. Although the legislation is drafted in more general terms, requiring providers of technical infrastructures to give access to payment service providers (PSPs) and e-money institutions (EMIs), it is primarily aiming at giving German card issuers a statutory right to access the iPhone's NFC antenna, effective 1 January 2020. The infrastructure provider is allowed to charge an "appropriate fee" for that access.

No public information is currently available on how this German law is being complied with in practice given its very recent date of applicability. It will in particular be interesting to see, in due course, how Apple will comply with the "appropriate fee" requirement, and whether that fee will typically be lower or higher than the standard Apple Pay fee? One would expect Apple to try and set the Apple Pay fee below the level of that "appropriate fee" so as to continue to attract card transactions through its Apple Pay wallet (as opposed to competing e-wallets), in particular in order to have access to the transaction data?

If you would like more information about this German legislation, please read our alert on this topic here

Other investigations against Apple 

The DG COMP investigation into Apple Pay should not be confused with another DG COMP investigation related to the so-called Apple In-App Purchase payment service or IAP. This separate investigation was triggered by a complaint lodged by Spotify last year against the 30% fee that Apple apparently charges for every upgrading from a free Spotify account to a paid-for Spotify account through the Apple App Store. According to Spotify, the fee would have the object or at least the effect of favouring Apple's own music streaming product (Apple Music) versus the Spotify services. Spotify also complains about a series of other technical measures that Apple would have adopted allegedly with the same objective of favouring Apple Music versus Spotify, such as for example the possibly to use voice command/Siri on an iPad or iWatch to play music, whereas this is locked in relation to Spotify. The DG COMP investigation is on-going. 

In addition, in April 2019 the Dutch competition authority (ACM) published a report on the market study that it performed in relation to the Apple and Google app stores, and announced by the same token that it was launching a competition law investigation against Apple in relation to some of its app stores practices – see here.

If you would like to read more about both of these investigation, I recommend you read the article published by my colleagues Pauline Kuipers and Mariska van de Sanden, which is available here.

Bird & Bird Payments team and alerts 

Should you have any questions about the above, please do not hesitate to contact one of the members of the Bird & Bird global Payments team.

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[i] Judgment of the Court of 14 February 1978, United Brands, Case 27/76, paragraph 65.

[ii] This clause also raises potential issues under payments regulations (as opposed to competition law), in particular under the EU Payments Accounts Directive (PAD), as transposed in the national laws of the various EU Member States, that requires in particular transparency in terms of the services a consumer is paying for. Arguably, due to the Apple standard clause, an issuer is potentially placed in position where it cannot comply with its transparency requirements under the PAD. 

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