Apple’s SCOTUS setback jeopardizes Apple Pay's momentum

Apple’s aggressive posture when it makes moves in retail and payments has drawn a lot of pushback and controversy, but its setback in the Supreme Court could be the most dire threat yet to the growth of Apple Pay.

The Supreme Court on Monday ruled 5-4 that iPhone users could sue Apple over its 30% commission to developers on sales through the App Store, a cost they allege was being passed along to consumers. Apple’s counter argument is that only developers, and not users, should be able to sue over this issue. Apple did not return a request for comment by publication time.

Though the ruling is tied to App Store pricing, Apple is notoriously one-sided in how it sets terms, and it garnered similar backlash for the fees issuers pay to participate in Apple Pay. If consumers can push back on App Store commission revenue, they could do the same for Apple Pay pricing.

David Paul Morris/Bloomberg

This development could also create issues for the recently announced Apple Card, which is built to encourage the very types of digital payments that are attracting legal scrutiny.

“This suit is about how Apple extracts rent and whether it has to open its App Store to direct downloads. That puts apps at risk. Even if Apple wins the suit, how does it secure payments? The banks rely on Apple for App Store quality control," said Richard Crone, a payments consultant.

Apple recently reported record 2018 holiday App Store revenue of $1.22 billion, driving Apple's Services revenue to an all-time record for the holiday quarter. That includes Apple Pay, Apple Music, Cloud Services and the App Store’s search ad business.

For the year, App Store revenue rose to $46.6 billion in 2018, up from $38.7 billion, reports CultofMac, adding Google Play Store revenue reached $24.8 billion in 2018, up from $19.5 billion in 2017, by comparison. Apple has also sold more than 1.2 billion iPhones globally, and has a U.S. smartphone market share of more than 45%, according to Statista.

“All of these app store sales tangentially touch Apple Pay,” Crone said. “If an iPhone user wants to access an app, and they all do, they have to enroll a payment credential. That is the ignition for Apple Pay.”

The power of that scale gives Apple an upper hand when negotiating with merchants and banks. After some early pushback, Apple eventually got most major U.S. retailers to accept Apple Pay, with Walmart remaining a notable exception. Apple has also spurred contactless payment adoption in Australia, despite the large Australian banks' attempt to collectively bargain with Apple over fees.

Apple has made Apple Pay and services a major part of its hedge against slumping iPhone sales. Apple has set a goal to double services revenue over the next two years, and that plan relies on gaining transaction revenue from streaming content, music and movies.

Apple has been nudging app developers toward subscriptions. It has told developers they can offer promotional rates on subscriptions in an attempt to get lapsed subscribers back, according to Ars Technica.

The subscription billing market is growing, as is the market to support subscription billing for third-party developers who want recurring revenue but aren't equipped to handle the processing. It's a market need that's drawn the attention of fintechs such as Stripe, and there are already signs that brands can suffer if subscription billing is mishandled.

“There’s an impact in subscription billing,” Crone said. “That’s the fastest growing use case. Subscriptions give the opportunity to renew payments automatically and initiate the subscription for recurring billing through Apple Pay.”

Apple recently updated its biometric technology to improve the user experience for subscription apps. These efforts can help Apple grow its services revenue even if it must take a smaller cut from app developers.

“What we’ve seen in Europe is if you use a ‘monopoly’ you get penalized in the end,” said Haken Nordfjell, senior vice president of digital banking for Gemalto, comparing the Supreme Court decision to interchange fee battles in Europe. “But that may not be a bad move. If a fee like interchange goes down you will need to make more money out of other services. That’s something Apple and Goldman may have to do [with Apple Card].”