Arizona’s app store bill could force Durbin-like changes

A video game publisher's battle with Apple could have as much impact as the Durbin amendment if a proposed Arizona law comes to pass.

The Arizona bill would effectively restrict Apple, Google or any large app store operator from exclusively extracting fees for developers who collect payments on their platforms. Apple and Google each charge about 30% for most app store transactions; the bill would not ban these fees, but would force the acceptance of alternative payment methods that may come at a lower cost.

This bill, which followed an incident last year that saw Apple banning Epic Games for trying to implement an alternative payment method, is strongly reminiscent of the Dodd-Frank law's Durbin amendment, which established the ability for merchants to offer the choice of an independent debit network for card payments.

The Durbin amendment also capped debit fees, but it has a cutoff; it applies only to issuers with assets of $10 billion or more. Similarly, the Arizona bill is designed to impact the market's largest players; it would not impose the requirement on app stores that handle fewer than 1 million downloads per year.

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There are similar app store fee restriction bills circulating in other states, such as Georgia and Minnesota, and one bill in North Dakota that has failed to advance. The North Dakota bill was more restrictive; it would have potentially allowed rival app stores in iOS and Android operating systems.

The European Commission is also investigating Apple's payment rules, and the U.K. has launched its own investigation. Additionally, it's not unusual for regulators to scrutinize Apple Pay over concerns it unfairly routes transactions. Apple made about $15 billion in app store developer fees in its most recent fiscal year, according to CNBC.

"The current cost of conducting payments in-app can be prohibitive to many developers and it’s likely we’ll see some movement from both Apple and Google changing their payment policies as continued scrutiny is coming both domestically and abroad," said Rachel Huber, a senior analyst for payments at Javelin Strategy & Research.

The app store fee battle comes at the same time as the card brands are preparing to raise fees under the interchange structure in the U.S. Interchange fees have been the subject of court disputes for years, and fintechs have capitalized on this to offer alternative payment methods at a lower cost.

The issues of interchange and app-store fees aren't directly related, but there is a psychological link that draws attention to these pricing models, said Steve Mott, a consultant at BetterBuyDesign.

"The association with Apple and Google is very similar to how merchants view interchange," Mott said. "It's the power of the app store, you don't have much choice. If the states got proactive it would be ominous for anyone who charges [monopoly pricing] fees."

But the removal of these fees wouldn't necessarily improve things overnight, since there's no large-scale model to replace it. "If you move away from monopoly pricing, the outcome may be worse than what you started with," Mott said.

A lobbying group called the Coalition for App Fairness helped write the Arizona bill. The group includes Spotify, Tinder, Epic Games, and other web app developers. The coalition did not return a request for comment, but its website is filled with arguments against what it calls "app taxes," contending Apple's 15% to 30% fee is a large portion of revenue for most developers.(Apple charges the lower 15% fee for developers who produce revenue greater than $1 million.)

Epic Games, which operates Fortnite, has sued Google and Apple over payment fees after attempting to implement its own payment system, a move which resulted in Epic getting banned from both companies' app stores. Google and Apple did not return requests for comment.

During Arizona House deliberations, Kyle Andeer, Apple's chief compliance officer, said the bill would require Apple to "give away" the App Store, and would prevent Apple from using its own "checkout lane," according to testimony documents Apple provided to The Hill. Apple and Google have also hired lobbyists to push back against state laws, and Apple is working with the Arizona Chamber of Commerce, which did not return a request for comment.

The issue in Arizona doesn't easily follow partisan preferences, passing the Arizona House 31-29, with Democrats mostly opposing the bill. That's opposite to the federal level, in which Republicans mostly opposed restrictions on payment fees such as the Durbin amendment.

"The spirit of Dodd-Frank was focused on payment choice and dual routing to help merchants lower costs, which is not currently the case with the respective app stores," Huber said. "It’s not unreasonable to think there could be a similar requirement of giving merchants/developers choice in how to process their payment, for all payment types, not just debit."