What angered Apple which led to the “Breakout”?

“Breakout” is Apple`s new project to build in-house payment infrastructure and eventually break away from the existing ways of processing the variety of its payment needs.

WhiteSight`s visual of Apple`s payment dual ecosystem captures the variety and ironically the high-level resemblance with Square`s dual ecosystem.

A story from 1976

Before I dive into the facts and try to connect the dots, I want to share with you a very old Apple true story. It is a story about a video game that was launched in 1976, the year Apple Computer Company was founded. The video was engineered by Steve Wozniak for Atari in collaboration with Steve Jobs, who was employed there as a technician and was called BREAKOUT. A clone version of Breakout was included with early iPod models (read more here).

B2B interchange fees

From the first minute I read about Apple Breakout vision, I wanted to go back and check the split of interchange fees when big or small card issuers are involved and banking as service providers.

Sacra`s B2B visual paints the picture well and we can connect VISA with ApplePay and Mastercard, and Goldman Sachs with the Apple by Goldman Card.

The US Banks were fed up with the revenue sharing scheme

Of course, we all know that not all players are equal and special deals are made by entities like Amazon, Apple, and the likes.

Just 6 months ago, the Wall Street Journal reported the upset of several US banks like JPMorgan, Capital One, and Bofa that felt they had to share too much of the interchange fees with Apple.

The banks were then pressuring VISA to re-negotiate these fees, especially for all the Apple recurring payments. According to the WSJ [1] journalists, VISA agreed initially but then didn’t implement the change.

The WSJ`s information shows the special and fragile relationship between Apple and the card networks, Visa and Mastercard:

Visa shared its planned technical change with at least some banks in recent months. A document reviewed by the Journal that explained the new process didn’t mention the fees but detailed a change to so-called tokens that Visa issues for mobile-wallet payments.

When consumers load their credit card onto Apple Pay, Visa issues a special token that replaces the card number. That allows the card to work on Apple Pay and also helps keep the card secure in a potential data breach, among other benefits.

Visa plans to start using a different token on recurring automated payments. That effectively means that after a first payment is made on a subscription, Apple won’t get fees on the following transactions.

Apple`s unusual concession

The other piece of information that adds to the suspense is a not so publicized agreement between Apple and Visa and Mastercard, that Apple agreed not to develop its own card network to compete with the two (Apple Card by Goldman is a Mastercard-powered card.)

Visa and Mastercard also agreed to give Apple an unusual concession, according to people familiar with the matter: Apple would be able to choose which issuers it would allow onto Apple Pay and which of those issuers’ cards it would accept. Visa and Mastercard generally require that entities that accept their credit cards must accept them all. Apple agreed to not develop a card network to compete against Visa and Mastercard, the people said.

Apple`s subscription model

Before I continue connecting the dots with you, let me share with you another story. They say that Vitalik Buterin first got fixated with the notion of decentralization because the company that produced his then-favorite video game changed suddenly the rules of the game which really upset him.

Apple got really upset with the new VISA token that would cut off completely Apple from its share of interchange fees from recurring payments (after the first one). At a time that Apple is clearly shifting to subscription models and also taking into consideration that Apple likes to own its supply chain.

Just last week Apple announced a new subscription service for small businesses to manage their hardware and software — Apple’s newest subscription service is an IT management package for small businesses — It combines iCloud backups, device management, and even AppleCare Plus

Plus, its intention to shift to a subscription model for its hardware too — Apple Hardware Subscription

From icloud and itunes subscriptions, to iPhone, iPad, and Mac subscriptions.

Connecting the dots — Apple`s Breakout move

Apple`s Breakout move is about control of the business model.

I do agree with Ron Shevlin [2] that sees Apple as a hardware company (a products company) rather than a software company (a data company). But innovation is all about changing the mix too and let’s not forget that the Apple Car is hardware but also software much like Tesla.

Apple wants to be able to have control when they choose to change monetization strategies. Their subscription model shift is the relationship breaker with the card networks. I agree with Jason Mikula [3] that Apple has two goals, to sell more phones and increase service revenues, and it seems that they are using a subscription model for both.

The broad interest and investments in the metaverse also, cannot be ignored. No matter what form and focus the metaverse takes in the next five years, one thing is clear — it will need native digital payments aka cryptocurrencies and or stablecoins. ApplePay just announced that they integrated with Metamask, so that ios users can buy crypto (up to $400) via ApplePay (which for now is reliant on the VISA network). According to the Apple rumor, Apple is in talks with Strike to integrate the Bitcoin lightning network.

I close by sharing Sarbjeet Johal`s recent Tweet, for all us of to reflect on what it may mean for Apple.

[1] Apple pay fees vex Credit Card issuers https://www.wsj.com/articles/apple-pay-fees-vex-credit-card-issuers-11633449317

[2] Why Apple Acquired An ‘Open Banking’ Fintech https://www.forbes.com/sites/ronshevlin/2022/03/27/why-apple-acquired-a-uk-based-open-banking-fintech/?sh=5396b8f810e7

[3] Apple’s Ability to “Breakout” May Be Limited https://buff.ly/3j0YQTV

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