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  • Sahil Gaikwad and Anna Zhuang

Apple’s walled garden approach: An analysis of Apple Pay, the Apple Credit card, and the NFT tax


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Apple's dominance in the technology sector is undeniable, especially in its Paytech offerings. With Apple Pay capturing 48% of the mobile wallet market and the launch of the Apple Card, Apple is continuing to challenge existing financial competition and create new revenue streams. However, new players in the Paytech sphere, like Ripple, are emerging, and it remains to be seen if Apple will incorporate blockchain into its ecosystem. We investigate Apple's innovation within the financial industry.

Even with bleak tech stock projections, Apple is the steadfast leader in the technology sector, weathering the downturn better than its counterparts: Amazon, Meta, Microsoft, and Alphabet. We can discuss Apple's dominance in the technology sector, but let's narrow it down to the evolution of its Paytech offerings.


Apple's Revenue Growth


The Growth of Apple's Share Price


Apple launched Apple Pay in 2014, which has now captured 48% of the mobile wallet market in the US and is one of the largest mobile payment providers in the world. Let's unpack what happens when you add your payment card to Apple Pay:

  1. Your card's PAN (Primary Account Number), name, and card expiration date are sent to Apple Pay servers.

  2. From your PAN, the Apple Pay server identifies the credit card Issuer Bank and then passes the PAN and your personal details to the Issuer Bank, requesting a Payment Token from the Issuer Bank.

  3. The Issuer Bank then calls a Token Service Provider (TSP) and requests a Payment Token.

  4. The TSP vaults the PAN, generates a Payment Token, and associates the newly generated Payment Token with the PAN.

  5. The TSP then returns the newly generated Payment Token and a Payment-Token-Key to the Issuer Bank.

  6. The Issuer Bank receives the Payment Token and Payment-Token-Key from the TSP and adds a CVV-Key (i.e. public key) to the mix.

  7. The Issuer Bank returns the Payment Token, Payment-Token-Key and the CVV-Key to the Apple Pay Servers.

  8. Apple Pay uses its Trusted Service Manager (TSM) and provisions the Payment Token, Payment Token-Key and CVV-Key onto the "Secure Element," i.e. the secure hardware chip on the physical iPhone device. This is the "Payment Token" that Apple saves on its Secure Element and calls the DAN (Device Account Number)

All of this happens in mere seconds. Note that Apple Pay does not store the card numbers on the device or Apple servers, and payment token data is never stored in their cloud servers.


The Mechanics of Apple Pay


In 2019, Apple expanded by announcing its Apple Card with Goldman Sachs - marking a position to compete with the banking industry. Apple Card tracks your spending and uses machine learning to suggest ways to manage your debt. There are no late fees, annual fees, international fees, over-balance fees, or higher interest fees if you are late with payments. The card also offers rewards such as 2% daily cash if you use it with Apple Pay. This model has allowed Apple to capitalise and start a new revenue stream from its credit card. Also, unlike Meta and Google, Apple has the hardware advantage — Apple's market share in the global smartphone market grew by 18%, while its top five competitors' collective market share fell by 9%.


Apple Card


Apple's dominance is undeniable, but a few exciting prospects are evolving in the Paytech sphere. Take Ripple, for example, a DeFi payment protocol that allows cheap payments to bank clients and deals with crypto and fiat currencies alongside other financial commodities. Ripple has benefits such as fast settlement, as transaction confirmations generally take four to five seconds, compared with the days it may take banks to complete a wire transfer. Ripple's transactions also cost a small fraction of a penny (0.00001 XRP), and the network is used by financial institutions such as Santander and Bank of America.


Ultimately, at this early stage, it remains unclear whether Apple wants to incorporate blockchain into its ecosystem. Note that Apple is currently under fire for imposing a 30% tax on Ethereum "gas fees" associated with NFT transactions. So Apple may be trying to control the user experience by crafting its own smart contracts for NFTs, which developers might be forced to use to stay compliant with App Store rules. These smart contracts could send Apple royalties automatically and lead to a new in-app payment fee pipeline.


Apple's Abuse of Monopoly Power


With $200B on its balance sheet, Apple is not pressured to change its walled garden approach. It is one of the few companies that has managed to stay a market leader, successfully challenge existing financial competition, and avoid impending economic slowdown and SEC regulations. One thing we can note is that Apple's transition and focus on payments marks a shift in its business model from hardware sales to a more service-focused approach.

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