A customer uses an Apple Inc. iPhone to pay via the Apple Pay system. App-based digital payments are challenging the dominance of cash, cheques and even plastic.Chris Ratcliffe/Bloomberg
For months, Canadian bankers defiantly kept up their no-surrender bravado about Apple Pay and other mobile payment apps.
Typical was Royal Bank of Canada chief executive Dave McKay, who proclaimed last November that he wasn't about to let a non-bank such as Apple Inc. mess with his clients.
"No one gets between us and our customers when they pay with a card," Mr. McKay said at an RBC conference in New York. "There is no one else in that ecosystem."
Well, there is now. This week, RBC and Canada's other big banks struck a deal with the California-based company to allow users of newer iPhones and Apple watches to use their devices for credit and debit card payments of $100 or less.
This isn't just about Apple. Several other big global players in fintech – including Google, PayPal and Facebook – are also chipping away at the traditional banks' business. And smartphones have become the focal point of a battle over how and where people will do their banking in the future.
This week's deal ensures Apple gets a slice of the emerging payments business in Canada, making it an insider in the "ecosystem." As Globe and Mail banking reporter David Berman reported, the smartphone maker's cut is believed to be 15 cents per $100 on credit card transactions and four cents on debit card purchases.
The banks insist they won't be sharing transaction data with Apple. But Apple will presumably gain a certain amount of aggregated information about how and where Canadians spend. And it will know who uses its app.
The deal will also speed up the adoption of digital wallets, which have been slow to take off in Canada. Users of Canada's most popular smartphone will have access to a convenient new tool. And that, presumably, explains why Canada's banks would grudgingly go into business with a potential rival.
So far, smartphone payments are little more than a blip in the market, accounting for just 3 per cent of payments in Canada last year, according to a report by GfK Canada.
But that matters less than the trend line. Apple Pay is adding new users at rate of a million a week around the world. And it's only one of a growing number of non-bank players vying for a piece of the digital payments business.
Like a lot of technological change, it's a generational thing. For most millennials, their lives revolve around their smartphones. It's a relatively small step to add payments to the long list of mobile tools they already use and trust.
Sluggish early adoption can quickly become a wave as consumers feed off each other and embrace new ways of doing things.
Apple Pay is essentially a three-way transaction between a consumer, their financial institution and the merchant. Person-to-person (P2P) payment apps, which can relegate financial institutions to bystanders rather than participants, are an even greater threat to the dominance of the big banks.
Among the key players in this space are Venmo and Google Wallet. Venmo, owned by PayPal Holdings Inc., isn't in Canada, but it's ubiquitous among U.S. millennials. It allows users to store and transfer money to friends and family using their smartphones.
You share an apartment with three roommates. One of you pays the cable bill and the rest "Venmo you" what they owe. Money changes hands, but there is no cheque involved and or trip to the ATM. It's like an e-mail transfer, which most banks already offer, but easier and simpler, particularly when individuals link their bank accounts through a smartphone app.
Venmo processed $3.2-billion (U.S.) worth of payments in the first quarter, up 154 per cent from the same period last year.
That isn't to say digital payments don't present huge challenges, including regulatory scrutiny and security. Venmo, for example, is now the target of a U.S. Federal Trade Commission investigation related to possible unfair and deceptive practices, while a recent study by Javelin Strategy and Research found that 112,000 U.S. consumers had their mobile wallet accounts hijacked by fraudsters last year.
But the trend is pretty clear. App-based digital payments are challenging the dominance of cash, cheques and even plastic.
And it's likely that a significant chunk of that business will be in the hands of non-banks.