Why Retailers are Wrong on Apple Pay

There's a war going on for your wallet. Around the world, the credit and debit cards we use every day are under threat from a combination of regulators and aggrieved merchants. At stake is the near-universal acceptance of credit and debit cards as we know them today. And if experience is any guide, the collateral damage in this war will be the poorest in society.

The latest front in this war is Apple Pay, the attempt by Apple to bring smartphone convenience to paying for groceries and consumer goods. Most Apple users reacted with joy to the company's announcement of the new payment system. The National Association of Convenience Stores, however, was a different story. Its spokesman, Lyle Beckwith, wrote in The Wall Street Journal: "Apple fell short of revolutionary change—because it built its product on the flawed credit-card payment system."

Beckwith's organization would prefer a mobile-payments system that "could link directly to an individual's checking account" or his or her mobile-phone bill. That would be more affordable for the chain stores he represents, who would like to pay lower the fees to banks and credit-card networks for the use of their systems.

Yet consumers have good reason to prefer credit-card networks.

For one thing, having a third party involved makes it easier to dispute an illegitimate charge than if the money had already been taken out of a bank account — and the hit to an individual from such a fraudulent charge could be devastating. In fact, one of the reasons people like credit-card networks is because of their security aspects, which is rarely acknowledged by advocates of different payment systems. Credit-card issuers and networks have made significant advances in this area, and Apple Pay will add to those gains. It should be noted that most of the recent large-scale data breaches that have troubled credit-card networks have come from the merchants, not the networks.

Another argument advanced by the merchants is that cash payments are cheaper for the store owners. This may be true at the point of sale, but the ancillary costs associated with handling cash soon outweigh that advantage – trips to the bank, cash counting, increased security, employee theft, and so on all cost the merchant at the bottom line.

Finally, thanks to the Durbin Amendment of the Dodd-Frank Act of 2010, card fees have been capped and so have not increased in years. Even before that regulation, card-interchange fees had been decreasing for several years.

So why the furor over Apple Pay? The merchants may be smelling blood in the water on the other side of the Atlantic. The European Union is on the verge of imposing interchange fee caps that go well beyond U.S. regulatory limits and is considering forcibly splitting card networks into card operators and network operators.

Unfortunately, the EU is ignoring lessons from experience in America and Australia. In both countries, caps on card-swipe fees led banks to increase their fees to users. Merchants, meanwhile, have not lowered their prices, leaving the average consumer worse off. Extrapolating from America's and Australia's experience, the consultancy Europe Economics found that every European household would be hundreds of euros worse off as a result.

There's yet another unintended consequence of severe interchange fee caps. According to research by George Mason University professor Todd Zywicki, the increase in bank fees under Dodd-Frank hit the poorest the hardest. He estimates that a million people were forced out of the banking system by these increased charges. As a result, these new "unbanked" consumers became more dependent on cash loans from the non-bank financial services, such as payday lenders.

If the large retailers succeed in shutting down Apple Pay, you might see the war in your wallet end with its credit cards disappearing. And the worst effects will fall on those who cannot afford an iPhone. If this battle is lost, the war could go further. Currently, American regulations do not cover credit cards, but could be extended to them, as in the EU.

Then, as credit cards become much more expensive, they will once again become the rich man's plaything, and the great American experiment with the democratization of credit will come to an end. Even the retailers might then realize they fought a war with no winners.