6 times Apple's payment policies overstepped

May 13, 2019 11:51 AM

Apple's App Store was a game changer for mobile payments. It made it possible for consumers to buy games, music and other software in a microtransaction model that evolved quickly over the years to include in-app payments, subscriptions and biometric authentication.

To Apple's credit, its mobile wallet ushered in the use of tokenization and other forms of strong authentication, and helped create a reason for merchants to upgrade from their aging magstripe terminals to ones that could accept NFC and EMV payments.

But Apple's ecosystem was also very much a digital Wild West, with app developers and Apple itself sometimes running afoul of regulators and legal authorities.

This item is compiled from reporting by PaymentsSource writers including John Adams, Kate Fitzgerald, David Heun and Michael Moeser. Click the links in each item to read more.

A big cut

A customer browses the App Store on an iPad at the Best Buy January 18, 2011 in Orem, Utah. earnings come for Apple come out after the market closes today. Bloomberg News/George Frey

George Frey/BLOOMBERG NEWS

Apple's latest legal woe stemmed from a backlash against its 30% cut on sales made through the App Store. This has long been a divisive issue — companies like Amazon don't sell digital items like Kindle e-books on iOS devices, despite having an app for selling its physical wares, because they want to avoid sending Apple such a large share of revenue.

The Supreme Court ruled on May 13 that iPhone users themselves could join the protest by suing the company. The lawsuit alleged that Apple's commission drives up the prices they pay to app developers.

This practice has likely fueled the emergence of "freemium" content where developers offer a game or other app for free but pad it with in-app purchases.

Smurfs put parents in the red

Apple agreed to refund about $32 million to consumers in 2014 after the government alleged the company charged minors for mobile app purchases without their parents' consent.

Under a settlement with the Federal Trade Commission, Apple also agreed to change its billing practices to make sure it has obtained express, informed consent from consumers before charging for in-app purchases.

The FTC contended Apple violated the FTC Act by failing to tell parents that by entering a password for one purchase, they were approving any purchases made for the following 15 minutes.

Apple's app store includes a number of items aimed at children that carry charges ranging from $0.99 to $99.99 for virtual items used within the app. For example, three years earlier a Smurfs' Village iPhone game came under fire for allowing in-app purchases of pricey virtual Smurfberries.

The FTC said Apple received tens of thousands of complaints about in-app purchases by children.

Creating a digital gold rush for fraud

A sign for the launch of the Apple pay system, from Apple.Inc is seen displayed at the entrance to a McDonald's Corp. restaurant in London, U.K., on Tuesday, July 14, 2015. Apple Inc. is making the U.K. the first market outside the U.S. for its digital-wallet system as the company fights for a place in the electronic-payments industry. Photographer: Chris Ratcliffe/Bloomberg

Chris Ratcliffe/Bloomberg

Apple learned many hard lessons when Apple Pay made its debut in the fall of 2014.

In addition to some early glitches with double-charging on Apple Pay accounts, a serious concern unfolded when it appeared that fraudsters were enrolling for Apple Pay with stolen accounts.

It was a trend that cost banks little financial loss because transaction volume was low, but it exposed a weakness in mobile wallet enrollment processes and resulted in 112,000 consumers suffering account takeovers through mobile wallet fraud last year, according to a 2016 study from Javelin Strategy and Research.

"The banks were feeling pressure to not be left behind with Apple Pay, so they signed on, and didn't have strong enrollment processes in place," said Al Pascual, head of fraud and security for Javelin and author of the report.

Bad apps

An Apple Inc. iPhone 6s smartphone is arranged for a photograph in Hong Kong, China, on Friday, Sept. 25, 2015. The latest models, following last year's hugely popular design overhaul that added bigger screens, may not match the success of previous releases, according to analysts. Photographer: Xaume Olleros/Bloomberg

Xaume Olleros/Bloomberg

Apple strictly polices which apps it allows on its App Store, but some malicious apps still make it through.

Apple dumped two apps last year from its app store because they used iOS Touch ID to trick consumers into spending huge amounts of money.

The Fitness Balance app and Calories Tracker app were supposed to compute health information like body mass and calories. Users were told to scan their fingerprint to view the service, but then saw a popup that said they would be charged a fee.

The apps used this method to charge fees of up to about $150, with users' cards automatically billed.

It's dangerous to go alone

Tim Cook, chief executive officer of Apple Inc., speaks during an event at the Steve Jobs Theater in Cupertino, California, U.S., on Monday, March 25, 2019. The company is unveiling streaming video and news subscriptions, key parts of Apple's push to transform itself into a leading digital services provider. Photographer: David Paul Morris/Bloomberg

David Paul Morris/Bloomberg

"With the success and momentum of Apple Pay, we've learned a lot about credit cards," said Apple CEO Tim Cook when announcing the Apple Card. "While we all need them, there are some things about the credit card experience that could be so much better."

Cook clearly wants to convey that Apple has the experience and vision to launch this product on its own. But Apple may be hurting its prospects by ignoring the value of working directly with ISOs.

"The problem the ISO industry has, as well as Apple, is they do not understand how to work with or even approach each other," said Paul Martaus, merchant acquirer consultant and industry researcher.

Martaus said he sent a letter to Apple five years ago to introduce the technology giant to the acquiring industry and that the company needed to enlist ISOs "because they own all of the merchant relationships" needed to expand Apple Pay.

"They responded that the banks are taking care of that for them," Martaus said. "They don't understand that the banks are not the best way to go all of the time to acquire merchant contracts."

Hiding from the truth

A customer view an Apple Inc. iPhone XS during a sales launch at a store in Chicago, Illinois, U.S., on Friday, Sept. 21, 2018. The iPhone XS is up to $200 more expensive than last years already pricey iPhone X and represents one of the smallest advances in the product lines history. But that means little to the Apple Inc. faithful or those seeking to upgrade their older iPhone. Photographer: Daniel Acker/Bloomberg

Daniel Acker/Bloomberg

Apple’s decision late last year to stop disclosing its mobile device sales — along with reports that the company's newest iPhone didn't draw the huge crowds Apple is known for — is a sign that Apple's handsets may no longer be a must-have. And if the iPhone is no longer the status symbol it once was, that chips away at Apple Pay's power.

Apple used its brand status and clout to set strict terms and limit access to the hardware features that enable mobile payments. Banks and credit unions have smoldered at the per-transaction Apple Pay fees they’re required to pay, reportedly about 10 to 15 basis points, but endure it as a cost of doing business in a market Apple controls.

Without the numbers to prove the iPhone's market power, it may be harder for Apple to force third parties to buckle to its policies, observers say.