Did Apple just become a big bank?

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Apple’s move into mobile banking could bring the tech giant under the same federal regulations as financial institutions.

{mosads}At a product launch event this week, Apple CEO Tim Cook made waves by unveiling a new mobile banking system that allows consumers to wave their iPhones for purchases instead of swiping debit and credit cards.

The product has generated tremendous buzz in the tech community, with some analysts predicting a revolution in the way people shop.

Apple is putting its considerable muscle behind the product, promising to work with more than 222,000 merchant locations in the United States. Visa, MasterCard and American Express are already onboard, as are Whole Foods, Macy’s and Disney. 

But by moving into the mobile payment space, Apple might soon find itself subjected to new oversight from federal regulators.

“Rules that apply to plastic card payments also apply to payments with a phone,” said Moira Vahey, a spokeswoman for the Consumer Financial Protection Bureau (CFPB).

Apple did not respond to repeated requests for comment. Many of Apple Pay’s inner-workings will remain unknown until its formal release in October.

Vahey declined to mention Apple by name, but said the CFPB continues to “closely monitor developments in the mobile payments space, so that we can identify any emerging consumer protection issues.”

Telephone companies, such as Verizon Wireless, retailers, such as Starbucks, and tech giants, such as Google, have already tapped into mobile banking in recent years, offering consumers more opportunities to use their phones like a wallet, whether in line for a latte or a shirt at the Gap.

But Apple’s move into the arena could spur millions of customers and stores to switch out the plastic in their wallet for the chip in their phone.

Lawmakers and regulators are racing to catch up with the change.

“For regulators and legislators, this is a big change,” said Jason Oxman, CEO of the Electronic Transactions Association, the trade group for payment companies. “People have been paying in the United States using plastic cards for 40 years. This is, without question, the most significant technological change in payments in four decades.”

Just this summer, the CFPB launched an investigation into the broader area of mobile financial services to get a grasp on the concept. 

“In a world where people can manage their money on the go, there is great potential to serve more consumers and allow them to take greater control of their finances,” CFPB Director Richard Cordray said in a statement, when the inquiry was announced. “But we need to make sure all consumers are protected whether they are opening their wallets or scanning the screen on their smartphones.” 

In comments that it filed with the bureau this week, the Federal Trade Commission said the technology could be revolutionary for people without a bank account and for those on the go, but it has also raised alarms about security and the privacy of people’s data.

One prime example for the new privacy concerns, Oxman said, is the data transmitted from phones that gives a person’s location.

“It was never a question for regulators or legislators: ‘Are you going to be using location-based technology for your credit card,’” he said. “Because your plastic credit card doesn’t know where you are. But your phone does.”

The privacy concerns loom, especially large for Apple, which is still dealing with the fallout from a leak of celebrities’ nude photos stored on its cloud system. 

While the latest scandal doesn’t involve mobile payments, Apple will no doubt have to answer how it plans to manage consumers’ private financial information.

The company seems well aware that it needs to play up its privacy protections.

Cook said during Apple Pay’s unveiling that Apple won’t collect purchase history, nor will it store card numbers on the device or on Apple servers. Instead, the company will assign a device account number that’s linked to a consumers’ phone.

“Security and privacy is at the core of Apple Pay,” said Eddy Cue, Apple’s senior vice president of Internet Software and Services, in a public statement following Apple Pay’s announcement. “If your iPhone is lost or stolen, you can use Find My iPhone to quickly suspend payments from that device.”

As far as whether traditional financial rules will apply to Apple, Washington seems to be in wait-and-see mode.

Carol Van Cleef, a co-chair of the global payments practice at Manatt, Phelps & Phillips, said Apple might have immunized itself from causing too much of a regulatory stir by serving merely as a middleman for people’s credit cards, instead of getting involved directly.

“They don’t seem to be any way involved in the flow of funds with this model,” she said. “By taking themselves outside the flow of funds — that they’re not touching the money — it eliminates many of the regulatory complications.” 

Banks and credit unions are certainly taking Apple Pay seriously.

Kevin Rowland, MasterCard USA vice president of strategic partnerships, is scheduled to brief the National Association of Federal Credit Unions (NAFCU) on Wednesday about it.

“Credit unions have embraced mobile technology and are looking to be part of every wallet, whether Apple’s, Google’s or CU Wallet, as they are known for their superior member service,” said NAFCU Director of Public Relations Patty Briotta.

It remains to be seen whether shoppers and regulators will embrace new service. But if Apple has its way, iPhones will do for people’s wallet just what they did for their music players, maps and beepers before it.

“Apple Pay will forever change the way all of us buy things,” Cook said.


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