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Tech behemoth Apple’s ongoing legal battle with California-based video game developer Epic Games could potentially reshape the mobile payments sector in the US. Although the dispute is taking place in the EU, the outcome could have implications that go far beyond Europe.
Last week, Apple published an updated version of its compliance with the EU’s Digital Markets Act (DMA), stipulating changes that iOS app developers must make to continue operating within the App Store, including alterations to how payments are processed.
Apple's new policy makes provisions for alternative payments via the App Store in the EU, giving developers additional payment options for digital goods and services that allow both in-app and linked-out payments to take place, but not both.
The new policy increases the payment processing fee by 3 percent, reduces commission to 10 percent for most developers or 17 percent for digital goods and services, and introduces a core technology fee (CTF) for very high-volume apps, where developers pay €0.50 for each first annual install per year, over a 1m threshold.
This follows a lengthy legal head-to-head between Apple and Epic, following Epic’s 2020 allegation that Apple was engaging in anti-competitive control over how iOS users pay for mobile applications and in-app purchases on iPhones and iPads.
Epic stated that Apple’s 30 percent fee on all payments throttled competition.
It has since been a long and windy public argument between the two that now finds itself in Europe, where Apple has been forced to comply with the DMA, which came into effect in November 2022.
In the latest policy statement, Apple wrote: “The DMA requires changes to this system that bring greater risks to users and developers. This includes new avenues for malware, fraud and scams, illicit and harmful content, and other privacy and security threats.
"These changes also compromise Apple’s ability to detect, prevent, and take action against malicious apps on iOS and to support users impacted by issues with apps downloaded outside of the App Store.”
Despite Apple’s apparent willingness to adapt its policies to align with the new regulatory requirements, an industry backlash against its new compliance plans has followed.
Epic Games CEO Tim Sweeney posted on social media that “Apple continues its malicious compliance by imposing an illegal new 15 percent junk fee on users migrating to competing stores and monitor commerce on these competing stores”.
He added that the updated terms make it uneconomical for developers to distribute apps through both the App Store and competing iOS app stores, “thus denying new app store market entrants any chance of competing and growing organically through better terms”.
Music streaming platform Spotify, another long-standing and vocal adversary of Apple, said that it deems the big tech's latest proposals are intentionally confusing and they disregard the inherent rationale behind the DMA. Spotify has called on the European Commission to investigate further.
The US landscape
Although currently confined to the EU, the outcome of these latest developments could have significant consequences for US developers, payment platforms and consumers.
The introduction of the new fees in the EU raises questions about what the impact might be in the US if similar changes were implemented by Apple, either in compliance with an update to an existing or a new US rule, or in an attempt to standardise practices globally.
Apple’s existing commission on in-app purchases already imposes a hefty financial burden on US developers that rely on the iOS ecosystem, which commands about a 40 percent market share, more than double the global percentage of Apple users. Higher fees can lead to higher costs for consumers and lower profit margins for developers.
In the US, as of January 2024, Apple implemented changes to how developers can offer in-app payments that require the use of the Apple payment system to remain in the App Store, which means they are forcibly required to incur the commission charge for doing so, including on memberships and subscriptions.
Patreon, the platform that allows users to run subscription services to sell products, has said that this has a direct impact on its “creators” and will significantly impact its pricing structure, and has since implemented tools that can either automatically increase prices within the iOS app to offset the fee change or keep the price the same and pay the fee out of earnings.
The former passes the cost onto the Apple consumer, and both mean a more complex and expensive experience for users. These changes could both deter consumers and prevent potential innovation as developers struggle to maintain profit margins.
Security v convenience
In its new policy update, Apple also wrote that using alternative payment service providers or link-outs to purchase digital goods introduces new threats to user security and privacy, which may affect the overall user experience.
This would be heightened by certain safety features, such as Apple’s problem reporting service not working in a third-party environment.
One of the major concerns that consumers and industry experts suggest underlies Apple’s case in the EU and its potential spillover to the US market is security.
According to one lawyer in the payments space who spoke to Vixio: “It's really about attacking Apple's walled ecosystem, opening up payments to others. It's a case of security versus convenience or access versus quality control.”
One consumer that Vixio spoke with during research for this article suggested that Apple simply has a better security track record than other similar companies such as Google or Microsoft, being traditionally less subject to hacks, bugs and malware issues.
Apple constantly updates its software to keep it as secure as possible, often forcing through updates to enhance security, and has long touted its security record.
But Apple’s influence over its payments ecosystem has drawn more than its fair share of disapproval.
“By owning the sandbox, you can push to position yourself for incredible profit to control over the industry,” said one industry source in the consumer banking sector, pointing to the parallel with the gaming sector, where Apple generates $2bn more profit than all other game manufacturers combined, including Nintendo, Sony and Activision.
“That's without them making games,” he said. “And they're doing the exact same thing with the payments ecosystem by running Apple Pay through there. That is the primary issue here in terms of regulation that needs to come into play.”
Security is also the main focus of DMA compliance measures. Apple’s introduction of new security protocols, such as Notarisation for apps distributed outside the App Store, looks to protect users from malware or fraud, but at the expense of convenience for users.
“Apple makes a good argument that says, ‘We make the hardware, we make the software’,” said the lawyer. “They may be running a monopoly, but they are also running a very secure environment.
"It's all about creating a safe ecosystem, and yes, they are profiting off it, but it also includes a lot of safety parameters and compliance requirements that make sure customers have a secure experience.”
Opening up the App Store to alternative payment service providers removes many of these safety parameters, and in doing so passes responsibility for security from Apple to the third-party providers.
“It becomes the customer's problem," the lawyer added. "I always advise fintechs looking to implement payment services to use a proper payments company, such as Stripe, in their offering. Then to simply have a disclaimer saying that no customer financial data is stored on the site and offload the responsibility. I assume Apple will do the same thing.”
Smaller companies would be “crazy” not to use reputable payment providers, he added, which would suggest the App Store is less likely to become a "wild west" than has been suggested.
Consumer data and privacy are very high on the regulatory agenda in the US, especially when it comes to finance, so it will be in the interest of Apple, developers and consumers to get this right if rules akin to those seen in the EU are imposed in the US.
Although there are tradeoffs, there are tensions between a desire for a secure platform and greater innovation that regulators should take heed of.
Consumer protection
A recent report from the Consumer Financial Protection Bureau (CFPB) indicates how US regulators may handle things.
In April, the CFPB drew attention to the financial and privacy risks that video gaming marketplaces pose to consumers, specifically as pertaining to digital financial transactions.
The report called for greater consumer protection in digital marketplaces and action to combat the growth in banking options and payments that are growing in the gaming sector, and said that it would be strongly monitoring activity to ensure compliance with the regulation.
The US Department of Justice (DOJ) has also taken action against Apple, arguing that it has imposed a monopoly on the entire US mobile phone industry, specifically suggesting that its closed ecosystem goes against consumers.
The case has yet to reach court in the US, but the implications of how the company acts in the EU regarding the payment disputes could have a bearing on how the DOJ views the company and its monopolistic tendencies once it does.
