Apple Opens Tap-to-Pay to Competitors, but Can They Take Advantage?

With Apple previously not allowing this, many digital wallets turned to things like QR codes or other workarounds to turn their iPhone apps into in-store payment tools. PayPal PYPL 0.03%increase; green up pointing triangle, for example, has long sought to become “omnichannel” by crossing the threshold from digital online and mobile payments to in-store payments. Being able to tap with PayPal’s iPhone app might be game-changing for that effort, particularly with younger consumers who have been faster to adopt in-store digital payments.

“Where there are locations where NFC opens up, that obviously becomes a very easy opportunity for us to provide a wallet in an Android or iPhone operating system, and we will be ready,” PayPal Chief Executive Alex Chriss told analysts earlier this year.

But before investors start drastically rerating digital wallet and payment companies for a bigger addressable market, consider a few things. First, a competing tap-to-pay app on an iPhone would need to get the customer to go through the trouble of switching from the default option when the phone is tapped to pay.

It is also not an end-run around Apple. Apple said it would require the developers to have a “commercial agreement” with Apple and “pay the associated fees.” So for example, while Apple Pay typically charges credit-card issuers a fee when their cards are used in the wallet, whether having customers tap a card via the card issuer’s own app is ultimately cheaper, or otherwise more advantageous, might depend on those terms.

Nor is it necessarily a new pathway to cheaper, non-card payments. On paper, it seems like a phone tap could be funded with any payment instrument, not just a stored credit or debit card. In practice, though, it is not so simple. For one, the payment type would need to be set up for secure tap payments. And then it would need to be accepted by the payment terminal at the merchant’s end. Plus, many neobanks will still earn interchange revenue associated with card swipes.

And more generally, while in-store might be a growth opportunity for many online-payment players, they must watch their flank, too. Apple Pay is continuing to press to take share in mobile and web payments, including via some recent enhancements to make it easier to use across browsers other than Apple’s Safari.

Still, there are big rewards to those who increasingly go omnichannel. Giving users potentially another reason to engage with a payment app via tap-to-pay could give a big lift to services like PayPal that are trying to do much more than just online checkout payments. They want to be a digital financial hub for consumers, and a broader commerce partner to merchants. 

“The impacts we see aren’t necessarily with the payments process, but rather the newfound ability for the likes of PayPal, a bank, etc. to drive consumer engagement by replacing Apple Wallet as the default payments app,” equity analysts at Financial Technology Partners wrote in a note this week.

Using the app more might prompt users to do a variety of higher-value things, too, such as borrowing money via installment payments, accessing merchant offers, storing money, and so on. Apple, too, has sought to pack its wallet app with services such as a cash account, balance information and other kinds of things you might find in a physical wallet, like IDs and event tickets.

Apple has opened a new door for competing wallets. It is up to others to show consumers why they should walk through it.

Write to Telis Demos at Telis.Demos@wsj.com

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