Payments Post #14: Wallet World – WWDC, VFC, Tokens, and the Future of the “Card”

Justin Pituch

June 14, 2024

Glenbrook has its roots in Silicon Valley, and sometimes it shows: We tote around Macbooks instead of Thinkpads, we communicate via Slack, and at least a few of us are regular hoodie-wearers. And like other Silicon Valley types, we get excited about Apple’s Worldwide Developer Conference (WWDC) each year. At the 2024 event, we heard a lot about AI and iOS 18, but we also caught some notable changes to the Apple Wallet. We’ll take a look at what those changes mean and put them into context. Visa and Mastercard also recently announced new developments that position them to compete against Apple Wallet for consumer transactions. There’s a battle between card issuers and Apple over consumer behavior, and (10 years after the Wallet debuted) it’s just getting started.

Apple’s Wallet proposition has only gotten stronger since its debut. Over time, Apple added a host of capabilities (like loyalty features and digital ID support) and used the Wallet to move deeper into financial services through slick integrations with the Apple Card and Apple Cash. At WWDC 2024, Apple announced a number of notable feature additions. One is the capability to transfer funds from accounts to cards. Another is Apple Pay support for third-party BNPL and installment solutions at checkout. We also noted the expansion of Apple Pay into new browsers, including those running on non-Apple operating systems. We found it interesting that Apple is in search of new ecosystems to deploy its capabilities, especially since we’ve been thinking about how other players are plotting ways to reach into Apple’s ecosystem in the past month.

It’s no secret that card issuers dislike the 15 basis point fee they pay on each Apple Pay (credit card) transaction, despite the security and conversion advantages that it brings. At the same time, they struggle to influence user behavior. In the US, this issue is compounded by the fact that they can’t really offer consumers an alternative for in-person purchases: Apple’s NFC chip is proprietary–and locked away from third-party developers. This is different in Europe, where a long antitrust battle eventually led to Apple’s acquiescence. US issuers have had no such luck, although the Department of Justice has raised concerns with Apple’s practices.

Visa seems to understand issuers’ predicament. In their own annual developer conference (they are also enmeshed in the Silicon Valley milieu, after all), Visa executives announced a slew of new developments, including something called the Visa Flexible Credential, or VFC, which combines multiple funding sources into a single card with flexible user controls. My colleague Samantha Gordon recently published an article unpacking VFC alongside other developer announcements in which she argued that the VFC could be viewed as roughly analogous to a single-issuer wallet. I like that line of thinking since it highlights value for both the cardholder and their issuer.  An issuer is able to remain consistently top of wallet by offering flexibility across funding sources and BNPL integrations. Theoretically, they could limit the VFC from being used in the Apple Wallet; if you know how VFC might work with Apple Wallet, we’d love to learn more. Even if the two products play nicely with each other, VFC offers a glimpse into a future where issuers have more control over the consumer wallet experience.

Mastercard has also been thinking hard about the evolution of the cardholder experience. Glenbrookers were intrigued by an announcement that Mastercard is aiming to tokenize 100% of ecommerce purchases in Europe by 2030. Their goal is to keep users from inputting card numbers at checkout and to reduce fraud, using tokenization and passkeys to achieve that. It may sound straightforward, but this is an ambitious timeline, especially given that only roughly a quarter of Mastercard transactions are tokenized today. On the other hand, that figure is across the entire network, and e-commerce has been an important driver for payments innovation in general and tokenization in particular. And as Managing Partner Bryan Derman recently pointed out, consumers are already less and less likely to type in their card credentials at checkout, instead using Apple Pay or other wallets. Mastercard’s announcement may push European issuers to offer digital wallet products (and may push merchants to accept them) to ensure that they reach their tokenization goal. As a bit of a side note, the announcement inspired another colleague, Drew Edmond, to write a piece on LinkedIn answering a question many of us had after reading Mastercard’s announcement: What on earth is a passkey, anyway?

Apple, Visa, and Mastercard are all showing us what the future of card transactions could be. The cardholder experience will continue to become more wallet-driven and, as wallets evolve, more flexible. It seems like more meaningful competition from issuers and their network allies will be good for consumers. Now we have to watch to see if consumers will change their behavior. Will issuers convince cardholders to move from Apple Pay to their own ecosystem? Or will Apple continue to build products that keep customers using the Wallet? 

You’ll have plenty of time to ponder that before the next installment of Payments Post; I’ll be in Mongolia this time next month. We’ll return with a full report on the Mir payments system (now live in Ulaanbaatar) and another headline roundup in August. If you have any burning payments questions in the meantime, however, our contact page never takes a vacation.

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