The Anti-Trust: On Apple and the EMV payment shift

The US Justice Department is taking Apple to task for the iPhone’s central bug / feature: its walled garden application access. As the Journal clarifies, the current DOJ lawsuit “doesn’t focus on the App Store’s tie to Apple’s payment technology.”

Apple’s defense lawyers apparently told their client their enormous billings were, in part, due to the government’s changing “its legal theories against the company at least six times over the past four years.” The suit also “alleges that Apple prevents banks and credit unions from offering products that would compete with the iPhone’s digital wallet.” Credit unions challenged these restrictions in 2022, which a district court judge last year declined to dismiss, asserting the plaintiffs “had a plausible claim that Apple charges ‘arbitrary and inflated fees’ to card issuers.”

iPhone, and iOS’s, private-park design was inherited from Apple’s Mac computer and OS. While Windows supports a multitude of hardware, including CPUs and GPUs in all manner of form factors, modern MacOS runs only on hardware, including processors, designed by Apple. Mac users trade adaptability and flexibility for performance and consistency, just as iPhone users who care know they cannot run a BitTorrent client on iOS. (I’ll also note by keeping MacBook designs largely consistent, MacBooks stay fashionable.)

Another option for smartphones exists, and it’s called Android, which is broadly open, supporting a multitude of device and processors designers and manufacturers. Offerings range from low-end phones for developing nations to boutique ultrasecure phones to; Android is also heavily localized, with separate Chinese flavors without restricted Western applications, for example. This makes sense, Android’s publisher, Google, wants you on the web wherever you are to sell you ads. Apple, meanwhile, sells “brand experience” at whatever markup the market will bear.

Apple’s walled garden is noticeable, because we can choose to go borderless. What about another “garden” with much higher walls; that is, the electronic payment networks operated by Visa, MasterCard, American Express, and Discover (or soon Capital One). These networks set transaction fees for billions of consumers using thousands of products: different credit cards. The merchants vary from churches to PornHub, purchases range from all manner of prophylaxis to precursors for crystal methamphetamine. Four payment networks cover the entire US (and largely world) economy; their issuing banks bribe customers with rewards while charging exorbitant interest rates; meanwhile, payment networks run a racket on their merchant partners, who cannot afford to be cut off but will be kept in line through complicated and punitive pricing and dispute-resolution approaches

One event illustrates how antitrust can, in certain instances with heavy marketing and PR investment, look like consumer protection, and be defeated by the regulatory system: the EMV liability shift. EMV stands for Europay, MasterCard, and Visa, and is shorthand for the chip that payment cards now sport to defeat swipe fraud. The magnetic strip of a payment cared could store only basic information and could be rewritten, with much fraud as a result. With chip cards, the payment is validated and transacted using the chip, which remains in the reader during the process (hence the requirement it remain inserted throughout the transaction). The transition to in-person EMV payments has forced much payment fraud online. This almost sounds like a success story.

How was this accomplished? Through the so-called EMV liability shift, whereby the payment networks banded together to force merchants to change their ways en masse. Before the liability shift, card issuers were responsible for paying for fraudulent transactions, so long as the card was swiped and signature verified. The day after the liability shift, merchants were responsible for fraudulent transactions when a chip was present but the card was swiped. This meant merchants everywhere suddenly had enormous incentive to update their payment systems, including credit card readers, a major undertaking. The collusion prevented merchants from dropping acceptance for a payment network that shifted liability rather than updating expensive hardware and often entire point-of-sale terminals. The payment networks simultaneously brought down a big stick to its merchant-partners who were already paying transaction fees.

And yet the biggest losers are the online merchants who now must deal with increased, more sophisticated fraud. Many of these are also mom and pop businesses who now must become experts on card testing, binning, and the tech-sophisticated world of online carding. Also, some small retailers were almost certainly forced out of business by the cost, time, and tech required to avoid the liability shift’s painful consequences.

When a hammer comes down simultaneously on all of us, we have sometimes called it an act of god. We should generally avoid entrusting companies with that power.