Payment Lock-In Mandates: A steep price to pay

September 20, 2021 7:00 AM

App marketplaces’ payment lock-in mandates could have a devastating effect on the start-up ecosystem

Financially this could translate into more than 50% of revenues earned going back to the companies owning these app marketplaces, which may also bypass taxation depending on how these are structured and set up.Financially this could translate into more than 50% of revenues earned going back to the companies owning these app marketplaces, which may also bypass taxation depending on how these are structured and set up.

By Rameesh Kailasam

Even as smartphone penetration continues to grow exponentially across the globe, the pandemic has added pace to adoption of the app-based digital economy. An app marketplace is like a real-world mall, only digital; it houses many shops and behaves like a distribution platform for any mobile/computer software (commonly called apps). The mobile app industry has been contributing billions of dollars in revenue for app marketplaces. Both Apple and Google may not have perceived their app stores initially to be key revenue generators, but, In 2020, the revenues from Apple iOS and Google Android apps alone touched $111 billion, with Apple holding a 65% share in value of revenue while Google is numerically higher in users due to widespread penetration of Android.

An app pays for its existence from inception to various stages of the continuum of its growth. A large part of the payment is for development around the operating system, listing on the app store, promotion of the app on the store, advertising, promoting app downloads, distribution, usage of other features such as search, maps, marketing, payment gateways, commission cuts and government taxes.

Apple’s App Store charges a 30% commission on apps and in-app purchases of digital goods and services initially, falling to 15% after the first year. For Google, the rate and model of commission is similar to Apple’s. In both cases, real world products are exempt and only virtual world goods and services are covered. In case of Samsung Galaxy Store, the commission is 30%, but with room for negotiation. Amazon’s App Store is similar to Apple and Google. Microsoft, this year, announced bringing down the commission to 15%, with 12% on games; however, the 30% rate remains for purchases on XBox consoles.

App developers feel that strict policies that lock you down to an environment for payments are restrictive in nature. Also, aspects such as ‘play-distributed apps’ using their billing system as the method of payment if they require or accept payment for access to features or services—including any app functionality, digital content or goods—unfairly bind them.

A lock-in of sorts on the payments side may seem equivalent to paying an MDR of 30% or 15%. If one were to analyse the type of apps that potentially fall into this subscription category, it will include apps in the education space, which has gone online and is critical to a developing country like India, matrimony which is a critical social requirement, health and fitness (of utmost priority these days). In addition, come many other areas critical for information, current affairs, mental well-being and engagements such as news, music, gaming and even business.

Financially this could translate into more than 50% of revenues earned going back to the companies owning these app marketplaces, which may also bypass taxation depending on how these are structured and set up.

The best way out is for the customer and app-developer to have the freedom to choose, as practiced currently without any forced lock-ins. Such lock-in mandates on payments may also potentially conflict with RBI regulations and consumer protection regulations. The proposed model is exponentially high as at 30% and 15%, in comparison to 2 to 4% which seems to be global upper limits for fee charged by payment providers and credit card networks. Primarily, such commissions are unwarranted since there is already a thriving revenue model. Such forced commission models can have a devastating effect on the emergence of the start-up and app ecosystem.

The challenge emanating from such captive app marketplaces today is being felt by the startup ecosystem which also complains of a lack of algorithmic transparency and an increasing stranglehold through bundled services and payment lock-ins.

Taking cognidance of this, the South Korean parliament recently approved a law that restricts major app stores from requiring developers to only use their payment systems to process the sale of digital products and services. This means that app developers will not be forced to pay the 30% and 15% commissions on every payment to these app marketplaces.

In Japan, the rules had earlier also barred “reader apps” wherein consumers consumed content bought elsewhere. This month, Apple has said in Japan that they would drop that rule starting early next year as part of the conclusion of an investigation by the Japan Fair Trade Commission (JFTC).

Epic and Apple have been engaged in a legal battle that seems to continue despite a district court ruling in the US. Epic had given its Fortnite players a choice to pay through either iOS and Google Play or Epic direct payment thereby passing on savings to avoid paying the 30% or 15% requirement that was contested.

It will be important for India to look at these developments closely as India now has the fastest emerging start-up and unicorn ecosystem which needs insulation from such business practices. Today, we all use various apps in our daily professional and social lives. Through such forced lock-in models and proprietary controls around payments, consumers may get trapped paying unfairly high prices, and freedom of choice will be the ultimate casualty.

The author is CEO, Indiatech.org

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