Apple is sticking taxpayers with part of the bill for rollout of tech giant’s digital ID card


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Wallet and keys
Source: Apple

Apple is making U.S. states foot part of the bill and provide customer support for its plan to turn iPhones into digital identification cards, according to confidential documents obtained by CNBC.

The company requires states to maintain the systems needed to issue and service credentials, hire project managers to respond to Apple inquiries, prominently market the new feature and push for its adoption with other government agencies, all at taxpayer expense, according to contracts signed by four states.

Apple announced in June that its users could soon store state-issued identification cards in the iPhone’s Wallet app, billing it as a more secure and convenient way for customers to provide credentials in a variety of in-person and remote settings. The feature, when combined with Apple’s biometric security measures like Face ID, could cut down on fraud.

But the move has brought questions from industry observers about why local authorities are ceding control of citizens’ identities to a $2.46 trillion private corporation. Beyond that, the integration of identity into powerful mobile devices has drawn concern from privacy experts about the risk of dystopian scenarios involving surveillance.

The contracts between Cupertino, California-based Apple and states including Georgia, Arizona, Kentucky and Oklahoma provide a rare glimpse into the dealings of the powerful company. Apple is known for its obsession with secrecy. It typically forces potential partners to sign non-disclosure agreements to prevent its documents from spilling into public view.

`Sole discretion’

The 7-page memorandum of agreement, obtained through public record requests from CNBC and other sources, mostly portrays Apple as having a high degree of control over the government agencies responsible for issuing identification cards.

Georgia and Arizona will be the first states to offer driver licenses on the Wallet app, but have yet to launch their programs. While the contracts obtained were virtually identical across states, CNBC did not review agreements for Connecticut, Iowa, Maryland and Utah, the four other states that have signed up for Apple’s digital ID program.

Apple has “sole discretion” for key aspects of the program, including what types of devices will be compatible with the digital IDs, how states are required to report on the performance of the effort, and when the program is launched, according to the documents. Apple even gets to review and approve the marketing that states are required to do.

The dynamic is similar to the way Apple typically deals with vendors, although instead of getting paid by Apple, the states have to shoulder the financial burden of administering the programs, according to Jason Mikula, a fintech consultant and newsletter author who obtained some of the contracts.

“It’s like a vendor relationship, which makes no sense to me because it’s the states that have the monopoly on what they’re giving to Apple, they could presumably negotiate a much more equal contract,” Mikula said in an interview. “I don’t know of any other example where government-owned systems and identity credentials were made available for commercial purposes in this manner.”

Apple declined to comment for this article. Representatives for Georgia, Arizona, Kentucky and Oklahoma didn’t immediately respond to requests for comment.

Along with the digitization of industries from finance to entertainment, there is a push around the world to create more modern digital ID systems. But efforts in countries including Singapore, France, Germany and China are implemented at the national level rather than through private companies, according to Phillip Phan, a professor at the Johns Hopkins Carey Business School.

Apple in control

Throughout the contracts, it’s clear who is in the driver’s seat.

Apple is asking states to comply with security requirements laid out by the International Organization for Standardization describing mobile driver licenses. Apple said in September it played an active role in the standard’s development.

States have to agree to “allocate reasonably sufficient personnel and resources (e.g., staff, project management and funding) to support the launch of the Program on a timeline to be determined by Apple,” according to the documents. That includes performing quality testing that the digital IDs work “in accordance with Apple’s certification requirements” across various Apple devices.

“If requested by Apple, Agency will designate one or more project manager(s) who shall be responsible for responding to Apple’s questions and issues relating to the Program,” the contract states.

States have to agree to wide-ranging efforts designed to ensure the adoption of Apple’s digital IDs, including by offering the new feature “proactively” and at no additional cost whenever a citizen gets new or replacement identification cards.

States also have to help spur adoption of the new IDs with “key stakeholders in federal and state government” like the Internal Revenue Service, state and local law enforcement, and businesses that restrict users by age who are “critical to the Program achieving a sufficient level of acceptance.”

While the state agencies have to “prominently feature the Program in all public-facing communications relating to Digital Identity Credentials,” the marketing efforts are “subject in all cases to Apple’s prior review and approval.”

All these efforts are paid for by states. The contract says that “except as otherwise agreed upon between the Parties, neither Party shall owe the other Party any fees under this Agreement.”

When asked if his state was in line for payments from Apple, a communications officer for the Arizona Department of Transportation confirmed that “no payment or economic considerations exist.”

No guard rails

The end result is that states bear the burden of maintaining technology systems at taxpayer expense, a move that ultimately benefits Apple and its shareholders by making its devices even more essential than they already are.

“Apple’s interest is clear – sell more iPhones,” Phan said in an interview. “The state’s interest is to serve its citizens, but I’m not sure why they think a partnership with one specific technology company that owns a closed ecosystem is the best way to do it. For the state to spend taxpayer’s money on a product that serves only half its citizens is questionable.”

Apple’s Wallet app is not a major revenue source for the company, although it generates fees from Apple Pay transactions, which is reported in the company’s services business. Instead, the Wallet app and other services are strategic features to make the iPhone more valuable to customers and discourage them from switching to competitors like Google’s Android.

Importantly, in its contract, Apple shifts responsibility for confirming the authenticity of user identities onto states: “Apple shall not be liable for any Verification Results, and Agency acknowledges that all Verification Results are provided `AS IS’ and without any warranty, express, implied or otherwise, regarding its accuracy or performance.”

The agreements are also notable for what is missing, in terms of constraints or guard rails on how Apple can use the powerful capability of identity verification, according to Mikula. That raises questions about whether the company can restrict access to the new capability for competitors’ products.

“Apple has a history of leveraging its dominant position in phone hardware and software to preference its own offerings and exact a toll from third parties using its platforms,” he said.

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