The big announcement for me at the Apple Event last week wasn’t the new iPhone or the Apple Watch, lovely as they may be. Apple have long been rumoured to be entering the world of payments, and now with Apple Pay, they finally have. With more credit cards on file than any other company in the world, they, along with Google, Amazon and PayPal, represent the greatest disruptive threat to established payments systems than anything else out there.
Many, including me, were probably expecting a more aggressive payments entry. Something around storing value, the development of an Apple merchant terminal product, and moving funds from one customer to another through a closed network with low fees like PayPal (or newer entrants Dwolla), bypassing the banks altogether and undercutting them and the card companies on fees.
But Apple Pay isn’t challenging anyone other than mobile payments players who themselves haven’t really gotten off the ground yet. On the contrary, they’re entrenching the card companies, merchant processors and acquirers as the de facto payment network of the future. If this takes off, merchants are going to have to stop surcharging, build 2–3 percent into their pricing, and accept that domestic non-scheme payment networks and cash are just going to fade into history. The EMV Payment Tokenization Specification is designed to provide consumers much more protection of personal information than they’ve previously had, and with Touch ID, we have the first biometric option for payments that has any chance of being successful at scale. But despite all that, consumers are going to want to pay this way for no other reason than that it’s super cool, massively convenient and there’s very little friction between seeing someone else do it and being able to try it themselves. You just load your card into your iPhone, and you can play too.
Are the issuing banks at risk? Chris Skinner points out that this isn’t going to disrupt banks – the banks’ position is assured as they have a banking license. That license means that they’re always going to be able to do things that other participants can’t.
However, disruption doesn’t just mean displacement. What banks are at risk of is commoditization – their services indistinguishable to consumers, and their ability to add value through over the top services diminished by losing control of the customer experience – exactly what’s happened to the telcos. This isn’t necessarily a bad thing (look at all of the innovation layered on top of the card companies’ payments networks, or indeed, on telecommunications networks), but Apple Pay presents a very real commoditization threat – at least where issuing banks had any desire to define any significant part of a mobile payment experience. Apple Pay demonstrates how high the bar now is for banks and even other handset manufacturers to deliver a competitive customer experience. Further, a banking license is not there to protect banks, though that may be a side effect, so it’s pretty dangerous to rely on it as a moat. It’s there to protect their customers. Telecommunications licenses have provided little protection for telecommunications companies, who have moved from selling broad-brush connectivity and communication, to minutes and gigabytes by the dollar. Telcos will always be around, but they’ve moved to the background and are as fungible as frozen orange juice.
Once non-US customers see Apple Pay in action they’ll be heckling their local banks into being compatible issuers, and there’s going to be a heck of a first-mover advantage for the first banks that do, especially if they can secure exclusivity. We already know that Apple is taking a rebate from the issuing banks – depending on consumer demand and retailer readiness, I’d expect them to be able to negotiate a higher rebate from issuers in non-US markets, and a significant rebate for an exclusivity deal. But, assuming a critical mass of retailers, every iPhone owner is going to want a deposit account they can use with Apple Pay – and as iPhone 6 and Apple Watch sales spin up, that could be a big chunk of the market – time will tell. Strong non-US sales will give Apple a lot of power when negotiating Apple Pay market entry in those regions.
It’ll be really interesting to see how Google and Samsung respond. Apple Pay is compelling because of the meld of hardware, the operating system, and the software – all under Apple control. From the secure element to the Touch ID fingerprint reader to iOS to the Passbook application, they all work in concert to make Apple Pay possible on all Version 6 devices. Can Google and the independent handset manufacturers work together to do the same? Can they secure the same deals with issuing banks as Apple has? If they can, they’ll accelerate Apple Pay-like payment methods further and hasten the demise of cash and entrench the position of the card companies further.
Also interesting is whether iBeacon and Apple Pay end up working well together, or whether Apple releases iPads that support NFC. If this is the case, the right combination of technologies may be able to let retailers use software POS products to accept payments without additional POS hardware. The experience may end up being that you tap your phone to an iPad terminal, while you use Touch ID, and a receipt is emailed to you. Examples are out there already – but they’re far from ubiquitous.
I think Apple Pay, though yet to be proven, has the potential to be the biggest thing that’s happened to payments for a while. And if retailers embrace it, this is the best chance we’ve so far seen for a significant shift to mobile payments as an option. I’m excited.
What do you think of Apple Pay? Are any retailers out there willing to share whether they’re likely to support it? And as a merchant, how do you balance the desire to make it easy for your customers to pay, versus the cost of taking payment through credit cards? Is running a merchant account too expensive, or is it just the cost of doing business? And if you currently rely on surcharging to recoup the cost of accepting credit cards, is Apple Pay likely to change that?