Will ApplePay Be the Company’s Next Mega-Business?


It is a truth universally acknowledged that Apple is currently in need of a really big new product (a la iPhone or iPad) to keep growing. The iWatch isn’t it.

The company is definitely working on something in the automobile space, but I think there is more game-changing promise in the company’s push into payments.

Before the iPod there were music players and there were music subscription services. But Steve Jobs took over the arena by putting design polish on an existing player, as well as with a mixture of charm and ruthlessness negotiating the contracts with the record labels to make the iPod/iTunes product.

Similarly, before the iPhone was launched there were touchscreen phones, and developers “could” build products for phone companies and carriers — but the products were poor and the processes expensive and opaque. Apple built a beautiful premium product and offered a simple 2/3rds-1/3rd revenue model to developers that in hindsight was blindingly obvious.

The company has also built ApplePay which is also effortless and simple but (according to Forrester Research) has been used by only 3% of U.S. adults to pay offline or online in the past 3 months. Another 10%, however, used iTunes. These numbers are still way behind the 57% that use a credit card, but ahead of the 5% that use StarbucksPay.

ApplePay loads your credit card onto your phone, tokenizes it for security and lets you use your phone to pay at merchants who have NFC readers installed. Because the company needs more merchants, it has partnered with Square to offer NFC readers to many merchants.

And here I think lies a clue to Apple’s thinking: if “the legal online purchasing of music” and “the getting of  3rd party apps onto a mobile phone” were messy areas that the company waded into with past products, then the payments industry is, from the merchant’s point of view, a gigantic bag of hurt.

If a small merchant wants to accept credit card payments he or she has to enter a Byzantine world of shadowy charging. (So shadowy that the European Union recently forced Visa and MasterCard to lower their fees drastically).

This world involves the merchant, the customer, the customer’s bank, the merchant’s EPOS provider, the “payment gateway,” the merchant’s bank,  the credit card company for the merchant and the credit card companies for the customer. All of these players take a slice of the action.

Basically, the bigger you are and the better you are at negotiating a deal, the less you pay, but it is telling that Square has built a business on “only” charging small retailers 2.75% of the transaction. If a small business is making 5% to 10% in profit on average, that means half or a quarter of the profits are going just to process the transaction.

Apple has the ability to turn this closed shop on its head.

Apple could itself take the place of the customer’s bank, the  merchant, the “gateway,” the merchant’s bank,  and the credit card companies. Apple has the financial muscle. It could just about buy Visa and MasterCard together out of its spare cash. But it is not going to, because those companies are going to be worth a lot less if Apple does make its move.

Let’s break it down into its component parts:

The technology in the merchant: there are now hundreds of thousands of businesses running on iPad EPOS systems (including Square and Revel); even more businesses are running loyalty schemes on iPads (like Belly and Swipii); and restaurants running their reservation systems on iPads (via OpenTable and simpleERB). iPads already have an  NFC chip. Add an antenna and they can accept ApplePay.

The “payment gateway,” the companies that provide the interface to the credit card companies. This would be easy for Apple to replicate. The merchant’s bank, the company that “acquires” the merchant and issues the credit card account — they are redundant in the new Apple model, they no longer have any say in the matter.

The credit card company on the customer side provides the valuable service for the merchant of guaranteeing that as long as the merchant follows the procedures correctly, the customer can afford their purchase. But Apple has 800 million iTunes account holders. Currently these have credit card accounts associated with them. But if Apple were to ask its customers to link their bank accounts to the iTunes account like Paypal does, then the “card” in the ApplePay wallet on your iPhone no longer belongs to Visa or MasterCard. It belongs to Apple. Like Paypal’s “BillMeLater” it could function as a debit or as a credit card.

As for the credit card company on the merchant side, Square has developed a whole new business lending to small businesses on the basis that it knows about the merchant’s finances from running the ePOS. If Apple can get the financial information that exits on these merchant iPads, Apple can make an informed decision about whether to offer the merchant an account, or whether to lend it money.

So we have Apple with 800 million premium account holders, (who as we know spend a lot more than non iPhone users); small merchants using NFC-enabled iPads; and credit card companies and hopeless banks skimming money out of the middle.

If Apple creates an “AppleBank” for its premium, high-spending consumers who trust it, then it has some singular advantages. Although Apple talks a good game about not selling your data, it knows a lot about you from what you do on your iPhone and can infer an awful lot more. It can solve the “Why use ApplePay rather than my credit card problem” with rewards via its iTunes store, (a free music track for using ApplePay five times perhaps…) — and will supply direct rewards to merchants who are happy to be saving money.

Meanwhile, Apple, is looking for something to do with its cash reserves (which are spread across the world, and which it doesn’t want to bring back to the U.S.) What better to do with it than to lend it to than its own customers, consumers and merchants the world over? Consumer APR’s sure beat government bonds for rate of return.

Also let’s not forget all of Apple’s expertise on maps and local search, where they are spending a lot. They can drive users to ApplePay-enabled merchants as Michael Boland argued recently here on Street Fight.

If I were Visa or MasterCard I would be pretty worried, and opening up to third-party developers, as Visa is now doing, is too little too late.

Essentially, no one has the advantages that Apple now has in the local payments space. They are slowly and quietly assembling the pieces for this to become Apple’s Next Big Thing (even if it is not quite as sexy as the AppleCar).

ronnieRonnie Somerville is the founder of restaurant reservation websites 5pm.co.uk and simpleERB.com. He is also a seed investor in small business CRM solution Swipii.

  1. John Mazur
    March 2, 2016

    Great article and I strongly agree with Ronnie’s premise. One thing Starbucks knows that The industry is waking up to is that combining early adopter payment technology like Apple Pay with digital loyalty programs drives higher usage of both. At Belly (bellycard.com), the data has increasingly convinced us that mobile payments and digital loyalty will continue to converge and drive greater adoption of both..

  2. bolamike
    March 2, 2016

    Good analysis. Thanks for the shoutout.

  3. DF
    March 3, 2016

    Don’t agree with your analysis.

    If I were Visa or MasterCard I’d be pretty happy that Apple Pay (and Android/Samsung Pay) were all using their rails and tokenisation tech. The power is with them and not Apple, as the shocking take up of Apple Pay shows.

    1. Ronnie Somerville
      March 3, 2016

      DF , I don’t think the evidence stacks up for your argument.

      1) Credit cards have been around for DECADES but still have only around 70% penetration in the US and UK.
      2) The iPhone launched the smartphone revolution in 2007, now more than 75% of Americans have a smartphone
      3) Mobile payments from smartphones are growing at a compound annual growth rate of about 150% (one hundred and fifty per cent).

      The take up of ApplePay might be slower than Apple would have liked, but Apple have all the cards, (sorry!) They have the users, they have the leading edge tech, they have 3rd party innovator app developers, they have iPads breeding like rabbits on merchants’ counters.

      CreditKarma figures suggest that 7% of US credit card holders use their cards for over 90% of their purchases, that’s 7% of about 170 million credit card holders in the US. Let’s call them “credit card super users”

      In mid 2015 Pymnts and infoScout suggested that 5% of iPhone users who could use ApplePay did so “every chance they get and/or every time they remember.” 5% of 24 million users. Let’s call them “ApplePay superusers”.

      And since Apple Pay is usage is severely limited by the limited number of merchants that accept it then it would seem reasonable to assume that given more merchants that 5% would be a lot higher.

      So after only a few months of ApplePay it already has a similar % of “super users” as credit cards do after decades of use.

      1. DF
        March 4, 2016

        You’re missing the wider picture. Apple chose (or had to depending on your view) play with existing tech, at least for card present and the existing four party scheme model. It had to deal with schemes and then each and every issuing bank country by country. Users can easily move to another phone and just switch on their existing card on say Android Pay.

        I would suggest online Apple Pay could be more disruptive – and certainly more sticky.

        1. Ronnie Somerville
          March 4, 2016

          Agree with you but think that Apple could ditch those partners as soons as it becomes advantageous. Think of the sweetheart deals they did with one carrier in each country they launched the iPhone in.

          1. DF
            March 4, 2016

            No – they can’t. That’s my point.

          2. Ronnie Somerville
            March 4, 2016

            Yes, you are right, “ditch” is the wrong word. But what Apple will be able to do is put in place on the smartphone their own “card” linked to Apple Bank accounts . One that is better for the customer , and better for the merchant. And people will use them in preference to the cards already there. There are any number of people doing good stuff around making banking easier, tracking expenditure better. Apple can take the best and turbocharge it.
            Remember computer stores before the AppleStore? Ugly uncomfortable unsexy places at the bottom of the retail pile. Apple turned that completely on its head by applying the UX and design rules that they been applying for years to their products and software to the buying experience. My argument is that banking, card and payments is as unsexy and messed up as computer retail was and just as ripe for an Apple makeover. Apple has the expertise do everything better, from the retail bank (Personal Finance Geniuses anyone?) to the user experience of bank accounts, to the total mess that merchants put up with, to the EPOS itself. Apple need big categories. Retail is big they have nailed that. Health they have started on. Cars are big. Payments and banking is big and they have so much of the jigsaw in place already.

          3. Ronnie Somerville
            March 10, 2016

            Just saw a link on the StreetFight newsletter today. “Amazon leasing 20 Boeing 747’s to rely less on carriers like UPS”. This is a good analogy regarding the “rails” argument. Apple will rely on Visa & MC for only so long as it suits them.

  4. Ronnie Somerville
    March 10, 2016

    And see this very perceptive article : http://azpaymentsgroup.com/blogg/apple-has-huge-plans-for-apple-pay/

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