Over the last week or so, since Apple launched Apple Pay on 9 September, I have been reading lots of commentary – like this article from the New York Times – that Apple Pay is no big deal. Sure, they say, it may lead to some marginal improvements in convenience for consumers and it will likely cut fraud, but it is hardly the revolution in payments that we might have expected. After all, through Apple Pay we’ll still be using credit cards, albeit indirectly, and paying over the same card issuer schemes. So how can Apple Pay really be shaking things up? Well, part of what makes Apple Pay interesting lies precisely in its attempt to preserve the status quo. However, Apple Pay is also a highly strategic move in the long game of financial services disintermediation.
A lifeline for Visa and Mastercard
Apple Pay uses a technology known as HCE (Host Card Emulation), which Wikipedia describes as “virtual and exact representation of a smart card using only software”. HCE has been endorsed by Europay, Mastercard and Visa (EMV) and both Visa and Mastercard have worked closely with Apple to help bring Apple Pay to market. The reason? While Apple Pay dematerialises the physical wallet, it is otherwise pretty conventional in the way it works. A merchant acquirer terminal reads the wireless instructions sent by Apple Pay, which are then processed through the existing card schemes. So, although EMV will likely see some compression in fees over time as Apple is able to exert more pressure and the incidence of fraud (which in part justifies present fees) falls, the future of EMV is safeguarded – for a while at least.
A stay of execution, but do merchant acquirers and scheme operators have a long term future?
The world is moving towards real-time payments. Mexico, the UK, Singapore and Sweden all operate real-time payment systems, many other countries are implementing such a system (e.g Australia) and countless others are investigating the possibility of real-time payments. With real-time payments, an individual can make a mobile payment – using a service such as PayM in the UK – and the recipient will receive value instantly (before settlement). But as well as receiving instant value, the merchant does not have to use a merchant acquirer service or pay fees to the credit card scheme operator. It is difficult to see how, long term, these real-time peer-to-peer payments won’t supersede credit card payments even though eventually it probably will come down to a choice for Apple (which theoretically could also process payments using iTunes if it wanted).
The data prize
The convenience and the fraud prevention aspects of Apple Pay are interesting, but the real value is in the data. Apple Pay doesn’t store any of a customer’s data on the smartphone itself and most of the sensitive data is encrypted. However, that does not stop Apple from gaining information regarding such things as the merchant name, the date and time of the transaction, which it can then associate with a person’s Apple ID.
A marketplace for financial services
With more data comes more power. Pretty soon, Apple will be a position to recommend third-party products and services to you (a service it can monetize in a number of ways such as taking a commission), it can help you make better and more informed spending decisions (e.g. letting you know there is a sale on at a merchant you use regularly) and so on. This would ultimately enable Apple to offer a marketplace for financial products without having to offer those services themselves.
Where would this leave traditional banks? Unfortunately, unless banks make the necessary changes to their business to take a much more active role in customers’ commercial and financial lives (see my paper on lessons from industry disruptors), the future looks like one where banks will lose the direct relationship with the customer and, by extension, any control over price or any capability to cross- or up-sell; that is, a future as a provider of a highly-regulated commodity service.
You see, Apple Pay is about more than making your iPhone stickier; it’s about making Apple stickier.