Payment Solutions Including Apple Pay
By Denis Thomas
Management Consultant, KPMG
“Are P2P Payments next for Apple Pay?”
“Roger Federer slams Wimbledon all-white dresscode.”
“Pluto shows its spots to NASA probe.”
These are some of the headlines captured from some of the well-established newspapers. Time is a key factor with regards to news. The platform that publishes the news first receives the most traction and eventually the most TRP (Television Rating Point/Target Rating Point) ratings. At this juncture, the network effects work in its favour and all this builds credibility for the news channel and eventually the news network. This chain reaction raises a few questions in my mind:
- Timing is critical to news but is it to entrepreneurs? Would timing play the same role for serial entrepreneurs?
- Is there really a first-mover advantage or does it differ on a sectoral basis?
- Does timing affect tech giants?
We have often heard budding entrepreneurs complain: “That was exactly my idea, and that firm just received $5 million in funding which should have ideally been mine!”
In my view, in today’s dynamically evolving world of payments, timing matters and Apple has done a phenomenal job with regards to timing the Apple Pay product launch at the crux of the FinTech and Payments tsunami wave sweeping across the universe. Kudos, Apple! However, the main success of Apple Pay is dependent on its widespread adoption; a world devoid of credit cards and cash. Is that sci-fi or reality?
The Payments Ecosystem
Apple, Google, or Starbucks? Did you say Starbucks?
Apple is a limelight baby and receives all the media attention. Google closely follows Apple but the silent player in the payments space is Starbucks, which should definitely get a mention. Starbucks has combined the ease of payments for ordering a Frappuccino via their mobile app and provided additional value to customers by providing a single source for keeping track of all reward programmes in one space. This move has seen a huge adoption amongst consumers that prefer using the mobile app to order to skip the long lines typical of Starbucks outlets in New York and other university joints that witness huge traffic during certain hours of the day. This is in line with CEO Howard Schultz’s ambition of making mobile payments a top priority as Starbucks is the only company that claims 90% of the $1.6 billion spent in US stores was made using a smartphone in 2013.1
The following Figure shows a sample ecosystem.
Figure: A sample payment ecosystem
Categorically speaking, there are several players in the payments space, classified across e-wallets (Google Wallet, Visa Checkout, Apple Pay, Swap), bank credit cards (Wells Fargo, HSBC, Chase), business credit cards (Best Buy, Target), e-wallet platforms (hyperWallet, Fundamo, GoNow, Payou, Zenius), card associations (Visa, MasterCard, American Express), acquirers (Wells Fargo, FirstData, TD, Moneris), processors (Chase, GlobalPayments, FirstData), third- party processors (Stripe, PayPal, Square), ISOs (Everlink, Pivotal Payments), point-of-sale terminal technology (Ingenico Group, Verifone, Magtek), integrated systems (Micros, Vivonet, Profitek), in-store terminal payment providers (Chase, Payfirma, GlobalPayments), e-commerce payment providers (Stripe, Payfirma, Apple Pay, PayPal), recurring billing payment providers (Stripe, PayPal, Payfirma), mobile payment providers (Square, Venmo, Intuit), and tablet POS providers (Vend, NCR, Square, Payfirma).
Another layer, denoted as the close loop payment networks (Amazon Payments, Bitcoin, PayPal, Boku, Sometrics, Dwolla) would operate across the entire payment ecosystem layer between consumers and merchants.
The examples cited above cater towards the American market but provide a good overview of the players across categories and can be easily used for comparisons across countries.
In 2015, Google Wallet announced its plans to launch the P2P network and Apple quickly followed suit. The evolution of such technologies will give rise to newer authentication norms at the device level and position Google/Apple as an evolutionary payment bank. Apple has always drifted away from the complexity of financial transaction processing but the benefits of building one in-house are not a far-fetched idea. We could ask Starbucks who recently did that and enjoy over a million transactions as part of their own payment network.
So, would Apple transform into a payment bank? Perhaps, if the benefits add up. However, as Starbucks has proved, Google and Apple need to provide something extra so that people begin adopting their technologies. For consumers, it is no longer about payments but about the extra added value.
Energizer Effects
Apple will continue to innovate on the FinTech platform but Apple Pay displays Apple’s vertical integration efficiency through seamless blending of hardware, software, and user-friendly interfaces into a harmonious ecosystem. The above attributes are specific to Apple Pay and this will definitely energize the iOS ecosystem.
Privacy
Apple does a phenomenal job on privacy concerns by not storing the following:
- What you bought
- Where you bought it
- How much you paid for it.
Apple also refrains from exchanging any credit card information with merchants during transactions, which further boosts its security mechanism.
Merchant Adoption
Apple Pay is a new but comprehensive payment solution as 83% of financial institutions across America have already adopted it. An average of 22,000 stores have already signed up to adopt Apple Pay. Some of the names include Starbucks, Whole Foods, Bloomingdales, Disney, etc. Service providers like Uber and Groupon have also climbed aboard.
The above network numbers and the potential to add several more over the next year pack plenty of adoption potential for this technology amongst bigger merchants, but would similar tactics attract smaller merchants?
Consumer Adoption
Merchants are adopting Apple Pay and Apple recently published that over 700,000 merchants are on board that have set up operations to accept Apple Pay as a form of payment. But how many of you out there walk into a store with just a phone and no card and no cash? I don’t know any of my friends who do that in developed economies.
Let us change gears a bit and look at the following Figure. What do you see?
Figure: Penetration of mobile users vs. credit card users in India
Source: Secondary Technology Research Providers
The graphs show the penetration of mobile users vs. credit card users and the percentage of active users in each segment in India. The interesting part to observe is that the penetration of mobile devices and adoption is along similar lines for most emerging economies. This means that technologies that drive usage of payments via a mobile device would prove to be more successful in emerging economies. But, in order to arrive at the ultimate goal of transferring to a world with no cash or credit cards, we also need to shift focus from customer benefits to merchant benefits, as smaller merchants are not jumping on board due to the transaction fees involved. As long as smaller merchants do not adopt Apple Pay, the common people are always going to carry an alternative mode of payment. Apple needs to provide incentives for smaller merchants to enable the widespread adoption of Apple Pay. If I am using Apple Pay, I would like to use it at my grocery store, my service station, my laundromat, and also the street food stall across the corner that serves hot dogs and burgers. The list of usage scenarios is endless but you get my point.
Potential for Data Analytics
Apple is not storing transaction information and one might contend that the potential for big data usage is almost missing in this scenario. Apple alluded to the above through its Cupertino event as data being used for a bigger purpose, which could hint at advertising or other revenue streams. However, Apple could use big data through technologies like iBeacon to provide live feeds or additional spot discounts on products within one’s vicinity while shopping in a physical store. This approach to analysing big data as it flows in would avoid transactional data storage and spur the development of several applications around this domain. Apple Pay and Apple Watch users would eventually benefit from all these network externalities.
Industry Economics
Gartner (a technology research firm) states that the payment market is expected to generate a total of $721 billion in global transactions by 2017. This depicts a 35% CAGR (Compound Annual Growth Rate) from 2012. Mobile payments are expected to constitute 45% ($325 billion) of these transactions. The NFC (Near Field Communication) segment is expected to be 5% ($36 billion) by 2017 but is growing at 64% CAGR. Overall, this looks extremely lucrative.
Summary
- Apple Pay re-energizes the iOS ecosystem and provides a new stream of revenue for Apple.
- The existing user base of 800 million, plus iTunes’ accounts that already contain credit card information would contribute hugely to its success.
- Apple Pay has hit privacy concerns smack on their head.
- Payment industry economics and resulting network externalities may or may not work in Apple’s favour.
- Regulatory bodies will pay a huge role in the adoption of Apple Pay like similar technologies in emerging economies.
Apple Pay emerges to be by far the most innovative disruptor in the FinTech space. Its simplicity of use, current iTunes’ user base, privacy policies, security features, and comprehensive financial networks that have already been constructed promise a bright future for Apple and several start-ups that would eventually evolve around this domain.