The One Big Thing Apple’s Project Breakout Needs but Doesn’t Have

Project Breakout is said to be Apple’s now-not-so-secret plan to turn itself into a full-fledged payments and financial services company by building its own acquiring, payments processing, risk management, fraud and credit underwriting capabilities. As reported last week by Bloomberg, this move is intended to reduce Apple’s reliance on FinTechs and other third parties — card networks, acquirers and banks, to name but a few — and bring all of those capabilities in-house.

It was reported that the stock prices of Apple partners, including Apple’s bank partner Goldman Sachs, dropped on the news. That said, I’m pretty sure that everyone whose core business is payments and financial services had a good chuckle when they heard it. Payments only looks easy — Apple should know this better than most, given its disappointing performance with Apple Pay in the seven years since its launch. Particularly considering Apple Pay has achieved its modest gains with a lot of help from many of the players Apple would reportedly like to disintermediate.

That said, Apple’s Project Breakout ambitions should hardly come as a surprise. Apple is under pressure now to find the next big revenue opportunity.

Its business model is selling hardware — iPhones, iPads and MacBooks — and taking a 30 percent cut of what App Store digital apps charge. Both of those revenue streams are threatened everywhere in the world — and for different reasons.

Apple’s made a big push into Services, which includes Apple Pay and all of its subscription offerings, but those sales account for only about 16 percent of Apple’s overall revenue, according to Apple’s reported Q1 2022 earnings. And given Apple’s penchant for opacity when reporting results, we don’t really know what’s driving the growth inside of that business unit.

Related: Apple Services, Wearables, 5G Devices Drive Record Quarter That Defied Supply Chain Woes

Enter payments and financial services, which apparently look like that next big thing to Apple’s top brass. Maybe it’s even a sign that Apple is getting sick of all of the prevailing Big-Tech-must-be-Bad-Tech bashing and interested in pivoting instead to a kinder, gentler, less regulator-antagonistic FinTech persona.

Forget BigTech Apple. Meet FinTech Apple, which simply enables embedded payments and credit options for all transactions happening inside apps that iPhone users download from the App Store – the technology FinTech platform that also happens to sell some phones and computers and subscription services, too, inside of its consumer-driven, privacy-first financial services ecosystem.

Apple, the consumer-driven, privacy-first financial services ecosystem, which will protect consumers’ interests inside of its ecosystem by establishing new ground rules for how stakeholders engage and how that engagement is monetized. That could even mean a different business model than the one stakeholders know today.

There are only two problems with this thinking.

First, Apple’s track record in payments hasn’t been all that great so far.

Seven years after the launch of Apple Pay, PYMNTS analysis shows that 94 percent of U.S. consumers who could use Apple Pay to check out in the physical store still don’t, and that statistic has held steady since its launch. According to our analysis, Apple Pay accounts for roughly 2% of overall retail sales in the U.S., even though there are more people than ever with iPhones capable of using Apple Pay and more stores than ever that accept it.

Read more: Apple Pay at 7 Data Shows Lackluster In-Store Usage of Digital Wallets

Second, and most important, the App Store isn’t a commerce ecosystem and Apple isn’t thought of by consumers as a commerce network.

The App Store is simply that: a place that consumers go to search for and download apps. Developers use the App Store as a distribution channel and not a place where consumers go shopping for products. Those apps sit on the home screen of the consumer’s iPhone. It is inside of those apps that consumers engage in commerce – searching for and then buying things, then deciding how they want to take possession of them.

Not only does Apple have a ton of work to do to change the consumer’s perception of the App Store from a place they go to download an app to a commerce ecosystem, but it will also take a lot of real work to turn Apple Pay into a platform that brings consumers and merchants together to engage and transact. At the moment, it is simply a payment option that consumers don’t really use much today to buy many things.

At the same time that Apple undertakes a massive effort to build a payments and financial services business from scratch.

Connecting the many Apple FinTech dots

Apple’s FinTech ambitions are not a big secret. They’ve been dropping a number of clues over the last couple of years suggesting that adding more Apple-native payments and financial services is part of a larger strategy, one that could lay the groundwork for Apple as a commerce ecosystem.

There’s the introduction of Apple-as-a-Service, Apple Installments.

Apple’s infamous Apple fan-boys will camp outside of the Apple Store days before a product release to be among the first to get one. That’s different, though, from having consumers feel a connection to Apple in the same way that Amazon Prime customers feel a connection to Amazon when they buy from them.

Apple’s Installment program announcement could be a first step to changing that mindset, perhaps even a V.1 for introducing Apple’s version of Amazon Prime. Introducing a bundle of hardware and software services provided by Apple for a set monthly fee creates a different relationship between Apple and its customers — and a platform for building on those bundles to keep users loyal to Apple and its ecosystem. This Apple-as-a-Service initiative could turn buyers of its devices and users of its à la carte subscription services into “members” of an expanding Apple ecosystem.

Then, there’s Apple’s move to use advertising to keep app developers sticky.

Apple’s decision in January of 2020 to force app developers to allow consumers to opt out of tracking put a big dent in their ability to target and track users. It also ignited Apple’s App Store advertising business.

As consumers opted out of tracking, brands opted out of putting their ad dollars into Facebook and Google and opted in to buying Apple’s Search Ads to drive downloads and conversions. It has been reported that the number of app downloads attributed to those ads increased nearly four-fold year over year. Mobile analytics platform Branch reported that 58 percent of Apple’s App Store downloads in 2021 were the result of Apple’s App Store ads, compared to 17 percent the year prior.

See also: Data Privacy Day Coincides With Apple’s Ad Tracking Changes

Those are the same developers who could potentially become another revenue stream for Apple if Apple becomes a payments processor, including the opportunity for Apple to further monetize transactions beyond processing fees.

Apple commissioned an economic study in 2019 to show the App Store breakdown of commissionable app sales (digital goods) and non-commissionable app sales (general retail, travel and ride hailing). That report shows that of the $519 billion in total 2019 App Store sales, $413 billion was related to non-commissionable apps. General retail accounted for $268 billion of those sales, ride hailing for $40 billion and travel apps for $57 billion. The intended takeaway of that report was that the vast majority of revenue coming from the App Store is from apps for which Apple does not take a cut of transactions.

Maybe not forever.

As Apple looks to diversify its revenue streams and create a commerce network, it might explore creating a new business model to monetize the non-commissionable apps that provide physical goods or services. Bringing payments and financial services in-house could be part of such a strategy.

Apple put a toe into the Open Banking waters by buying Credit Kudos.

Apple Pay Later, Apple’s BNPL product, is already pretty late. News of this BNPL product was announced (leaked?) in July of 2021. Eight months later, we still don’t really know what that program will look like. It is reported that it will more or less follow the typical BNPL playbook: pay in four installments every two weeks without interest for smaller-dollar purchases; pay in monthly installments over a longer period of time with interest for larger purchases.

See also: Apple Working On ‘Apple Pay Later’ Monthly Installment Offering

As I wrote in July when the news broke, Apple Pay Later is in a bit of a conundrum about how it will go to market, since its model is reportedly to leverage existing lines of credit on bank-issued cards. That also happens to be the model that banks and FinTechs working with banks and acquirers are also using.

Read more: Apple Pay Later Could Pose Larger Threat To Card Issuers Than To BNPL Players

When Apple announced the acquisition of U.K.-based Credit Kudos for $150 million on March 23, it was described as a way to help Apple underwrite and manage the risk for small-dollar purchases. It could be the steppingstone to something more.

Read on: Apple Acquires Credit Kudos, UK Data Tool for Lenders

Credit Kudos describes itself as an Open Banking tech platform, regulated by the U.K.’s FCA. Provided that the deal closes, it will provide Apple with access to the bank account details of any potential borrower — Apple’s or anyone’s — who has granted Credit Kudos permission. The U.K. is also a market where Apple Pay has roughly 3.5 times more usage than other markets. It could be that the Credit Kudos platform is used to support an account-to-account BNPL service over open banking rails, first in the U.K. and then the U.S.

There’s the Apple Card, which set the bar for credit card provisioning.

In partnership with Goldman, Apple innovated credits with its Apple Card. Everything — from the application process to the activation process, from the user experience when purchasing to the user experience when managing transactions and payments inside of the Apple Wallet — is different, innovative, seamless and really terrific. The Apple Card was a wake-up call to traditional credit card issuers about what a mobile “card app” experience should be for consumers.

Related: Goldman’s Apple Card: What Will Q2 Hold?

It’s hard to know how well the Apple Card is performing, though — no one says much about it. Even on Goldman’s Q4 2021 earnings call, there was only one mention of the Apple Card — in reference to Goldman’s $344 million credit loss provision that quarter. Goldman’s CFO said the loss provision was the result of the firm’s consumer business expansion for that quarter, and attributed primarily to the Apple Card.

The operative word, however, for the Apple Card is partnership — Apple doing what it does best, Goldman doing what it does best and Mastercard doing what it does best by enabling acceptance everywhere Mastercard is accepted. This model, if Project Breakout reports are to be believed, is what Apple would like to dismantle over the next couple of years.

What’s Next

With roughly $93 billion in free cash flow for the quarter ending December 31, 2021, Apple has the money to do anything it wants — including building out its own financial services and payments business, and taking its time to do it.

I also wonder why Apple now wants to be a payments company.

Apple has done two things really well: produce the iPhone and an app store that revved up the digital economy. Both were remarkable innovations. Yet every other innovation that followed has been me-too, late to market and largely uninspired or uninspiring: Apple Books, Apple Music, Apple TV, HomePod.

Even Apple Pay.

Although Apple Pay represents about half of mobile wallet checkouts in the physical store, mobile wallets usage at the point of sale more generally is still quite small.

According to a PYMNTS March 2022 consumer digital payments study, 1.1% of consumers used Apple Pay in store to buy retail and grocery products and food from restaurants/aggregators, and 3% used Apple Pay online to make their last purchase in those same categories. That’s compared to debit cards at 39% and 34% instore/online, credit cards at 31% and 38%, and PayPal at 1.9% and 10% respectively. It seems that Apple has yet to crack the “it’s better and more than a card at the point of sale” code.

Read the study: Digital Economy Payments: March 2022 U.S. Edition

Apple’s strategy has long been to keep people inside of its own ecosystem, using their hardware to access apps and services. It explains why Apple might think that building its own payments and financial services platform is how it will scale and grow. Others with ecosystem ambitions have taken a platform, device-agnostic approach to growth and scale.

Apple’s announcement of Project Breakout signals that Apple is fine with using partners today, but not for the long term. It could also expose a fatal flaw in its thinking, one that fast-tracks the strategies of every other player who works with Apple today to shift their focus to more open ecosystem pastures.