Commentary

Will Apple Become The American Express of Mobile Payments?

Today is the day that we might actually get a peek into Apple’s playbook on mobile payments.

Anyone who hasn’t totally tuned out everything over the last week but the near endless coverage of the Kimye wedding and honeymoon knows that Apple is hosting its worldwide developers conference today, also known as WWDC. In anticipation of this event, there’s been a steady drumbeat of articles professing to know Apple’s moves with respect to payments, which we all know is pretty hard to believe since Apple’s penchant for secrecy and a human being’s propensity for blabbing anything they’re told “in confidence,” especially when it comes to Apple, are at serious cross purposes. Those who may be in the know on even the slightest bit of Apple’s plan also know that if they did blab, they’d be cut out of the Apple equation faster than, well the Vegas oddmakers say it will take for the Kimye marriage to dissolve. (The odds on that, if you’re curious, is 5/1 for a divorce by end of 2015.)

But that hasn’t stopped people from speculating about everything Apple and mobile payments including whether it will include NFC (a near certainty, people say this time) and the ways in which it will leverage its 800 million iTunes accounts (create Apple’s own payments network). The latest story, reported on Thursday night is that Apple is in serious talks with “high end” retailers about a mobile payments play. As part of those conversations, said article goes on to report that Apple is encouraging retailers to adopt its Beacon technology which is the Bluetooth-enabled way that iOS devices communicate with each other in micro environments.

As you know, I’ve written a lot about what I think Apple might do in mobile payments based on how they’ve approached innovation in other areas and my own views on the future of payments and commerce. I have absolutely no first-hand knowledge of what’s to come (and if I did, I wouldn’t be blabbing about it here) but have been paying attention to the bits and pieces of coverage on Apple and mobile payments more broadly. So, on the day that we might get a clue about what they might do, here’s what I think could be a plausible mobile payments play for Apple.

Apple becomes the American Express of mobile payments. Think about it. In the US, American Express has about a third of the cards in circulation  as MasterCard and about 25 percent that of Visa (52 M v. 178M v. 277M). It’s accepted at about half of the number of merchant locations globally as Visa and MasterCard (16M v. 33M), yet, its cardholders spend 4 times as much annually, on average, as Visa and MasterCard cardholders do ($11k v. $3.5k v. $3k). (Note: As recently as 5 years ago, American Express was accepted at only 9 million merchant locations, a decade ago at only 7 million.)

But here’s the real kicker. The American Express market cap  is 7 percent higher than MasterCard’s and only about 28 percent lower than Visa’s ($97B v. $90B v. 135B) a network more than 5 times its size (as measured by cards in circulation). Yes, I know, American Express is also the issuer and acquirer, and yeah, it isn’t exactly apples to Apples, (pun intended) but this is still a pretty impressive showing.

Anyway, this little payment network math game is meant only to make one important point: you don’t have to be ubiquitous to be very valuable in payments, just everywhere your target audience expects you to be.

Now of course, that flies in the face of just about everything everyone in payments talks about with respect to what’s essential to ignite mobile payments. But, I’m not so sure that’s as relevant as everyone thinks. Ubiquity is all about gaining merchant acceptance and we all know what a monumental task and wholesale pain in the butt that is to achieve. Clearly, moving 33+ million points of global acceptance away from cards and mag stripes to a single standard of mobile payment is going to take some time – once a ‘standard’ emerges. It hasn’t yet and I don’t think we’re even getting close to that.

But American Express wasn’t ever chasing that dog. As all of you payments historians know, American Express launched as a premium T&E brand in 1958 with an annual fee that was one dollar higher than Diners. Its goal initially was to capture the high spending business/corporate traveler segment; it evolved over time to become the premier brand for individual premium spend. American Express introduced its Gold Card in 1966 and Platinum Card in 1984 which today has an annual fee of $450. Its super-duper exclusive Centurion Card is reserved for the biggest of all spenders (even I haven’t qualified!), comes with a hefty annual fee and is by invitation only.

From the beginning, Amex didn’t want everyone as a cardholder, just those with the capacity to spend, including corporate travelers. It organized programs and rewards and marketing around that positioning and value proposition. And that became the core of its pitch to merchants: pay a higher merchant discount and I will drive consumers with the capacity to spend more to your doorstep. That has been good enough to convince 16 million merchants worldwide to take the card. The similarities to Apple and its products are pretty interesting.

In the PC market, which we all know is in steep decline overall, Apple has a roughly 9 percent share with market leaders HP and Dell at 24 percent and 21 percent, respectively, according to IDC. But unlike its larger competitors, Apple has seen a 30 percent growth year over year even though its products are more expensive than its competitors and the PC market last year shrank by about 8 percent. Its market cap at $545 billion dwarfs that of HP at $63 billion and Dell’s before it was taken private at $25 billion, not to mention Microsoft’s (which makes the OS for these guys) at $338 billion. Proof, again, that a company doesn’t have to have everyone as a customer, just those with the capacity to spend the money to buy their products. Research has shown that households with Apple products in the home (and 50 percent of households do) have disproportionately higher incomes than those that don’t. When it comes to smartphones, people love to play the Apple-is-so-far-behind-Android game and use it to talk about how Apple needs to work harder to close the gap. comScore reported in March that in the US, Android has a 52.2 percent share compared to Apple’s 41.4 percent. That prompts bloggers to publish stories about how Apple better release a cheaper “and amazing” iPhone 6 so that it can move beyond servicing only the “most elite consumers” in the world. But maybe that’s the whole point. Maybe the customers that Apple is thinking about designing its mobile payments strategy around are those with the capacity to both purchase their products and drive spend.

Gee, sort of just like their strategy with just about everything else they’ve brought to market.

And who might those consumers be? The young(ish), the affluent and the well-educated—with a heavy emphasis on people with money. Apple hasn’t really ever deliberately targeted a demographic group that’s defined by age, but instead one with rather specific socio-psychographic characteristics: people that like cool technology, appreciate good design and aren’t afraid to buy new stuff before it becomes mainstream. Sure, that’s often young people, but the common denominator is consumers with money to spend. (Not everyone over the age of 27 is a Luddite!) At an average price per phone of about $650, that’s not surprising – and the price gap between Android and the iPhone is only increasing; now about $374. Pew research did a study of smartphone ownership late last year. They found that the more affluent and more educated consumers owned an iPhone. In fact, they reported that half of all smartphone owners with household incomes in excess of $150k reported owning one, so did about 44 percent of the Boomers they surveyed. A full 54 percent of those ages 35 – 54 also own iPhones, a demographic that accounts for 64 percent of the households earning $150k or more a year. If you add Boomers to that total, 76 percent of people ages 35 to 64 say they own an iPhone, a population that represents 75 percent of households in the US that earn $150k or more annually. When it comes to retail spending, this age band, 35 – 64, spans two big honking consumer groups. Baby Boomers are the 44 percent of the US population that drives a disproportionate amount of consumer spending, some $2.3 trillion annually – buying for themselves, their kids and their grandkids. They are also said to purchase more than 40 percent of all Apple products.

But when it comes to luxury purchases, Gen X rules, outspending Boomers by nearly 20 percent on luxury purchases, according to an American Express survey. Individuals in this group at the higher end of the income bracket spend more than $23k a year on clothing, $3k on cosmetics and beauty items, $6k on fashion accessories and $4k on liquor in addition to a higher than average spend on entertainment, personal and health services. And in just three years, Nielsen says that this primo consuming Gen X group will swell the ranks of those who will be 50 and older and in control 70 percent of the nation’s disposable income and nearly $15 trillion in wealth that they’ll inherit from parents, grandparents and relatives.

Developers are tuned into this little tidbit too, earning twice as much revenue on the iPhone platform as they do on the Android platform, even though they see more of their apps downloaded in Google Play Consumers are more engaged with iOS apps, they reason, and that engagement leads to more in-app sales. Developers also say that it’s just “more sexy” to develop to the iOS platform, not to mention easier. Google’s Android fragmentation issue makes it really tedious and expensive to reach every single person with an Android phone. NDTV reports that in March of 2014, only 5.3 percent of Android users have its latest OS version, Kit Kat 4, while only 61.4 percent have Jelly Bean. By contrast, nearly 90 percent of Apple users have installed the latest version of its operating system, iOS7.

Bottom line – more people with more money have iPhones, they have more apps to choose from in the iTunes store and have more money available to them to buy apps and make in app purchases. And, just like merchants, developers flock to where they can find more customers with more money to spend. So Apple gets more and better apps and gets many of them first. That means that those who drive spending at merchants – on and offline – own iPhones, and probably other Apple products too.

A little back of the envelope calculation that we did at MPD suggests that roughly 70 percent of all consumer spending is associated with people who own one sort of iOS product or another. So, reports that Apple is in talks with high end retailers about a mobile payments play doesn’t seem all that surprising. It’s where their core customer shops now anyway. But, of course, it’s how Apple might go about enabling payment at the physical point of sale at those merchants that’s the source of all of the rampant speculation.

American Express differentiates its product on the basis of the form factor (a distinctive looking card, some even made of titanium), customer profile (premium individual and corporate spenders) and the customer experience (personal service, rewards, offers) but leverages existing payments infrastructure to process payments. Many in payments believe that Apple will follow a similar playbook, leveraging existing merchant POS infrastructure and standards to enable payment, which many believe to mean adopting NFC. And, that’s where I just scratch my head, well, at least as we define NFC for payment today. Apple has never introduced a branded product where it hasn’t been able to control and monetize every aspect of the customer experience. Its music can only be played on its devices, its products have its own operating system, its app store is not interoperable. It also keeps a close eye on what apps get into the apps store in the first place and it takes a cut of what people buy when they download them.

Of course, Apple will differentiate – and has – with its form factor, the iPhone, its customer profile (people who like and can afford to buy its products) and its customer experience thru its apps store, user interface and beautiful design. And, it today leverages existing infrastructure to enable a whole bunch of transactions via apps that consumers download onto their iPhones at various merchants. I can use my Starbucks, LevelUp and PayPal apps at any store I want to, and can scan my boarding passes stored in Passbook at airports, leveraging their existing scanners and readers. In fact, Passbook makes it easy to organize and use boarding passes, coupons and anything that can be read with a 2D bar code scanner. Passbook supports 47 airlines, a bunch of rail operators, movie and ticketing suppliers, and merchants ranging from AirBnB to Sephora to Hotels.com to Target and Walgreens.

But I still have a hard time believing that Apple will adopt NFC technology without creating something entirely different that it can own and control and monetize. Apple is smart enough to know that it and it alone has the power to drive change at the merchant point of sale. It just seems uncharacteristic for Apple to design a payments strategy and standard that would also help ignite the market for its competitors. Could Apple, by incorporating NFC chips into its iPhones persuade merchants (many of whom have turned off NFC in their stores) to enable it, and activate it when their new EMV terminals ship? Sure. But, Steve Jobs was quoted in 2010 as saying that part of Apple’s plan was to “lock in” consumers by making their devices interoperable within the Apple ecosystem, but not outside of it – always innovating inside of their own ecosystem. An NFC strategy that helped to ignite the NFC market that also didn’t include something proprietary to Apple seems to fly in the face of that credo.

Now, if Apple believes that HCE has put it at a further disadvantage with Android for selling iPhones and other devices that would enable payment via iTunes at the physical point of sale, then I would understand why Apple would feel compelled to incorporate NFC/HCE for payment into its plans. But that hasn’t happened with Android phones in spite of the fact that many of them now have NFC chips in them and payments networks have embraced it as a standard. Maybe an Apple NFC/HCE technology play could simply be used to more precisely pair Apple iPhones and iTunes accounts via Bluetooth to enable a commerce experience, including payment, using its own iOS Beacon technology and Touch ID to authenticate the consumer.

It has been speculated that the new powerful chips that Apple will include in the iPhone 6 could more easily leverage NFC in this way, enabling an Apple branded and controlled consumer payments experience in the cloud, sidestepping existing POS infrastructure entirely. But it still strikes me that Beacon is where Apple has placed its bets and will look to enable mobile payments. Beacon is cheaper for merchants to adopt, install and maintain. From what I’ve read other technologists report, it’s superior for proximity targeting. When Apple launched Beacon in 2012, it unleashed a developer community that has now created a whole ecosystem cranking out lots of cool new apps that leverage this technology. If you don’t believe me, look around. BLE and Beacon technology has gained more traction and momentum in the last 2 years than NFC has done in the last 10. As a result, merchants have adopted Beacon technologies and more and more are doing it every day. GE is even embedding Beacons into LED lighting and it’s reported that Walmart will be the first to give that a go. Apple’s Passbook is enabled to work with Beacon too, pushing coupons saved in Passbook to the consumers screen for easy access. Leveraging a cloud-based mobile payments scheme to enable payment via those bar codes, well, it just seems like the rail tracks that they have been laying for the last couple of years.

All that said, Apple still has one big mobile payments conundrum to crack: merchant acceptance. I don’t think that Apple wants to become its own payments network; payments is a low margin business that’s all about managing risk and fraud. I believe that they’ll outsource that function to someone that has already made a lot of progress getting acceptance of digital accounts at the physical and online points of sale at the places that Apple customers shop – high end retailers – bringing to those retailers a new payments experience plus high spending consumers.

And, who knows, given all of the travel-related apps that Passbook supports, it wouldn’t be much of a stretch to imagine Apple truly channeling their inner Amex and mobile payment-enabling the travel segment where bookings are done online, and boarding passes with bar codes are already Pass-enabled. Aligning with a player that would be willing to white label its network to easily enable mobile payment acceptance plus all of the apps bells and whistles that add value to the consumer shopping experience – shopping lists, offers, reminders, etc. – is how I believe Apple will roll out and then monetize payment.

And, interestingly enough the list of retailers that they’d have to connect to in order to enable acceptance at those merchants that drive the preponderance of consumer spending is relatively short; the contenders that could enable merchant acceptance of iTunes accounts on and offline at those merchants is even shorter.

I’ll stop there.

So, today, like you, I’ll be all eyes and ears on WWDC to see what Apple has to say (or doesn’t say) about its mobile payments ambitions. Honestly, I’m not sure that we’ll learn a lot more than we know right now. But, we might want to keep our eyes peeled for the new bells and whistles that Tim Cook will discuss in his keynote that could offer us some more tangible clues about the direction Apple could take.

What I will guarantee is that, after the day is over, we’ll be writing about what Apple will be doing in payments for some time to come.

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