What a week for Apple Pay!
CurrentC strong arms its merchants to switch off NFC so their customers can’t tap their spanking new iPhone 6s to pay—or for that matter anything else that uses NFC. Apple Pay gets even more publicity.
Tim Cook then whacks the merchants over the head for sticking it to their own consumers. And in a feat that seemed just nigh impossible, even the banks and card networks came out smelling like roses. This was like scoring a goal for the other team.
Could it get any better? Yes!
CurrentC, which wants consumers to hand over their checking account details to them so they run everything through the inexpensive ACH system, gets hacked. What more evidence do consumers need that they should use the highly secure payment method from the boys and girls in Cupertino and stay away from anything the cyber-challenged merchants want to foist on them?
It has been such a great week for Apple Pay, though, that I figured the best thing to do for them, and their entourage, is to throw a bit of cold water on them.
So here I go.
A lot of successful platform businesses have adopted a “go local/go deep” strategy. Take Uber. They pick a city. Then they sign up enough drivers to meet demand. More passengers get more drivers and so on. That gets Uber off the ground in that city. Then they do that for another city. Facebook took a similar strategy. It started with individual universities. It got a critical mass of friends there. It moved from university to university. And then later it opened the platform up for advertisers. Yelp too. They pick off cities. They hire people to write reviews to kick things off often by focusing on particular verticals. That attracts readers. And off it goes.
Many payment systems have taken that strategy too beginning with patient zero—Diners Club. Back in 1950 there was no such thing as a payment card that consumers could use at a lot of different merchants. Diners Club got the first payment system off the ground. It did that by doing just what Uber, Yelp, and Facebook did. It started in Manhattan. It signed up a handful of restaurants—so it focused on a narrow vertical—and then signed on cardholders. They then expanded to other cities, and to other verticals.
MasterCard and Visa got built the same way at first. Banks had to take a local strategy back then because many couldn’t operate cross state lines or even have multiple branches. They signed cardholders and merchants up in local areas. Those local systems got consolidated into regional associations and then ultimately into the MasterCard and Visa associations.
ATM systems of course started with local networks too. Banks created their own local networks and they gave their customers cards. They quickly ignited and then got connected together.
Now some new payment systems haven’t followed the “go local/go deep” strategy. But in those cases they’ve been able to start with enough critical mass of merchants and consumers that they could ignite. Discover Card, which was started by Sears, is a good example. It could get Discover Cards quickly into the hands of many Sears cardholders and accept the cards at Sears. And by the time it started it had gotten a very large fraction of merchants signed on to take the Discover Card. They followed a “go broad/go deep” strategy. Not many platforms can do that but it happens.
Apple Pay is following what I will call the “go broad/go shallow” strategy. Let me explain.
Apple has introduced Apple Pay throughout the entire United States. Anyone can use it so long as they have an iPhone 6 and a merchant willing to take it. That gets me to the “go shallow” part of the strategy. More than half of people don’t have an iPhone and most iPhone users don’t have an iPhone 6. Only some of the iPhone 6 users will turn on the feature. Then of course about 98 percent of merchant locations don’t have NFC terminals so consumers can’t use their phones to pay for most things.
The number of participants on each side of the platform is shallow. That’s a problem for a two-sided payment platform because ignition comes from getting the two sides to interact—a lot. The likelihood that any consumer ready to pay at a retailer has an Apple Pay enabled iPhone 6 is very small and will be for some time. The likelihood that the merchant has an NFC-enabled point-of-sale at which a consumer with an Apple Pay enabled iPhone 6 is very small. Important math point: if you multiply a small fraction times a small fraction you get a really small fraction.
The Apple Pay “go broad/go shallow” strategy is even worse than the failed contactless card strategy used by the networks. The networks got the banks to flood the market in various countries with contactless cards. So that side of the platform was deep. The merchant side was shallow though because merchants didn’t install or turn on NFC.
I don’t know of any two-sided platforms, let alone payment platforms, that have ever succeeded with a “go broad/go shallow” strategy. The mathematics of ignition should make us pretty dubious that this strategy could work. It just can’t create enough interactions to get to critical mass.
Of course, Apple does have some other things going for them that most platforms don’t. They have been so successful at getting disruptive businesses off the ground—iTunes and the iPhone—that consumers and merchants may just assume that Apple Pay will be successful. Creating those kinds of expectations can overcome many obstacles. And unlike most startups they are benefitting from massive publicity. That counts for a lot.
I wouldn’t write Apple Pay off as another payment system fizzle. But the economics, history and math of two-sided platforms tell me that Apply Pay isn’t going to ignite quickly. This new payment platform is likely a long-play, a slow burn.
Lots could change including Apple Pay’s strategy and merchant resistance. Maybe Apple Pay will switch on all iPhones with a cloud-based solution, and maybe the PR nightmare will get merchants to upgrade to NFC terminals in the middle of night soon.
Or maybe not.
Over the coming months anyone interested in the future of Apple Pay, and thus perhaps the very future of payments, should cut through the hype by focusing on two statistics assuming anyone ever makes them public. Forget about Tim Cook’s account activations. What you need to look at is how many transactions are taking place and the rate of growth in those transactions. If you don’t see many transactions and they are flat you are probably seeing another fizzle. If you see lots of transactions and an increasing rate of growth then you are probably seeing ignition.