Apple Pay | Winners, Losers And Question Marks

Regardless of Apple Pay’s long run success, we’ve all just witnessed an inflection point in payments – a point in time after which nothing will ever be the same. What happens over the next three to five years will likely decide the direction of payments and commerce over the next forty or fifty.

Here’s why I say that.

It’s rare when a week goes by that something other than Kim Kardashian’s latest selfie or Brad and Angelina’s wedding pictures captures so much mainstream media attention. Last week, that was the launch of Apple Pay and the iPhone 6.

The news, by and large, has been pretty bullish on Apple’s entrée into payment. Consumer awareness of using a phone to pay for things in store and in app has never been higher. That’s a good thing. But it’s still way too early to tell, of course, how successful Apple will be, especially because no one will be able to even use Apple Pay until October. How and how often consumers use Apple Pay will be a leading indicator in measuring Apple’s ability to move the needle permanently in its direction in mobile payments.

But that hasn’t stopped everyone from making their lists of winners and losers.  And what most media outlets and commentators have declared as winners and losers doesn’t really take into consideration how Apple makes its decisions to enter a market segment and what it hopes to achieve when it does. Here’s what I mean.

Tim Cook did an interview with Charlie Rose last Friday (September 12), just a few days after the launch of the iPhone 6 and Apple Pay. He talked about several things – domestic spying (the government hasn’t yet found the right balance), Apple’s use of data (they don’t and can’t since they encrypt it and don’t have the keys), Apple’s biggest competition (the GOOG), and on TV (lousy interfaces in need of reinvention).

He was also asked by Rose about the legacy of Steve Jobs.

His answer will give you all you need to know about Apple Pay and Apple’s intentions in payments.

“His office is still as it was on the fourth floor. His name is still on the door. If you think about the things he stood for on a macro level, he stood for innovation, he stood for the simple not the complex. He knew Apple should only enter areas where we control the primary technology. All those things are still deep in our DNA.”

As of this particular moment, everyone believes that Apple Pay’s embrace of NFC and EMV has made the networks and issuers – as well as the traditional payments ecosystem – big winners. After a decade of slogging along try to convince the U.S. that EMV was essential, and about a decade trying to ignite NFC, they’re front and center in Apple’s mobile payments strategy.

Apple has strategically designed Apple Pay as a way for it to control access to the consumer who wants to buy stuff using Apple Pay – however and wherever that may happen. By doing that they, defacto, control payments in the iOS ecosystem, provided they are successful. Apple Pay is now an acceptance mark – sitting in front of the consumer’s payment credentials that are tokenized and safely secured in its secure element in Apple’s phone (and probably one day in the cloud). Apple Pay transactions are initiated when the TouchID button is activated, biometric credentials that are also secured on the iPhone and controlled by Apple. Apple Pay may have digitized the traditional payments ecosystem and preserved its four party model, but if it’s successful, it will have the power to decide who and how much it costs to access the consumers whose cards and brands they provide access to.

The mobile network operators (MNOs) have seen this movie before–one that started in 2006/2007 when Apple  negotiated deals with the mobile operators to launch the iPhone. It granted periods of exclusivity in exchange for having the mobile operators invest massively in things that Apple wanted them to do (e.g. visual voice mail), while retaining control over everything else, including the terms of some pretty sweet revenue share deals. By the time the exclusivity periods ended, Apple devices were wildly successful and Apple had amassed enough power to cut even better deals with those same carriers without giving them any ability to push back.  Remember, back before Apple came along, the MNOs pretty much controlled everything on the phone which was one of the reasons there wasn’t much. After Apple, the MNOs have virtually no control over the apps that run on Apple, or any other smartphones. Seven years later, when it was time for Apple to consider payments, the MNOs were completely irrelevant and didn’t even have a seat at the table for discussions over Apple Pay. The MNOs now have effectively no ability to fulfill their long term dream of monetizing payments and the schemes that they back are pretty much DOA.

But when it comes to putting networks and issuers in the winners column, it’s quite possible that they all end up being seriously bummed out over time. It’s hard to know if the issuers are already feeling a little bit that way since it is they who will be giving up basis points to Apple very soon every time an account is activated and each time it is used. That figure is only going to go up as Apple becomes more successful and gains more control. As I mentioned in my piece from last week, even the name “Apple Pay” subordinates the branding of the issuer as it becomes more mainstream. Consumers will talk about paying with Apple Pay, not Apple Pay with my Bank of America credit card. Cards may be visible in Passbook but remember what the Apple Pay experience is – consumers don’t have to even pop open Passbook to pay. Consumers just hold their thumb down on TouchID and payment is automatically triggered. You can’t get more invisible that than. Apple Pay and Passbook also just put the last nail in the bank wallet coffin.

If Apple Pay takes off like a rocket ship, merchants may also find themselves severely bummed out because what they pay in merchant fees today could go even higher as issuers and networks look to recover the costs of paying Apple for access to the consumers that they control. It’s unlikely that issuers are going to be okay with taking a permanent haircut on Apple Pay transactions. Now some merchants in high margin categories probably won’t care if their conversions are higher and their consumers spend more when they use Apple Pay. But lower margin categories like grocery and QSR might have more to lose, literally, as Apple Pay becomes more popular, and the traditional payments ecosystem adjusts fees to accommodate that popularity and Apple’s business model. At some point, everyone may look back fondly at today’s rates and wish for them back. Oh, and there’s a really good reason that Apple launched in the U.S. first. Interchange in a lot of European countries, especially for debit cards, are very low and will drop to .2 percent for debit cards and .3 percent for credit cards if there is final approval for legislation working its way through the system in Brussels.

It’s sort of funny/ironic that the things that networks and issuers and even merchants hated so much about prior mobile payments schemes – having an intermediary sitting between them and the customer and being invisible – are now okay (at least that’s what they say) as long as it’s Apple in that role.

One of the other winners that had been crowned last week is NFC. I’m still a bit dubious – are you really surprised?! I think that if Apple Pay wants to win, it will need a critical mass of merchants and consumers and it will need it quickly. And that doing that will mean that NFC will have to take a back seat to the cloud – or at least sit alongside it.

Just like any other new payments schemes, consumers have to want to and get in the habit of using it. And that is, of course, a function of how many places they can use it and how slick the consumer experience is. Apple did something pretty uncharacteristic when it launched the iPhone 6 and Apple Pay last week. It made a point of telling consumers that they can “now pay for things using their mobile phones.” The reality is that most people really won’t be able to, at least using Apple Pay.

First of all, the only consumers that will be able to use Apple Pay are the fraction of the 25 million consumers in the U.S. that are expected to buy an iPhone 6 or 6 Plus and who want to use Apple Pay.  Those consumers don’t have a lot of places now to use it, in store. Only about 2 percent of stores can support NFC transactions today, which means that 98 percent can’t. Analysts have projected that it will take until approximately 2020 for 85 percent of POS to be EMV enabled and by the end of 2015, only 35 percent of terminals will be able to enable an NFC transaction. It’s possible that the pace will accelerate now that Apple Pay is in the game and that terminals that are shipping with EMV and NFC capabilities are installed. But turning on NFC will depend entirely on how many consumers merchants think will trot into their stores with the (a) ability – they have phones that can pay using Apple Pay, (b) intent  – they want to use Apple Pay just for payment only (c) incrementality – they’ll spend more than they ordinarily would because they’re using Apple Pay to pay for things.

That’s the mental math that merchants will be doing to decide whether it makes sense to turn on NFC or to accelerate it. The last decade has seen that “use your NFC phone only to pay” movie play out at least three or four different times, with the same result – not much has happened. Even in places where people have contactless capabilities available to them, unless they use it frequently, they just don’t get into the habit of using it at all. If Apple Pay is only about in store using tap and pay technology purely for payment in the few places today that accept NFC, Apple Pay could take too long for enough consumers to have enough places to use it to ignite Apple Pay, much less NFC.

In that situation, both consumers and Apple Pay lose.

And because Apple doesn’t like to lose and they really like it even less when consumers do, to ignite Apple Pay, Apple will have to go to the cloud. There they will then be able to create and ignite an Apple Pay ecosystem that embeds Apple Pay in lots and lots of apps that developers have or want to create that include also payment. And if there is one thing that Apple knows how to do better than anyone currently in the payments world, it’s how to create and ignite ecosystems.

That’s why the cloud and developers and apps can be the big winners with Apple Pay. Apple Pay launched last week with an SDK with 800 million potential Apple Pay customers as bait and a well-developed iBeacon ecosystem to leverage, too. Apple Pay’s in-app experience, I’m told by those who know, is pretty slick from a consumer’s point of view – holding down the TouchID button to enable payment is all that is needed – and pretty easy to integrate from the merchant’s perspective, too. The more developers use the Apple Pay SDK and mash it up with iBeacon capabilities, the faster Apple Pay gets distributed in market, the more value it creates beyond payments, the more it gets used by consumers and merchants, the more developers are inspired to innovate. Voila! Ignition!

That still means that the only real consumer winners are those who buy the new iPhone 6s, which in a way isn’t all that surprising. Apple is all about selling hardware, and they really want apps and the unique experiences that they enable to drive the sale of their phones. That also means that I wouldn’t be too surprised to see those bigger iPads that are rumored to be coming turned into mPOS devices bundled with iBeacons and marketed to small merchants as a way to get Apple Pay integrated into smaller, more localized retail establishments.

Now Apple Pay is obviously all about the Apple ecosystem. This suggests that one of the next battle grounds for mobile payments will be the Android ecosystem. It captures far more share then iOS, has a worldwide footprint and is growing faster – but comes with a less affluent customer profile. Someone will use the Apple Pay opportunity to move hard and fast to dominate the Android ecosystem on a worldwide basis. That’s a challenge given how fragmented it is, but this ecosystem will be as exciting to watch develop as Apple’s over the next few years.

Ultimately, I think that Apple Pay’s entry into mobile payments means that the big winner will be the payments and commerce ecosystem overall. It will be reshaped, reformed and rethought and it will probably happen now with an intensity that seemed to be missing in the market for a while. In fact, we’ve already won by having a tokens standard that will enable lots of innovation to happen securely and consistently across many channels, bringing the internet of things to life, for real. Investments in innovation can now be pointed directly at solving merchant and consumer problems, not using time and energy and money inventing new standards or working around them. We can now get all get busy adding value to consumers and merchants and creating new opportunities for innovation to emerge and flourish.

But the real work to ignite Apple and Apple Pay begins now.

Everyone is convinced that Apple Pay will break the mobile payments logjam and accelerate the move to mobile payments because, well, it’s Apple and they’ve had time to watch mobile payments evolve (or not) over the last four years. But we all know that anything in payments takes twice as long and is ten times harder than originally planned.

That’s why the next several years will begin a period of intense competition for consumer and merchant adoption of mobile payments. The market will consolidate as those without scale or a unique segment or value proposition will die – and they’ll die quickly.  The sheer buzz over Apple Pay alone is enough to kill them off since merchants and consumers will simply look the other way.

Those who stand a chance at competing successfully will use the next year or two – while Apple Pay is getting established – to massively populate consumer accounts and give those consumers more places and better reasons to use them. The winners will be apps that live in the cloud and leverage an ecosystem to enable safe and secure payments and commerce transacting. Whether or not those apps live in Passbook under the control of Apple remains to be seen.

The future of payments has just begun.