Is Apple the Payments Industry’s Black Swan?

No, I’m not talking about the creepy Natalie Portman movie by the same name, but the concept that describes a surprise event, something unpredicted yet extraordinarily powerful – an event whose impact reshapes the future in dramatic ways. The concept was given business context after a book by the same name was published in 2010, but the notion of “black swans” has its origins back to 16th century London. Then, it was used as an expression of impossibility since all historical records of swans were white. After a Dutch explorer returned from an expedition to Western Australia in the late 1600s, with evidence of black swans, the expression was used to describe something that although seemingly impossible could, in fact, be found to be true in rare instances. September 11th has been characterized by many as an example of a black swan.

In business, there are many examples – the book’s author cites things like the Internet (which doesn’t strike me as a surprise event – even though its application has produced a number of very powerful impacts), and the PC. One of the more contemporary examples is the camera phone and what that black swan has done to the once tried and true camera. I remember wondering, back in the day, what in the world good a camera could be in a phone – and on my last vacation in May, didn’t even bother to pack the camera (truth be told, I couldn’t remember where I put it – I use it that infrequently). What I trade off in picture quality, (which is getting better) is the ability to take a ton more pictures – and more importantly to share them with people in real time. By 2003, more pictures were taken using camera phones than digital cameras and by 2010 all mobile phones – even the cheapest ones – had phones built into them. That phenomenon drove Polaroid out of business in 2008 and Kodak into Chapter 11 not long thereafter. Kodak stopped producing film ten years ago and this last February decided to stop manufacturing digital cameras altogether.

In payments, there are many innovations and players that are creating great disruption and, to be more precise, that are mashing up the multiple forces of disruption, to drive great change throughout payments, but perhaps none so powerful as to be put in the black swan category. Smartphones, cloud computing, data and the new business models brought about by MasterCard and Visa’s decision to go public, are all major developments that are changing the face of payments as we know it, but certainly were neither unexpected nor unpredicted.

So, will there be a black swan in payments?

Well, it is a bit of a weird question since the notion of a black swan is that you aren’t supposed to see it coming. Nevertheless, I think that the answer to the question is … yes, there certainly might. And, one of the potential examples has an Apple logo around its slender neck.

The article in the Wall Street Journal on July 7, 2012 described Apple’s methodical approach to payments. It quotes sources who say that Apple has been looking at it seriously, even disagreeing internally over its approach, but, for now, is happy to sit back and watch how it all plays out.

And, of course, signing up more iTunes accounts by the day that happen to be registered to payment cards that ride the existing payment rails (so are accepted by all merchants today). At last tally, Apple reports 400 million registered iTunes accounts.

That’s just about four times as many accounts as PayPal reports – and they’re just sitting there all black swan-like just waiting for the right payments opportunity to come along.

Apple’s MO seems much less about first mover advantage and much more about letting others do the slogging, so that it can perfect its own strategy thru the lens of the market research of others. That’s certainly part of the reason why it decided that Passbook would be a wallet, all right, but not one that does payments, at least for now.

Apple Passbook is its second toe in the payments water (iTunes is the first, obviously). It’s a wallet that neatly and conveniently aggregates all of the little bar code enabled apps used for things like ticketing, loyalty cards, coupons – you know, the things that people have paid for (tickets) or use when they shop (loyalty + coupons) and find convenient to have all nice and handy in one little container when they want to use them.

We’ve seen just how powerful bar code apps are for payment – Starbucks has the distinction today of being the largest mobile payments network on the planet right with 4+ million users and counting. And, even though the numbers here are a little dated, Forrester reported that 15% of all smartphone used their phones to access bar codes. Giving iPhone users the ability to aggregate things that already have a bar code in one spot and could be (or were at one time) associated easily with payment is one giant step towards creating a wallet that can someday also do payments. [Wonder how many bar code-enabled somethings this announcement by Apple will stimulate?]

Here’s something else. iTunes and Apple have also done something interesting in getting iTunes off the ground. They have worked out the payments aggregation issue (since their purchases are small). That could give them an interesting advantage in some categories today characterized by low value transactions. And, Apple has created a mobile POS product that is used today in its stores and has been piloted in a few commercial trials, as well.

The NFC/iPhone debate was also addressed in the WSJ article. It has been fun to read the various “loves NFC, loves NFC not” coverage over the last couple of months. The article reports that there has been a big debate internally over NFC and its relative merits for all of the reasons that my MPD colleagues and I have been writing about forever. Why go to the trouble and expense, this article reports insiders saying, to imbed a chip in the phone when it can’t be used anywhere? Concerns over battery life were interesting to read about too. Some work that I am doing now caused me to do a little digging into the situation in Japan with iMode/DoCoMo role in stimulating the Japanese consumer’s adoption of NFC payments. Interestingly, a couple of articles report lackluster consumer interest and cite the suck on battery life caused by NFC functionality as one of the real inhibitors (along with a clunky user experience). Since we’ve seen how happily-ever-after payments + bar codes are living today at Starbucks, the experiments now underway by PayPal and Square with cloud-based payments solutions that are not NFC-based, and Apple’s reluctance to compromise the customer experience in any way (especially over a payments technology that hasn’t ignited anywhere in the world) my bets are on a thumbs down for them for payments. My view is that NFC and payments will be disaggregated at Apple, in spite of their patents and media hype to the contrary.

But back to the black swan and Apple’s potential to be one in payments. Certainly, its 400 million registered iTunes users and its Passbook wallet seem to portend an interest in and capacity for payments at the point of sale (anywhere) via iTunes. But here is one data point that I think could make them a black swan.

MPD did some analysis recently on the spending power of iPhone users. That analysis showed that conservatively, 63 percent of consumer spend in the US today is done by people who also own smart phones and roughly 32 percent of smartphone users own iPhones (today). So that means 25 percent (give or take) of spending power is held by people with iPhones—a number that is probably much larger since iPhones are the high priced alternative relative to Androids and therefore, probably attract bigger spenders. Various research reports confirm that. iPhone users are slightly older than their Android brethren (29 percent more likely to be over 35), better educated (37 percent more likely to have a graduate degree) and more affluent ( 67 percent more likely to have an annual household income over $200,000). So, while not the majority of smartphone owners (yet – the pace of iPhone sales is accelerating and starting to close the Android gap in the US), they seem to wield a disproportionate share of spending power.

As we know all too well, payments is a chicken and egg business – a big hairy one – and ignition is a function of getting merchants and consumers and the various stakeholders to play together nicely, and at the same time. A proposition by Apple to a merchant that goes something along the following lines could, I think potentially put Apple into the black swan category …. whenever they are ready to swim.

  • Hi, Ms Merchant. It’s Apple. You know, the guys with millions iPhone users here in the US who account for more than a quarter of spending power – both of which, by the way, are growing.
  • Our users love our phones – they download apps by the truckload and use our phones already to shop online. That means that using their phones to shop is pretty familiar turf. Our users are pretty well educated too so they get the whole technology gig and payments and how it all works. They’re early adopters too. If we offer this payments capability to them, we think they’ll try it. Just look at our track record in getting them to try new things.
  • Did I mention that we also have about 400 million people who have set up iTunes accounts – and who have cards attached to them already? They don’t have to do one thing to shop at your store – they are ready to roll! You have customers! Ok, so these 400 million aren’t all in the US, but you get the point.
  • These accounts are linked to cards that ride the existing payments rails. So, the cards that are linked to our accounts are cards you already accept. Sure, you have to add Apple as a tender type, but that’s not nearly as awful as adding a new network or ripping out terminals and replacing them with new ones and doing all of those integration gymnastics.
  • Did I mention that I have a massive number of iTunes customers who could be ready to pay at your establishment on day one?
  • Now, about adding us a tender type, how soon can we get into the IT queue?


I think that one of the only things holding Apple back from plunging into payments right now is the business model. They certainly have a lot of the important pieces lined up – the big question then becomes how they decide to enter and monetize the business. Apple is a ginormous company that likes high margin businesses – payments isn’t one. But, it has created a big cash register called the App Store which essentially delivers a high margin back to the business by charging developers for access to its customers, whose apps in turn drive sales of its high margin products like the iPhone and iPad. Will it adopt a similar strategy for payments and maybe perhaps even enter the POS market with a suite of products that leverage the merchant and consumer value propositions of Apple products and software opportunities linked to payments and those 400 million consumer iTunes accounts? I guess only time will tell.

So, that’s my take on one of the black swans in payments. What do you think? And, what other black swans are getting ready to take a swim?


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