Apple Pay is a new payment service from Apple that aims to remove friction from the buying process, in both the physical and digital realms. Over the course of the coming year, I expect the service to gain significant traction and to trigger greater responses from other players in the digital payments space, such as Square and Google. In particular, I believe Pay is well-suited to succeed in areas with established payments infrastructure where iPhone market share is already high. In those areas, Apple Pay will be massive in a couple of years. Pay is Apple's boldest project since the iPhone itself.
Payments is an interesting space for a few reasons: there are promising startups built around it and older companies trying to establish them through sheer financial force, it has been relatively stagnant until recently, and it is also the very engine of the world economy. So, when you see the world's largest company by market cap take an interest in controlling the medium through which all transactions take place, it's worth taking notice.
How This Plays Out
Initially, Apple Pay's scale will be limited to developed countries with strong infrastructure—the same countries where its mobile phones already have strong traction. I suspect that, given an easy-to-implement payment solution, Apple Pay will quickly gain similar traction among consumers, and businesses will be forced to implement it. Accepting Apple Pay will be a requirement on par with with accepting a credit card. This chart shows why:
This high level of penetration among Apple devices in developed nations indicates that, given Apple has cleared the bars of security and ease-of-use, consumers will demand. At its core concept, tapping your finger on a device you carry with you and which you don't have to rifle through every time you make a transaction has tremendous appeal.
In addition to benefitting consumers, though, a successful Pay results in a meaningful long-term revenue stream for Apple. One concern that has faced Apple after years of gargantuan growth is the law of large numbers: it ensures results flatten out in the long term, and Apple’s kind of hockey stick growth, the type that is so attractive to investors, has already slowed. It is rumored Apple will collect 15 cents on every $100 in transactions. Apple Pay proves a couple of things, then. First, Apple still has the ability to negotiate favorably with intractable industries (first music, then wireless carriers, and now banks). Second, given Apple’s core markets’ near-saturation, the company has made a long-term bet at the scale of business itself.
Consider that McDonald’s drive thrus have the NFC capability Apple Pay may finally make popular, and that estimates show 70 percent of the company’s sales come via the drive-thru. Taking 0.15% of the roughly $18b in sales (rather than franchise revenue) McDonald’s did last year comes to... around $19 million dollars. That's not enough to really move the needle—but that’s kind of the point. Looking at Apple Pay on the scale of individual businesses, themselves behemoths, overlooks the sheer size of the opportunity in Apple Pay. It’s not 0.15% of any one business’s credit card transactions, rather, Apple has its sights on an industry that processes three trillion dollars in the United States alone each year. Sure, the service only works on the new iPhones or on an iPhone 5 paired with an Apple Watch. But the new iPhones are already poised to be Apple’s most popular devices ever. It being an Apple product, Apple Pay will face harsh criticism for failing to achieve instant world domination, but there are a few trends working in Apple’s favor:
The company’s penetration of the smartphone market is increasing on the high end in any developed country with a sufficiently large middle/upper class (and those segments are growing, worldwide). This is a generalization, but the many of the people who are buying the iPhone in the first place are the ones with money to spare, and therein lies the brilliance of Apple's Pay product: the target market is people who spend money.
The payments industry itself continues to grow. The sheer scale of global commerce, and the growth of the global economy, dictate that entering the payments space is not necessarily a winner-take-all proposition (which is good, because Apple would likely not do well if success were predicated solely on market share). Apple gains simply by showing up here—the opportunity is that big.
The businesses that stand to serve Apple’s interest here also serve their own interests in implementing the infrastructure to support Apple Pay. Many businesses already have the requisite NFC technology for Apple Pay to work, but those that don't will be akin to those that don't accept credit cards—avoided unless they're serving some serious street food you can't live without. Further, Apple Pay will work for non-physical merchants as well, meaning the platform can be used for online purchases. By all indications, the product will be easy to use, and just require a confirmation via fingerprint authentication. This affords businesses the opportunity to easily decouple their sites from major eCommerce vendors, without the hassle of separate credit card entry or PayPal (PayPal may have set the standard that online payment can take place safely, but the product remains a burden to use). I was unable to find statistics regarding the phenomenon of "window-shopping" on one site, and ultimately purchasing on Amazon instead for convenience's sake, but I would be willing to bet that it is (a) common and (b) frustrating for non-Amazon vendors. Apple Pay could change that, and introduce a new era in eCommerce.
Apple has two things working against it: a recent security snafu (with the celebrity nude photos sex crime), and its relatively weak history delivering online services. I will count the latter here as irrelevant—Apple pay seems to be a straightforward service not requiring the kind of cloud infrastructure and talent that say, building a Dropbox competitor does, but the security issue, if played up in the media, could be bigger. In that regard, Apple is lucky that the issue was an insecurity in the password retrieval and account access process, rather than a true code vulnerability. That Apple's new Pay product requires phones with the Touch ID fingerprint sensor, which thus far seems airtight, is promising. Already, the news is awash in reports that this weekend was the iPhone's biggest ever, and most of the Apple backlash around the iCloud crime has subsided. Apple is in a great position to make waves not just in mobile payments, or eCommerce, but in all areas where digital currency is used.
The Landscape Pay Joins: Who Wins and Who Loses
Apple Pay seems secure and easy-to-use, which are the most important points to hit in a payments product. Where Apple Pay is streamlined, though, Bloomberg indicates that non-iPhone efforts to produce easy electronic payment products are fractious at best. Apple does not have first-mover advantage, but the company does have the presentation and product skills that produce a compelling and newsworthy product before it's even been released. Here are the companies affected by Pay:
- eBay, which owns PayPal, stands to hurt in the face of a successful Apple Pay. PayPal is the company's fastest-growing division, but this could definitely prove a speed bump for it.
- Square, which produces the popular Square reader, a device that turns mobile devices into point-of-service terminals, has historically been an Apple partner. But that was pre-Pay. Any company that has built a payments ecosystem on top of iOS skates on thin ice in a world where Apple has an alternative service and an airtight hold on its App Store.
- Softcard (formerly Isis) is a mobile payments effort collaboratively led by the four major United States carriers. A US-based effort will by definition be weaker than one that can spread internationally, and Apple has the advantage here of leading a consortium of credit credit card companies, rather than a regional, by-committee attempt at the same.
- The pressure is on for Google to get traction for a comparable platform on its Android devices, though its own business model is not at this point imperiled the way that Square's or eBay's is with this news.
Meanwhile, there are some groups that do not lose out, and will gain a lot from a successful Pay:
- Banks are one of the major beneficiaries here for, as I argue here, Apple Pay is poised to be huge. No major bank stands to lose subscribers as a result of this, as Apple, rather remarkably, got them all on board for the platform. (Verizon famously denied the concessions Steve Jobs wanted to bring the iPhone to the network, and it resulted in half a decade of subscription slowdowns for the company—there is precedent for giving Apple what it wants.)
- Apple, of course, has quite a bit to gain, as described in this post. A 0.15% cut of all commerce is nothing to scoff at when you're operating at global scale, which is what the payments platform inevitably moves toward.
- Consumers, meanwhile, are going to start seeing a lot of innovation around how they pay for things, and different benefits that emerge as a result of that. We may see discounts for certain types of payments, easier ways to split bills at restaurants, and the ability to purchase things at the venues we choose—both online and in-person—without having to carry cash.
At the time of writing, there are only 10 million devices that support Apple Pay. There will be a couple tens of millions more, likely by Christmas. Apple Watch will be released in Spring 2015, and can be paired with older devices to enable Apple Pay (which, Apple points out, extends compatibility to some 200 million other device owners). In other words, Apple Pay, device- and infrastructure-based as it is, will not be an instantaneous wildfire. Rather, the service is a slow-burning play for the long term. That Apple announced it over a month before its commercial availability is something of a warning: Pay was the sleeper star of the keynote, and if not right away, everything will one day be in its orbit.
Correction 9/23/2014 7:11PM: The percentage of revenue Apple was taking from Pay transactions was incorrectly "printed" as 0.0015%. This figure has been corrected; the math using that figure was unaffected and remains unchanged.