What is Apple's end game with payments? Part 1
One of the most significant pieces of news in the past few weeks was Apple unveiling “Tap to Pay”, a way for merchants to use an iPhone to accept payments without any additional hardware. This has been fairly well broadcast since they made the acquisition of Mobeewave for $100m in mid 2020 so was not a complete surprise.
While some folks have pointed out the impact on other new POS providers such as Square, Toast, SumUp and the like, these are far from comparable solutions. Many of these types of companies offer software functionality on top of the hardware to physically accept card payments and while Square’s shares were down 3.2% on the news, this is likely an overreaction. As an example, Square offers the ability to accept payments online (underwriting the merchant risk itself), as well as software for managing teams, invoicing, payroll, inventory management, marketing and loyalty. Apple is not likely to build out these same solutions but could leverage its App Store model to allow others to build on its payment acceptance platform and take a cut.
Apple’s “Tap to Pay” is likely partially designed to increase sales of iPhones and other iOS devices to merchants who want to accept payments. I think there is not much of an increase likely given a lot of people already use iPhones and potential merchants may just use a device they already own.
Apple has been increasing revenue from its services business and reducing the reliance on hardware sales for a few years, further monetising the ecosystem it has built from its success in hardware which is the more likely impact. The Services revenue increase has come from Apple’s extension into the fintech space with Apple Pay, its digital wallet embedded in every iPhone and Apple Card, its credit card offering in partnership with Goldman Sachs. Apple earns 0.15% every time the Apple Pay or Apple Card is used for payment, something which no other party earns outside of the traditional four party model. Apple were able to leverage their power and secure this commercial arrangement by playing off issuing banks FOMO, as well as the card networks giving Apple the ability to decide which cards were able to work with Apple Pay, something they refused later to Google. Apple then went on to create Apple Card with Goldman Sachs, a product that competed with the very issuing banks that agreed to Apple’s 0.15% cut for Apple Pay.
With “Tap to Pay”, Apple is likely going to increase the number of transactions that flow through Apple Pay, whose adoption in the US has been somewhat slow, padding its coffers with 0.15% from every transaction. Apple was able to extract this fee around the time of the debut of Apple Pay back in 2014 and how long this lasts is anyone’s guess. Banks are already putting pressure on card networks to stop or limit its impact by changing how payments with Apple Pay are made. It is entirely possible that Apple could also extract a similar 0.15% from the acquiring side for transactions over Apple Pay, much like it did with banks on the issuing side and so would earn 0.30% in total for any Apple Pay transaction.
I predict that Apple Pay will increasingly gain traction because of the simple UX customers get when checking out with Apple Pay. This great UX comes from the fact that Apple has control over both hardware (iOS devices) and software (browser and apps) and can integrate them in a way that no other company can.
Apple is very well embedded in the consumer side of things given their ownership of hardware and software and this move with “Tap to Pay” is likely to focus on building out their merchant footprint, which is the reverse order of what Square did. Square focused first on POS and payment acceptance of smaller merchants and then focused on consumers with Cash App. Apple is doing it the other way around and time will tell if there are advantages of doing it one way or the other.
Where does Apple go from here?
Apple is already rumoured to be working on a BNPL solution, Pay Later, through a deepening of its relationship with Goldman Sachs. Apple already has a physical card that it could offer its solution through but an even more interesting proposition could see Apple offer a Pay Later service over the top of any card that has been added to Apple Pay. This would leverage Apple’s distribution and allow anyone paying with Apple Pay to split a transaction. Apple could even partner with merchants on a commercial basis to allow the service to apply with specific merchants transactions. For example, if I pay £500 at John Lewis and use Apple Pay to pay with my Lloyds-issued card, Apple could offer terms to Pay Later and receive a fee from John Lewis for that, similar to how BNPL rivals receive payments from merchants.
Apple could further limit its Pay Later to merchants it has a commercial relationship with. This would require Apple to build out commercial relationships which it may not be inclined to do but can potentially leverage existing Apple Pay relationships and merchant solution resources. Alternatively Apple could offer its Pay Later without receiving the traditional fee from merchants with the goal of driving more usage of its core Apple Pay solution and earning either its current 0.15% from issuers or also adding 0.15% from the acquiring side.
P2P / PFM
With an iPhone now a device that can both make and receive payments, the obvious way forward would be to enable consumers to pay each other in P2P payments. Much like Venmo, Apple could create a P2P UX that is embedded within Apple Pay which would make it easy to pay friends. This could further be integrated into iMessage, something Meta (Whatsapp) has only just started to launch. Additionally, combining Apple Pay with P2P payments, Apple could layer on traditional PFM type of tools, or more likely, allow third party app developers to do it by providing them access to the required information
These P2P payments could be on traditional card rails, where Apple would probably collect its usual fee or, if integrated with the App Store and Apple ID, could allow Apple to create a true digital wallet that can also store value. An Apple Pay Wallet where a user can store a balance would essentially replicate Venmo functionality, allowing the user to spend their balance at merchants or use it to pay friends. This could be the beginning of Apple creating a closed-loop payments ecosystem, a holy grail in the payments space with even more significant economic benefits.
By expanding from consumer solutions deeper into merchant solutions, Apple could leverage transactions where it represents both sides of the transaction to extract favourable terms like JPMorgan’s ChaseNet has done. With the clout that JPMorgan has, it was able to extract a 10year deal with Visa to create a network within a network with ChaseNet where it pays no network fee for transactions where it is both issuer and acquirer, enabling it to keep basically all of the interchange and payment fees for itself.
As Apple expands its merchant footprint with “Tap to Pay”, it will likely want the same sort of deal as it seeks to replicate what Square looks to be doing.
It remains to be seen as to what Apple will do when it comes to crypto, from a payments perspective as well as from an app perspective. Apple does have ARKit, its augmented reality framework and it is likely that its role is one of providing a framework and hardware for others to build on top of, as it has done with the App Store.
Games built using Apple technology would have to pass through the App Store which is where the company could seek to monetise its position. As mentioned previously, Apple is loosening its grip on payments within the App Store due to regulatory and legal pressures, either by reducing its 30% cut on payments or allowing developers to offer alternative payment methods. It also recently allowed developers to distribute unlisted apps, relinquishing its famed control of the App Store.
For games like Fortnite and other future “metaverse” style games, Apple could seamlessly integrate in-app purchases using its App Store infrastructure and the payment cards on file, providing the best UX compared to allowing game developers to redirect to another payment flow. Apple would likely have to adjust its App Store pricing accordingly and it could be content with collecting its 0.15% or 0.30% via Apple Pay. Apple could additionally facilitate the cashing out of in-game currency through an integration with a web3 exchange like Coinbase or UniSwap. A gamer could earn in-game tokens, spend them in-game via a web3 Apple Pay wallet and then cash out to fiat/stablecoin into an Apple Pay stored value wallet through an exchange with Coinbase/UniSwap or similar. Apple could be neatly placed to provide a way of moving money into and out of web3 if they wished.
Apple will need to tread carefully with payments and App Store agreements that may be seen to harm consumers. It has notably faced anti-trust issues, more recently vs Epic Games, about how it charges 30% for any payments done via apps from its App Store without allowing any alternative payment method and needs to tread carefully where it might be seen as abusing its position. Apple has started to concede their 30% cut or allow for alternative payment methods in some jurisdictions but how likely these are to catch on is anyone’s guess given what will surely be a superior user flow for using Apple Pay and the App Store as well as their likely “most favoured nations” clause.
Apple’s approach has always been on creating the best experiences which is why I believe Apple Pay will increasingly gain adoption both on mobile and web. “Tap to Pay” is likely to be the start of a deeper push into the merchant side of e-commerce which will provide a platform for future bets with BNPL, P2P and eventually creating a closed loop payments network. Apple will keep its focus on providing a platform for others to build on top of and will likely not build apps for merchants itself.
If Apple were to move into creating a stored value wallet, this would open up a lot of opportunities as it grows its consumer and merchant footprints as well as facilitating a path to benefit from metaverse activity that takes place within the App Store.
Questions for the community
The above represents my hypothesis and guess as to what direction Apple will take its payments strategy but it relies on a few key assumptions that I would love to get thoughts and feedback on.
Does Apple have the desire and talent to build out merchant relationships?
Is Apple likely to create a stored value wallet?
Will there be incentives for using Apple Pay with a “Tap to Pay” enabled merchant?
Will Apple continue to receive its 0.15% of transactions in perpetuity? Will they be able to extract 0.15% also from the acquiring side?
Would Apple create a crypto wallet?
Will alternative payment methods gain much traction if widely introduced in apps?
Fintech News Highlights
🇪🇺 PayPal is launching its BNPL “Pay in 30” service in Germany.
🇪🇺 JP Morgan is looking to enter the German retail market with a robo advisor.
🇬🇧 Neo-broker Lightyear is looking to socialise its app with “Profiles”, allowing users to share portfolio details.
🇬🇧 The Faster Payment System has had its transaction limit increased 4x, to £1m, with LHV UK already offering payments at this increased limit.
🌍 Google Cloud has launched a Digital Assets Team to explore blockchain platforms.
🌍 Solana Pay, a collaboration between Solana, Circle (USDC) and Phantom wallet, has been announced to enable merchants to accept and settle USDC for payments online and offline.
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Really interesting scenario analysis for Apply pay. I think there is a such high chance for something like an AppleNet being developed giving them 0.30% commission using the existing Mastercard payment rails. In terms of crypto is really early to comment on it as De-fi has still not stabilised and we have seen Apple play it safe with such tech to perfect it before jumping in. So, the Scope for A2A payments might become a part of this ecosystem given the fact that Apple Card already operates on the Mastercard payment rail. But it is similar to integrating UPI into Apple Pay in India. There is no real incentive for apple to enable payments through Faster payments(UK), SEPA(EU), RTP(ACH) or even FedNOW (potentially 2023). But apple maximising on the potential 0.30% until De-fi picks up is probable, and then an apple device based blockchain could also come into play to facilitate De-fi.