Thursday, May 12, 2011

Why Apple is Poised to Become the King of Payments

Via Micheal Koploy of Software Advice
Bear with me as I imagine grocery shopping in 2013. You walk into Sam’s Club and grab a shopping basket. Your iPhone lights up with a new push notification:
“Welcome to Sam’s Club. Do you want to use your standard shopping list?”
You click no, and instead select the “Summer BBQ List” that you found on Epicurious. The app pops open a map of the store and tells you to head to aisle 2. You enter the aisle and find your first item: pickle relish.
“Please scan each item as you place it in your shopping basket,” the screen reads. You locate the bar code on the jar, and scan it with your iPhone.
The iPhone responds, “You have selected Josh’s Pickle Relish. This brand is $0.22 cheaper at your nearby Safeway. Would you like a Safeway coupon?”
Not worth it today. You press, “No,” and continue shopping, guided by your phone, and scan each item as you place it in your basket. The app is smart, of course, and it guides you around the store in the most efficient route, alerting you as you near each item on your list.
You have completed your shopping list. Based on your selection of: pickle relish, ketchup, onions, hot dogs, and buns, would you also like to purchase potato salad? It’s $1.00 off today. If so, head to aisle 11.
Sounds like a good deal. You go for it.
As you walk towards the exit, your iPhone reads, “You have previously chosen to pay with your Visa card ending in 4128. Select, “Pay,” to complete your purchase using this account.
You select, “Pay,” take your cart, and exit the store. You’ll receive an email on your drive home detailing your purchase with electronic coupons for your next shopping trip.
Apple has the potential to change our retail experience, and this future is becoming closer to reality.
Apple Payments Would Be a Game-Changer
“It Gets Better.” This slogan has become a staple of Apple’s World-Wide Developer Conference each year, and a creed for the company’s services. If the scenario above is what I can dream up, imagine what the minds in Cupertino can invent. Apple has revolutionized how we consume music, mobile applications, and media, in general. I fully expect them to revolutionize the retail experience, too. In the process, I think they will come to own a huge chunk of the payments industry.
Why is that important? For one, it’s a $48 billion opportunity. Assuming companies like Visa, Mastercard, and American Express receive about 1.5 to 2.5% of every transaction, that’s easily over $20 billion in swipe fees alone. Meanwhile, merchant services providers – the companies that set up retailers with terminals and act as a conduit to Visa, et. al. earn .5 to 1% of every transaction—up to another $16 billion for their role in the process.
We think Apple has a chance to own the later opportunity by acting as a merchant services provider. If Apple can revolutionize the point of sale, consumers will use their iPhone for retail checkout. Behind the scenes, Apple will be processing payments as a merchant services provider. Consumers won’t care who’s processing the transaction or earning fees.
Here’s my experience. I used to only have a Visa credit card, but was forced to obtain a Mastercard because it was the only one accepted by my loan provider. And that is the beginning and end of my payment preferences. I don’t care if I make a purchase with a Visa, Mastercard, or any other card brand, or if the merchant I am purchasing from uses merchant services company A or company B—it makes no difference to me. Consumers are indifferent to the various payment service providers.
I would, however, care if one provider gave me tools to make informed purchases and make the retail experience more enjoyable. And this is why Apple has the potential to shake-up retail and own the payments industry.
The NFC iPhone Will Change Everything
There is increasing speculation that Apple will soon release a touchscreen device with near field communication (NFC) capabilities, most likely a next-generation iPhone. This technology powers services such as Mastercard’s PayPass, where consumers just need to tap their credit card or other PayPass-enabled device to make a purchase.
When Apple releases this device, they’re poised to leave a heavy footprint on the payments industry. Purchases would be facilitated by presenting an iPhone instead of a credit card; Apple can create a merchant services offering to receive the processing fees for these transactions.
This iPhone would not only be a device that facilitates purchases, but one that creates a more robust, efficient, and enjoyable shopping experience. This is why Apple Payments would be different and a game-changer. It would create reason for the consumer to choose one payment network over another, and give Apple leverage to enter and own the payments market.
Apple Has the Done It Elsewhere
Apple already acts as a merchant for its iTunes and App store, and receives a cut of all transactions. Here’s how much they receive from App Store revenues:
  • Apple collects 30% of all revenues from App Store sales
  • Apple collects 30% of sales revenues from in-app purchases
  • Apple collects 40% of ad sales from in-app ads (iAd)
  • Apple charges $99 per year for developers to have access to its SDK
Services like iTunes and the App Store enhance the quality of Apple’s products by extending their functionality. And the market for iPhone and iPads is just beginning to reach its potential, as estimates are that only 30 to 40% of mobile phone users have a smart phone.
Growth of iOS Products
As Apple has matured their hardware and adopted this revenue-sharing model, they have become increasingly closer to Apple Payments. Apple is poised to enter the merchant services market—as soon as they release an NFC iPhone.
Apple Payments Graphic
Consumers Would Force Merchants to Switch
iPhone users would input their credit cards numbers into their iPhones, and present their phones at virtual checkouts to complete their transactions. No more waiting in line. With consumers overjoyed at the convenience of iPhone checkouts, retailers would have no choice but to adopt Apple payments.
But why would merchants switch to Apple Payments? Traditionally, merchants made these decisions based on their own interests. But Apple could offer an experience that other providers don’t, and can’t. Bundled with Apple’s customer loyalty, this could potentially force the merchants’ hands, and allow Apple to demand whatever they saw fit for processing fees. By doing so, Apple could enter the $16 billion merchant services market I alluded to earlier.
But what if they take it a step further. What if Apple owned the entire payment network? What if consumers didn’t pay with their Visa card on their iPhone, but their Apple credit account on their iPhone? This could entitle Apple to up to another 2.5% of every purchase.
Yes. I realize I’m starting to get a bit out there, but who ten years ago would have thought Apple would dominate the music industry today? Or the smartphone industry? Or tablet computers? Apple is sitting on Scrooge McDuck-esque cash reserves, an amount sure to grow over the next few years. A few years from now, maybe Apple could just buy Visa and own the entire payment industry.
What Will It Take For Apple to Be the Payments King?
If and when Apple announces an NFC-capable iOS device, it will assuredly be bundled with an official Apple Payments app—third-party apps would be subject to Apple’s revenue sharing, and that would never work.
Apple will need to release an NFC iPhone, and prepare a merchant services portal. This means that Apple will have to prepare these services well before they announce the device, meshing with new rumors that the iPhone 6, not 5, will be the one with NFC capabilities. Once in place, merchants can accept iPhone transactions, and will pay Apple a processing fee. After they establish this network, Apple can blow the entire industry out of the water, and become a new credit brand à la Visa and Mastercard.
So, what do you think? Do you think Apple could shake-up the payments industry? This would assuredly make Apple one of the most powerful companies in history, so maybe a better question would be: would Apple play nice as the King of Payments?

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