Part II – Deep Dive: Apple Pay and The Strange Bedfellows Analysis [free login]


This is a deep-dive follow-up to my Will Apple Pay Reign Supreme? article in Forbes.

Apple Pay launched last week with a million cards registered. How did you celebrate? CVS and several other retailers celebrated by disabling all NFC chip payments in anticipation of their own solution, CurrentC…based on my favorite punching bag, QR codes.

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Finally, the payments space is getting exciting – but not for the reasons everyone thinks.  Sure, NFC and Bitcoin are practically Fifty Shades of Grey compared to credit cards. But it in my years in payments and loyalty innovation, this is the first time new contenders will succeed – and redefine the consumer experience.  This is a follow-up to my Forbes article, “Apple and the Merchant Payments Showdown”. Here I will deconstruct Apple Pay and the many unexpected deals its success will unleash. And my old colleagues at American Express and MasterCard might not be thrilled.

Think about this question (which I’ll answer after login below): How long do you think Apple Pay will feature photos of credit cards in its wallet?

As you ponder your answer, feel free to use this chart for inspiration:

payments showdown v2 web

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How long will Apple Pay feature photos of credit cards in its wallet?

The answer: exactly as long as the Compact Disc was the official icon for “music” on every device. 

New competitors and old school payments companies have 5 years to redefine their brands as all remnants of plastic disappear. For now, they will compete inside a wallet they don’t control, the same way web sites scrambled to make apps to compete on smartphone home screens. No website could afford to be buried inside a browser shortcut. Same here.

The Apple Payload

The over hundred million iPhones owners with credit cards will generate loads of sales – and sales data that can and must be used for loyalty and marketing.

Before making big predictions, some questions need to be answered:

1. How tightly will Apple control the experience, API and NFC chip?

Apple doesn’t let developers access the iPhone’s wallet or NFC chip. For now, developers will be limited to building loyalty solutions that summon Apple’s wallet at the Point-of-Sale. In the early stages of any deployment, this level of control makes sense. In the long term, it’s consistent with Apple’s obsessive control over consumer experience. Compare that to health apps. Because Apple was late to the game, for now, Fitbit (and similar apps) can access the iPhone’s accelerometer and GPS. But it’s new health app is an attempt to reign in that experience.

In the long-run, offering payments (like online bill pay for banks) will increase switching costs for consumers. It will make iPhones even more indispensable than the heroin-encrusted appendages they already are.

2. What kinds of restrictions do Apple’s deals with retailers and card companies place on its use of data?

There are some rumors Apple doesn’t get as much data as I suspect they can. But assuming few restrictions, Apple can safely make a bundle by doing very little. Supermarket chain Kroger makes $100M a year selling data from its 2,600 stores and 55 million shoppers. Apple launched (with hiccups) in 220,000 stores. But even if Apple made 10x what Kroger does by offering a data API, $1B in pure profit would be only 2% of pre-tax income.  So to make a dent in its monolithic financials, Apple must move up the value chain – to marketing and loyalty services.

This is likely where Apple’s IBM partnership will blossom (or constrain it from working with competitors).  IBM will bake Apple data into its retail solutions that include iPad sales terminals and marketing services (not unlike ones we created at MasterCard).  They can also create a B2B marketplace (or “app store”) for multiple retail solutions, similar to what Salesforce offers.

Throughout, Apple will continue to gain leverage, as long as iPhones retain market share. That means the company will be able to exact higher tolls and more concessions from retailers and payments companies, as they did with music companies…until streaming players like Spotify and Pandora came along. What will be the payment equivalent of streaming? It might be Facebook* – with a big, fat asterisk. (Sign up to our mailing list to get notified when my Facebook payments article is out.)

Apple’s head start can’t easily be dismissed, but despite Tim Cook’s more collaborative stewardship, the company’s history of hardball in music and market dominance in devices has conditioned partners to be weary. That will keep the door ajar.

Strange Bedfellows Matrix – Mobile Payments & Loyalty – 2014

Of course, Apple isn’t the only game in town. There are a lot of wildcards – Paypal, Google Wallet, Square, Starbucks, Telcos, Amazon, handset makers, and card companies. Below is a detailed Payments Bedfellows Matrix and analysis, where I explain some of the intriguing partnerships and feuds that might shape payments in the years to come.

Quick plug before diving in: if you need help innovating in payments, eCommerce, retail, or consumer tech feel free to contact us at IdeaFaktory.

apple facebook payments showdown v2 final web


This is already happening and it’s called CurrentC. Read my thoughts here as to why it’s important for merchants.But as Telcos proved with ISIS, making a consortium competitive is like using cats to win the Iditarod.Iditarod catsRegardless, there will be clashes, competing interests and inconsistencies in user experience. Most concerning, will be avoiding conflict between individual loyalty programs and the collective CurrentC effort.
2, 32
This is why you’re reading this…There are some retail holdouts, but as consumers demand the convenience, resistance will become more difficult. Though merchants still hold significant advantages, but see cats above.Telcos are out-leveraged by the Apple juggernaut. They must yield to Apple on payments for the foreseeable future.
As mentioned in the article, partnering in retail would be a natural extension of Facebook’s current relationships with brands. Facebook’s challenge will be consumer adoption.For everyone, Android fragmentation will impede consumer adoption. Many Androids don’t have NFC. In ones that do, the experience is currently an odyssey. This will take time to fix and Google and Telcos may try to assert some control, if either gets serious about payments.Though Apple won’t allow another wallet to be used directly in-store, there will be some API tie-ins that will allow merchants and even Facebook to integrate, similarly to OpenTable, particularly in loyalty.Merchant exclusives, personalization, in-store perks and unique shopping experiences can help drive adoption of a combined Facebook-Merchant effort.
This is not as crazy as it seems. I fully expect Apple to continue developing and acquiring its own data sets and analytics capabilities. However, they will never have the kind of profile data Facebook does. It might happen indirectly, through mutual partners like Acxiom or Datalogix,but I wouldn’t be surprised to a deal or “coopetition” here.
This is the default setting. But beyond current merchant acceptance, the market is looking to more innovative players (with less baggage) for leadership on loyalty and payments. In fact, the tense relationship and fee structure is as much of a reason as mobile payments to explain why a merchant consortium exists in the first place.
Neither side gets the others very far until Facebook has a viable consumer payments app. Facebook will certainly be able to link cards to their wallet, but anything beyond that will require overcoming major adoption hurdles.
Called Visa & MasterCard
9, 11
Once PayPal is a standalone company, it will have a better proposition for merchants than the murky one under eBay. I think their best play might be to run payments and loyalty for the merchant consortium. The economics will be tight, but doable. I hope someone’s making those PowerPoints now!A Facebook data set could be the killer app PayPal needs to attract retailers. A trifecta of the merchantconsortium, Facebook, and Paypal is great on paper, but only slightly easier than performing your own plastic surgery.
Apple Pay supports PayPal in its wallet. That limits the innovation and in-store propositions PayPal can offer to stores. I expect PayPal to aggressively pursue an independent strategy with merchants. It has to.
This already exists and it’s a frenemy-type of relationship. PayPal delivers a lot of volume as a “merchant” (via eBay). ButPayPal also aggressively tries to move users off cards to ACH. The nature of this relationship will not immediately need to change.
Throughout all of this, Starbucks has quietly built a jittery empire. Coffee junkies need their daily fix of its creamy, magical confections, as if they were spiked with some sort of addictive stimulant. More importantly, 15% of them pay with the company’s mobile app. That’s six million weekly transactions. Soon Starbucks’ app will have your coffee ready as you arrive – and a narrowing window of leverage.Everyone wants needs the habituation of affluent customers that Starbucks has achieved. But extending payments outside its ecosystem is a big undertaking and not core to their business. I don’t think they can or should try this alone. If they do, expect management changes…Starbucks’ best bet is using their accumulated leverage with other players. If I were Starbucks negotiating with Apple, I’d make sure to ask for access to the NFC chip for their own app in exchange for accepting Apple Pay. I’d also want to make sure they did not compete and carried whatever offers Starbucks wanted to push through. But that’s me…The clock is ticking… If Apple shows it can achieve habituation with drug stores and other chains, Starbucks will fall in line and accept Apple Pay without concessions (as will resistors like Best Buy).
Thus far, Google has only dabbled in payments. While Android integration with apps like Uber is elegant, very little makes it outside the phone. Google has to do a lot more to show it’s serious about this segment. With Apple’s entry, Google will be forced into parity. It will have a much harder time because it must reign in dozens of manufacturers with hundreds of phone models. The real coup would be to convince Telcos to play ball, replacing their dabbling efforts with Google Wallet. Besides that, Google’s next best bet is to strike deals with a whole slew of merchants – or likely, with CurrentC itself. Google has the resources and as it’s shown when competing with Amazon, it’s willing to step out of character and miles from it’s core to deliver same-day groceries. But because of fragmentation, the degree of difficulty here is spectacularly high.
24-30, 38, 47, 57
Sure, there are deals Square could make (like its failed experiments with Starbucks), but the company is bleeding money and raising new capital. I’m not surprised, their economics are brutal. They are now experimenting with lending, POS terminals, and many other services. Until they settle on a model that scales, it’ll be hard to get enthusiastic commitment from major partners, or acquirers for that matter.
Like Google, mobile telcos have not been serious about payments. For good reason. It’s not core to their business and they have much lower hanging fruit, like getting data right, managing MVNOs, network expansion, etc. At best, they may be getting a tiny part of every mobile transaction on Apple Pay. They might try to do the same with the messy Android ecosystem or strike an unlikely deal with Google itself. ISIS, or whatever the non-terrorist payment consortium is now called, has been badly mismanaged and ineffective. An Islamic civil war has been the only notable PR for this effort. I know I colored in a bunch of boxes in the chart, but realistically, I’m not going to burn more calories analyzing this segment for telcos until they get in or out of the pool.
40-49, 59
Android manufacturers are unprofitable and desperate for any way to differentiate beyond hardware. And they don’t have much leverage, as I illustrated in my surviving platform risk article. They must get into services and content but have no expertise in it.They have existing relationships with Google and Telcos, but neither will be sending them a life preserver anytime soon.Although Amazon stumbled with its phone efforts, it has a content working in its favor. I wouldn’t be surprised to see one or more major Android makers include Amazon content and payments functionality on their devices. The distribution might be there, but it won’t solve the merchant adoption challenge Amazon faces.
50, 51, 56
Fairly self-explanatory for competitive reasons. Where it might get a little interesting is when Amazon opens its retail stores. Will it accept Apple pay? Amazon already plans to make its credit card Apple Pay compatible, but it’s not likely to be a sign of deeper collaboration on Payments.For retailers, Amazon Lockers were likely their last experience. Between showrooming, bar code scanning apps, entry into new categories, and same-day delivery, snuggling with Amazon is like sleeping with a hungry pet lion.
For PayPal, this would be like divorcing your wife to marry her twin sister. It could happen, but unlikely to advance either company’s offline ambitions significantly.
This would be interesting to Amazon if it could turn the tide on other merchants adopting their payments technology. Amazon’s standalone payments prospects will be nearly impossible to resuscitate, even if it gave a lot away for free. Most merchants are far too leery.
Telcos are eager to create a counterbalance to Apple and Google. Amazon’s fork of Android is improving and has a strong content ecosystem. I can see telcos making a deal to feature Amazon’s store, but treading lightly into commerce, loyalty and payments.