Do banks like Apple pie?
“Timing is everything in comedy and business.”
By Bjorn Cumps, Professor at the Vlerick Centre for Financial Services
It was never a matter of whether they would do it but rather when they would do it. Many banks have had internal meetings, discussions or even conferences on the future of payments systems and the possible threat of technology companies entering their market. What would happen when Apple or Google would start with their own payment service? Well here it is: Apple Pay – a contactless, NFC-based payment system that securely replaces your credit- and debit cards. But is Apple Pay innovative, disruptive, revolutionary? Were banks correct to be afraid? Nope. The story unfolded quite differently.
Timing is everything in comedy and business. How different is Apple Pay really from the already existing Google Wallet? The details are different, the principle is the same but Apple’s timing is impeccable. Whereas Google Wallet was a story for the early adopters, Apple now pushes the gas pedal for the NFC payments car to accelerate and probably reach cruising speed in a few years. The timing is right. Now that many merchants in the US are replacing their terminals to comply with security regulation. Many will make sure the new terminals are NFC-enabled. With the new iPhone owners NFC-ready the merchants’ potential user base will get an enormous boost (over 4 million pré-orders of the new iPhone model in the first day the new iPhone is available). With their well-timed move Apple will quickly help to establish the infrastructural foundation of a new payments platform. And platforms, well, that is what this game is all about.
What about the banks? Well, some seem relieved to be included as a partner in Apple’s business model. Others remain hesitant and suspicious of what is about to come. It is obvious that Apple wants a piece of the payments pie. And it is quite a sizeable pie with worldwide more than 300 billion non-cash payment transactions yearly. Different sources claim Apple gets 0.15% of each Apply Pay transaction which means their revenue stream will increase as both the amount per transaction or the number of transactions increases. First estimates indicate this could evolve into a multi-billion dollar business for Apple. So yes, banks will get a smaller piece of the pie and see a sizeable part of the business go to tech companies. Why are banks relieved?
First of all because Apple is the perfect ally to grow the payments business even further. And who doesn’t like an even bigger pie? Even if it is Apple pie! But more importantly, for years banks have been fighting a war on cash, trying to reduce the number of cash transactions. Without great success. A service like Apple Pay could well be the catalyst that further reduces cash transactions which are a great cost for banks today. So Apple can help reduce costly cash transactions for banks and could increase the size of the payments pie as the amount of transactions increases. Not all bad news for banks I would say.
Secondly, because banks are, for now, part of the payments ecosystem Apple is setting up. Banks are still in the loop. Apple does not reinvent the payments business. They just did what they always do. They take an existing product, improve it, re-invent it, create a platform for it and embed it in the Apple experience and design. Banks know they cannot deliver this. They don’t know how to themselves. But by partnering with Apple Pay they don’t have to. Their customer can enjoy a new payment experience in a myriad of new apps which will embed Apply Pay. Apple has the platform and will further develop it in the future. Shows that both partners could be winners when partnering in an ecosystem rather than competing against each other. And yet, not everyone will join Apple’s platform.
And so, also in this business, we will see a battle of the platforms in the years to come. Apple Pay will be a catalyst for the payments business. But they are not the only platform out there. In the US some major merchants (Walmart, BestBuy, 7-eleven, Target, Shell, ExxonMobil and more than 50 others) combined forces to create MCX (Merchant Customer Exchange) a merchants-owned mobile commerce network that offers an app-based mobile payments solution. A similar initiative exists in Belgium with Sixdots, a platform supported by all the major banks which will enable in-app mobile payments combined with fidelity cards and couponing solutions. And many other solutions are out there. All platforms will have a different ecosystem of partners, services and technology. Looks like in the payments business, much like in the gaming business (Playstation – Xbox – Wii) , the telco/digital TV business and many other businesses, the war on platforms will rule the coming years. And let’s not forget the Android platform with Google Wallet. Who will win this fascinating battle? Difficult to predict yet timing, ecosystem partners, platform infrastructure and embedded/integrated services will certainly be crucial enablers to win the battle. In the end it will come down to who creates the best perceived value for the customers. Where do we as customers/users get the best payments service and experience?
As I said before in an earlier paper: tech companies do not want to become banks. They just want a sizeable part of the pie of certain banking services (payments, credits, …). They know how to optimise or even re-engineer certain parts of the banking processes in a way banks never did. Tech companies are in the payments value chain from now on. No doubt about that. We have crossed that bridge. How much of the payments pie they will be able to claim depends on how these new ecosystems will evolve. Which partners will find each other. How new value will be created with new services. And finally, which platform will come out as the winner. Is Apple Pay the right services at the right time? Time will tell. And yes, one more thing … stay tuned as we have some fascinating years ahead of us.