First Take on Apple Pay
The long awaited announcement of Apple Pay, on September 9, promises to scramble the existing payments system in the same way that Apple’s Macintosh, ipod, iphone and ipad products upended the computing, music and telecommunications industries.
The full ramifications of these changes won’t be apparent for months, even years, as Apple’s strategic move into mobile payments incorporates many moving parts that depend on the cooperation (or not) of other players. However, for a first take on the likely impact of the announcement on bank players in the payments system, we turned to consultant Steve Mott, CEO of Stamford, Conn.-based BetterBuyDesign.
Mott is a long-time student of the payments system who is scheduled to appear at BAI Retail Delivery 2014 on November 12 to discuss “Payments Innovation – What’s New and What You Need to Know.” What’s new in payments now, obviously, includes Apple Pay; Mott’s initial view is that it’s a long-term positive for banks, as he explains below:
Q: What does the Apple Pay announcement mean for the payments industry and the major bank players?
Mott: It’s act one of a big change in the way payments are made, but it’s not act two or three. There’s still a lot of work that has to be done. Apple is not a slam dunk choice to make payments secure. There’s a lot of learning that they have to do and, like everyone else, they probably underestimate how much that work is.
For me, the announcement is noteworthy for three reasons. First, Apple has basically announced that the credit card system is broken; they just blew up the credit card model. That’s important because the announcement comes from such a well-known and well respected player outside the payments industry.
The second thing they did was to heighten the visibility of payments as a business. You have media all over the place recognizing that this could be a big business – probably not as important as the rest of Apple’s business but still an important link to how people live their lives digitally. Payments facilitate a lot of people’s digital activities.
The third point is that after watching what PayPal, Google and Amazon and others have done with payments, somebody has finally figured out how to package that transactional experience in a much more fluid, natural and efficient way. And, more importantly, they’ve done it with an augmentation of security. So, logging in with a palm reader creating a dynamic token to get rid of the card data and then making the card transaction transparent to the merchant is an important step in getting out of the fraud and other problems that have accumulated in the payments system over the last 40 or 50 years.
It’s like taking something old and cruddy from your basement, refurbishing it and making it work a whole lot better. With new technology, we now have the opportunity to build a payments transaction completely embedded, completely transparent and completely associated with the individual making the transaction, as opposed to some account number that winds up in stolen lists on some black market website.
And, by the way, in my view, Apple is not trying to be a part of the payments system but rather they want to extract a toll for making the payments system more efficient. And from the standpoint of the banks, Apple is building a safer system so it probably doesn’t need to cost as much. We’ll see in the next few months how their pricing system with banks and merchants actually works out. But, if you’re in the payments world, this is historic because you actually have somebody putting their money where their mouth is in terms of saying that the payments system should be cost-based.
Apple Pay is also chapter one in the unraveling of the interchange system as we know it which, historically, has been about market power. Now, it will be based on the value that players contribute. That’s a real step forward that I think most banks will embrace. For example, the issuer will give up 15 basis points for a point-of-sale transaction, which provides them less revenue but also a more profitable transaction. Because of the added security, issuers will experience fewer chargebacks over time, fewer security-related calls, etc.
That’s the real advantage of transparent, embedded payments transactions. Over time, you’re going to get rid of all those unnecessary structures and processes that are the legacy of the physical payments world, the physical processing world, as it dissolves into what is, in effect, a set of digital identifiers so that the technology can reduce these transactional costs to, ultimately, near zero.