Bitcoin Crashed, But Will Apple Pay Take Off?

You're showing your age if you remember "master charge" (all small caps).

I'm kind of surprised Apple didn't name its payments service "iPay." It could have eased the terminological transition to lending, "iOwe," and the unfortunately common American phenomenon of being unable to pay debt on time, "iDefault"--which, in direr circumstances, leads to the state of being "i(M)Bankrupt." All kidding aside, "Apple Pay" is an expected development that nevertheless holds much promise, the first emanating from it being an Apple service and the expectations people have that it will have a higher chance of success in the company's Reality Distortion Field. 

Apple's fearsome reputation aside, Apple Pay also deals with many of the obstacles which render Bitcoin a non-starter. To wit, I enumerated the following not so long ago:

1. Has this payments service addressed legal impediments to payments handling such as (a) occupying a grey area questionable by monetary authorities, and (b) meeting anti-money laundering / counter-terrorist financing legislation worldwide or AML-CTF?
2. Would mainstream banks course their transactions through this payments service?
3. Would mainstream retailers accept its payments?
4. Would consumers use this currency secure in the knowledge that (1)-(3) are met?

Apple is usually quite comprehensive in ticking the boxes, and its relatively late entry into the payments arena is largely attributable to performing due diligence on these four factors in a way the upstart outsider Bitcoin hasn't. In other words, it meets the three necessary characteristics of money as a store of value, medium of exchange, and unit of account--especially the first two. Given how Apple's fashionably late entries into the music and mobile telephony spaces have revolutionized those categories, the FT is predicting the same for payments. At the outset, all the major players all already lined up:

But such is the sway of the tech company that JPMorgan, Visa and the other banks and payments networks sent senior executives to Mr Cook’s presentation on Tuesday to pay homage. Bank chief executives fawned about the “exceptional customer experience” and the “exciting move”.

They are also paying hard cash for the privilege of being involved: 15 cents of a $100 purchase will go to the iPhone maker, according to two people familiar with the terms of the agreement, which are not public. That is an unprecedented deal, giving Apple a share of the payments’ economics that rivals such as Google do not get for their services.

How about this for a star-studded lineup of the Who's Who of American finance:

The list of early Apple Pay partners is impressive, including the 11 biggest US card issuers, representing 83 per cent of the market, and retailers such as McDonald’s and Walgreens which together have 220,000 US stores ready to receive iPhone payments. While it lacks retailers such as Walmart and Best Buy, which in 2012 teamed up to develop a mobile wallet of their own, Apple’s ability to wrangle representatives from three big groups of the payments world – banks, credit card companies and merchants – is no mean feat. 

Part of the reason the 50-year-old credit card system remains “antiquated” is because it relies on a complex ecosystem of players that rarely agree on how best to change their industry. However the chief executive of one payment technology company, who asked not to be named, said he was surprised that the banks were so willing to concede to Apple after what happened to the record labels.

Actually, the FT article is useful in understanding how this situation will unfold if Apple Pay is successful, which is by no means guaranteed. There have been, after all, several Apple flops over the years. Let's begin with the head of the credit chain: Banks, strictly speaking, are not endangered unless Apple decides to go into the business of providing credit, which I doubt. Ditto for mass and specialist retail. So, they are relatively safe since Apple has little reason to go into their lines of business.

However, there is a case to be made that the existing payments handling services--Visa and MasterCard--are likely to feel the squeeze. What they do is facilitate payments--on credit or debit--from existing bank accounts. In effect, Apple Pay fulfills the very same service as Visa and MasterCard do. Since terms are undisclosed, what will determine whether Apple Pay supplants Visa & MC are the following:

1. Swipe fees per transaction being lower for retailers via Apple Pay than Visa/MC;
2. Royalties per transaction paid by banks to Apple Pay being lower than Visa/MC; and the hard part:
3. Apple Pay handling transactions outside of Apple-branded consumer devices.

Mind you, (3) has already happened with iTunes for Microsoft Windows being a notable example, so I'd be very uncomfortable if I were Visa/MC right about now. Sure Apple is playing nice, but cutting Visa/MC out will become a more realistic proposition as more payments are coursed through Apple Pay and reach critical mass. If Apple is already the middleman, there is certainly no need for another to pile on more fees for banks and consumers alike.

At present Apple will not charge retailers anything, only banks:

Apple declined to talk with Digital Transactions News about Apple Pay’s pricing or operational aspects. But clues can be found in the Web site it created for software developers working on applications for Apple Pay. The “Getting Started” section poses some common questions, including, “How much does it cost to accept Apple Pay?”

Here is how Apple answered its own question: “Apple does not charge users, merchants or developers to use Apple Pay for payments. Your credit and debit transactions will continue to be handled by the payment networks.”

Translation: Apple will not upset the Visa/MC gravy train just yet, but in time, what's there to stop it from approaching retailers offering to do (1) and banks offering to do (2) and cutting the existing payments services altogether? What they currently enjoy is brand recognition: both Visa and MasterCard are global top 100 brands. But guess what? Apple eclipses them both by a huge margin in valuation. Remember Nokia? It too used to appear on this list with regularity--until iPhone came around.

MasterCard, in other words, may soon be joining "master charge" in the Great Cash Register in the Sky.