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Going where the money is

The bank robber Willie Sutton did not say, when asked why he robbed banks, “because that’s where the money is.” He did agree with the idea however saying “Go where the money is…and go there often”.

Regardless of it being apocryphal, this idea came to be called Sutton’s Law and is often taught to medical students. It’s similar to the notion of Occam’s Razor: when an obvious or simple answer competes with an obscure or complicated answer, pick the obvious one first.

These are sound analytical rules of thumb. When thinking about what products and services could arise in the immediate future, those most obvious and with fewest assumptions should be put forward first. The what part is relatively easy. The tough question is more about when will they emerge?

We now know that Apple will announce new products on September 9th[1]. This gives us an idea of when something will happen, answering the tougher question. It leaves the simpler question of what will emerge.

I put forward my predictions as follows:

  • Regarding iPhone, a tweet on product mix and pricing.
  • Regarding an “iWatch”, an answer to a question from Eric Jackson.
  • Regarding the potential for wearables, a post on the subject.

One more item has surfaced on the potential of payments processing which I want to address now.

Handling payments, to me, is a perfectly plausible activity for Apple mostly because the company has made quite a few comments on the value of their “customers with credit cards” and the effort that went into Touch ID (which seems to be extravagant relative to the value of rapid unlocking).

But one word of caution: if Apple does enable payments it’s important to realize that being a (payment) bit pipe is not a particularly profitable business. It will undoubtedly bind value to the iOS devices which make it possible, but I don’t think there will be a direct capture of profit from the transactions themselves.

Profit needs to be in proportion to the value delivered. When that value is marginal convenience it is worth something but it’s not a huge something. It is a marginal something.

You might disagree pointing out that payments are big business and banking bigger still. But those businesses are not hired to simply funnel low friction payments around. They are proxies for trust and complex risk management.[2]

So for a company that facilitates the payment clearing system, the margins are likely to be very thin and with costs being non-zero it may be nearly a wash. The real impact of the decision to support payments will be in the aura surrounding the iOS ecosystem. An aura which will glow intensely.

The idea of untold riches coming from “being in the payments business” is rather like the bank robber’s dream of being where the money is. It is tempting to think that handling lots of money must result in wealth. However consider the value of Brink’s. Net income of $57 million on $4 billion revenues and $1.3 billion market cap.

Reality is that wealth comes from the creation of value not from its transport.

Notes:
  1. I’ll be there and will report via Twitter and a special session of The Critical Path podcast []
  2. Nota bene: this trust could be commoditized with crypto currencies and blockchain technology making these giant businesses perilously smaller. []
  • crustyjusty

    I have to disagree on the premise of this piece: That there is not that much value in being a payment pipe.

    The payment processing companies are rewarded for their ubiquity (convenience), and for removing risk from the retailers. You could argue they also are rewarded for lending money to customers for 30 days, although more and more payments are debit vs. credit.

    For these benefits, retailers are charged between 2%-3%.

    How would Apple be able to capture more value than just a handling fee?

    1. By using hardware authentication, they can reduce the risk of fraud significantly.

    2. By connecting directly to bank accounts, instead of debit and credit card numbers, they could reduce the retailer fee, creating significant value to the retailers. They could capture some of that value. One could also argue they could charge more fees because the payment would be quicker than typical credit card swiping.

    So, I think Apple may be able to simplify or capture some of the value Visa currently creates. Maybe then some of Visa’s $130B market cap would flow toward Apple.

    • Walter Milliken

      My first thought was the same as 1. above — Apple may be able to pick up some fraction of the payment processor fee by reducing the risk of fraudulent transactions.

      • Walter Milliken

        And then I see this: http://bankinnovation.net/2014/09/apple-said-to-negotiate-deep-payments-discounts-from-big-banks/

        Bingo!

        The question is whether they are keeping some of the saved fee, or if this only applies to direct iTunes transactions. I’d bet on the former.

      • obarthelemy

        Interesting, thank you.

        It seems in the long term the only way to make payments very profitable is to go direct, and take over the CC and bank fees. This must scare up a whole lot of risk and regulations issues though.
        Otherwise 0.25% really isn’t much, and long-term prospects are murky, with credit card themselves becoming IT based, probably biometric too. My phone is more ready-at-hand than my CC though, that must be a factor, if costs are equal.
        I also wonder if that payment thing ties in with iBeacon tracking to make a “real life” tracking database similar to what Google has for web-based tracking.

      • Tatil_S

        Even at 0.2% which would be a pretty good cut, being a middleman in $100 billion worth of consumer transactions would bring in $200 million of income. Some of that will be spent on compliance costs, fraud risks and the inevitable customer support, so it would not really move the needle for a company the size of Apple. Of course, it is better than not earning it at all, but not a panacea.

      • Walt French

        @obarthelemey wrote, “…credit card themselves becoming IT based, probably biometric too.”

        Methinks that Apple will do little to keep this a proprietary feature of iPhones, but instead work to build it out as a more attractive form of the secure transaction game. They’ve already done this with in-app payments, something that cards don’t seem to be likely to do anytime soon (I’d think it’d require a separate, biometric dongle, essentally everything that’s in the iPhone), or perhaps set up their own “rewards” tpe program.

        But yes, eventually, a technology is sufficiently mature that it can be commoditized, with interchangeable parts of the whole transactions stack.

        Since you’re interested in the dissemination and adoption of this tech, it’d be interesting to see if you have a more recent take on the December, 2012 stories (if memory serves), wherein Verizon refused the Google Wallet app on its phones, saing it was because it tapped into a “secure element” that was not present on all phones.

        At the time it was taken as Google trying to elbow their way into a business that carriers mistakenly thought they’d control, or perhaps that Verizon didn’t want to be beholden to Google for key functionality. In retrospect, it might have been that the banks Verizon would’ve had to work with, felt like Google was trying to elbow into THEIR business, whereas the announcements I’ve seen re Pay are that they see it as a sustaining innovation.

      • David Leppik

        Also consider that much of the world doesn’t use credit cards. Of course, that’s mostly the part of the world that doesn’t have big Apple penetration, but there is some growth potential. China, for example.

      • handleym

        OR they do what the various affiliated credit cards do — some sort of points scheme…

        The 2 to 3% charge for credit cards is somewhat misleading because that has to cover fraud (and such money as it costs to run the system) AND much of it flows back to the user as “points” of one sort or another. My credit card gives me from 1 to 3% back depending on what and where I buy; but the money back comes as points that I can use to buy at Amazon. Other people do the same thing but get airline miles or whatever.

        Regardless of what you think of these schemes as scams, attempts to screw over merchants, or whatever, the fact is, that is where a large part of the money is going.
        Since Apple (presumably) can’t make paying by iPhone more attractive than credit card by charging 99% of the credit card price, the only way they can compete is the same game, which presumably means I’ll build up an account of Apple points as 1% of my purchases, which I can then use to buy at the iTunes store and/or Apple store.

    • StevenDrost

      But, Apple has a 600B market cap. If they capture 10% of Visa’s market in the first 2 years (That would be wildly successful), then that would be worth “only” 13B. But the way to beat Visa would be to be more efficient, that means lower margins. If we guess they make half the margins, then that makes the business “only” worth 7B and those are optimistic numbers. That’s big business, but not for a company as big as Apple.

    • Walt French

      Try out your logic against the iPhone: how was Apple to profit in a market where nice phones cost $50, and the carriers, if they gave Apple even 5% of the monthly bills, wouldn’t even be paying $1 per month?
      .
      The profit for Apple is not in the 0.2% of transactions that they might capture (hypothesizing even a 10% share of ALL card transactions: about $1billion a year). Instead, the profit is in creating a network where all the people who want easy, “modern” and secure transactions are seen in shops using iPhones.
      .
      I would suggest to Horace that he puts a break into his adoption/penetration curves at the day that Pay becomes available.

  • beidaren

    I think Apple mobile payment actually creates wealth (or save money for card issuers).
    Credit card Frauds are big expenses. iPhone payment model, with geolocation, fingerprint ID, will greatly reduce credit card frauds. A penny saved is a penny earned! I think Apple will get a cut of this saving.

    • LTMP

      Another cost that Apple will save the credit companies is the actual cost of producing credit/debit cards. The last time I was involved in that industry, the cost per card was in the neighbourhood of $4.00.

      I don’t expect Apples’s iPhone payment system to replace many cards right away, but within a few years, I could see that happening. Much like iTunes eventually replaced physical media purchases.

      I would expect Apple to run this business on a break even basis for now. Perhaps charging the banks a buck or two per activation, and a very small piece of each transaction.

      Once their payment system gains a large enough base (maybe 100,000,000 regular users), that tiny amount becomes a significant addition to their bottom line. Maybe as much as 3 or 4% of earnings.

      In other words, I expect it to follow the iTunes music model. Break even at launch, then growing to significant profit through massive scale.

      • StevenDrost

        The cost of the physical card is very very small compared to all the other cost (administrative, marketing, credit risks, etc).

      • LTMP

        Agreed, but when multiplied over a few hundred million accounts, it is a huge sum. For a company like AMEX, with $5.3 B in profits last year, that adds a few percentage points to the bottom line. Reduced fraud adds even more.

        Apple’s costs will be largely fixed, so at some point, the tiny amounts they make begin to add up to billions.

        Like I said, massive scale.

  • hcscott

    There is value in removing friction as well as threatening to add friction. Apple is perhaps looking at the long game. In the short term, the enhancement to the iOS ecosystem could be valuable. In the long term they will have inserted themselves into and accepted into the credit card payment stream which currently generates more than $100 billion in fees to all parties involved. Once inserted, Apple becomes at least a partial gatekeeper of transaction flow and hence in a position to collect fees. The business should also be able to scale significantly without substantial investment. This seems like a solid short and long term bet.

  • ronin48

    Medical students aren’t routinely taught Sutton’s Law or Occam’s Razor. But nearly all are taught an aphorism coined by an American physician named Theodore Woodward: “When you hear hoofbeats, think of horses not zebras.”

    • Jess

      The word used was “often” but your probably right that nearly every country talks about zebras.

  • GlennC777

    Transaction fees amount to a 2-3% “tax” on nearly every retail purchase, paid by nearly every consumer and funneled exclusively to large and not necessarily benign institutions.

    It seems to me that while Apple might be in a position to accumulate a portion of this tax among its own profits, the real value would be in finding ways to reduce that 2-3% frictional cost to the benefit of its ecosystem participants. How it might do that is something I’ve wondered about, because while it’s a very desirable and Apple-like thing to do; it’s not very clear how it could be done, and it’s all well-defended industry turf. I get the sense, though, that bits and pieces have been falling into place. I am very curious to see what happens with this.

    • Jess

      Paying a voluntary transaction fee is not a TAX, to call it such is to admit one is ignorant.

    • Walt French

      Go ahead and ask a merchant why they voluntarily give money away. Some don’t want the security risk of cash—employees shot during holdups can pretty much ruin your Saturday night—and most know that a discount for cash is legal, no matter how much Visa might like to tell you otherwise.

      The ones I’ve asked have a simple answer: customers LIKE the convenience and safety of not fussing with cash—my sister-in-law is amazed that I take out $300 when I go to the ATM; she’d rather not carry more than $50, much more than invisibly higher prices cause.

      Cards are a fact of life. A quasi-card in your iPhone, that can’t be used to run up charges and isn’t really worth much without your fingerprints, is an even better card.

      • GlennC777

        Well, being a merchant of sorts myself, most of the “voluntary” intermediary fees one pays are neither truly voluntary nor a particularly good value for either party. They exist largely because there is no concentrated set of interests focused on removing them. Of course, convenience, fraud protection, and personal security have value, but the value provided only represents a fraction of the actual costs being levied.

        The insidiousness of these costs seems to me apparent in your comment, the implication being that since we do gain these benefits, it isn’t useful to question the costs. The way I see it, any significant fraction of 2.5 *trillion* dollars spent using credit cards (US alone, 2012, from Ben Bajarin’s most recent article) is enough money to think very carefully about.

      • Walt French

        In a couple of days I’ll retire from a firm spun out of one of the nation’s biggest commercial banks and won’t be so circumspect about my opinions. But in truth, banks *DO* compete for companies’ (retailers’) credit card servicing, obviously on many aspects, including service quality as well as price.

        When somebody is unhappy about prices for services, it behooves us to understand why the mechanisms that normally control price-gouging, have failed to work. The usual suspects of monopoly or cartel don’t seem relevant here, as merchants don’t need to use a local bank for their cards. There *is* the fact that a bank has much better negotiating position in contracting, and much better info about the competition, but while I’ve not tried running any business with cards myself, I’d think it not hard to contact many banks for quotes in a way that’d minimize those concerns.

        So I think to a first approximation, the fees reflect realistic costs. Most cards now include some sort of consumer rewards like miles; that might be a percent of the purchase. Fraud costs obviously vary, and have a habit of sneaking up, sometimes involving store personnel, in a way that blindsides a bank, that they cannot recover.

        Finally, of course, there’s the actual hardware, communications and operations of checking a number in their system and guaranteeing the merchant payment in 30 days or whatever. I was told that if the bank failed to decline a card in one second, they ate whatever losses because merchants cannot tolerate delays at a busy POS. Systems have to be extremely redundant.

        So I’m not saying to question the costs — not at all. I’m saying that looking for competitive bidding, or a reason why you DON’T get competitive bidding, is the most effective, non-paranoid way to dig into them.

  • katherine anderson

    Here’s going where the money is: making growing old look cool.

    Wouldn’t it be amazing if Apple’s new wrist wearable had sensors that could emit infrared heat waves, or infrared heat radiation (which is a safe heat therapy apparently) to soothe the pain of arthritis in the wrists and hands.

    Think of the copper bracelets of years past. They are still being produced today in the belief that the antioxidant properties of copper are better absorbed through the skin rather than orally, and that the body needs copper to make an important enzyme called superoxide dismutase, which fights the inflammation causing the arthritic pain.

    Wouldn’t it be even MORE amazing if sensors which measure air pressure (pressure in the air affects pressure in the joints, due to the change in the level of fluids that lubricate the joints), could emit pressure directly on the fluids in the wrists and hands, so that you wouldn’t suffer from joint inflammation and subsequent joint destruction and pain in the first place.

    • handleym

      My hypothesis has been that the two primary markets for a large-screen iPad would be professionals (who’d want to drive it in “3x” resolution mode and the aged (who’d want to drive it in “2x” resolution mode and basically have it behave like a visually blown up “classic” iPad).

      We shall see, but to me this looks like a market worth pursuing, especially given how well Apple has traditionally provided for the more severely disabled.

  • GuruFlower

    Apple’s not in the business of picking up pennies, it’s in the 30% gross margin/big dollars business, so I think there’s something else going on here if not immediately then in the future for this proposed transaction business.

    One thing is for sure, Apple has vastly more cash in high quality, liquid assets than most banks. Compared to the credit card companies it has partnered with (American Express, Visa and MC) it’s liquid assets are a multiple of the combined liquid assets of these companies. So perhaps the step from holding iTunes credit card accounts to offering its own credit services (hence the reserve function) to Apple customers is not too big a leap. Apple already offers credit to buyers of its computers, so perhaps getting your iTunes and other Apple purchases directly billed through iCredit is their eventual plan. That’s a high volume, high margin business that I can easily see them getting into by eliminating the middlemen. From there, broader credit services would be possible.

    The only caveat I can see is a likely non-compete clause in the arrangement with AMX, V and MC but that’s not a problem at this stage because Apple will only be facilitating the CC companies’ transactions. Once Apple’s established credibility with it’s own customers, the iCredit roll out begins, eventually to compete with the big three.

    Overly simplistic? Sure. Possible? I don’t see why not. We all recognize that to achieve mega-growth Apple needs to be in the services business. What better way than to “go where the money is”.

    • Accent_Sweden

      While it will likely elicit laughs from many, I’m looking forward to Apple disrupting banking, with the upcoming payment system as a step in that direction.

      • handleym

        Part of the issue is that “banking” is many things.
        It’s the payments system (checks and credit cards).
        It’s handling deposits and making consumer loans.
        It’s making business loans (which sometimes has a substantial element of advice and hand-holding).
        It’s mergers and acquisitions and IPOs.

        It’s hard to know what is meant by “disrupting banking” unless which of these elements is meant is clarified. Certainly I think Horace is right that there isn’t much money in payments. But nothing indicates an Apple interest in the more profitable parts. (Even with credit cards, the money is in the credit part, not the payments part.)

      • Accent_Sweden

        Certainly, banking is many things to many people and I’ve not made any attempt to define it. Banking is a concept for most people as much as it is all the things you mention.

        One danger of taking on banking is that people often really dislike their bank, almost as much as they dislike their telecom and cable providers, and Apple would risk inheriting that aura. But that’s also the reason I have had this fantasy of an Apple bank for years. It is my desire to not loathe that which I’m so dependent on. I want to be delighted and who does that better than Apple? But banking is a dirty business. You must say no to some customers, you are the constant target of thieves and con artists, there are times when you may feel compelled to repossess an elderly person’s home or take away someone’s car for default. And you have all sorts of regulators who want to tell you how to do your business. So I acknowledge it is highly unlikely, but we all need to dream. Just imagine going to the Genius Bar loan officer for advice….

    • StevenDrost

      It is overly simplistic to look at Apple as only selling products at a 30% margin. What about the Apple TV or ITunes? Also, they develop a lot of software only to give it away. They basically work on products that either make a high margin or help another product command a high margin. I agree with Horace that payments would likely fall in the latter category.

    • Walt French

      You’re on the right track with your thinking, but banks don’t actually need a lot of cash to facilitate transactions. Those of us who pay off our bills in full, let the banks debit our checking accounts before the money goes to the merchant.

      I hope most Apple customers aren’t in the situation of paying 18% or higher rates to roll over debt, which ALSO means that banks don’t have a lot of their own money at stake in running cards. Nor would Apple.

      We will likely never know the terms of the deals between Apple and the card companies, but I’m gonna guess that non-compete isn’t part of ’em. First, the cards DO compete with one another. Second, Apple’s existing setup with iTunes is all tied to existing credit cards; they’re not really doing credit. (Yes, any financed payments ARE credit deals, but methinks those are (a) tiny, and (b) done through an arm’s length banking relationship. And for Apple to agree not to compete, Visa or whoever would be inviting regulatory oversigh of the worst kind.

      Finally, every term in a contract has an implicit value/cost as part of the overall deal. If Visa or whoever wants a non-compete, they are going to pay for it in terms of lower commitments, lower profits, or something ELSE that is valuable to them. Apple would likely not want to be hamstrung, so it’d be costly, even if Apple wouldn’t just walk away from a major issuer. Apple probably has a good negotiating position because, years after people were suggesting it, they haven’t bought T-Mo and turned it into a dedicated Apple-brand carrier. Ever since the Second Coming in 1996, Apple has been a tough negotiator and hard bargainer, but also a dependable partner in its deals. If Apple some day decides it wants to be a bank, it will. But it won’t.

      • stefnagel

        “… most Apple customers aren’t in the situation of paying 18% or higher rates to roll over debt …” Would Apple customers not reflect the national stats on card debt?

      • Space Gorilla

        I doubt Apple customers reflect the national average when it comes to financial stats, but that’s just a guess, I have no evidence. The only debt I have is part of a mortgage on my house. Paid for 100K, got a mortgage for the rest. We have two credit cards, but we load them with cash and use that, never the credit. I can only speak for the folks I know, but the idea of carrying high interest debt seems rather foolish.

      • stefnagel

        Best I could find were these 2010 figures. Lots of Apple owners with lots of debt, I’m guessing.

        The median US household owed $3,300 of consumer debt;
        The average US household owed $7,768 and
        The average indebted US household owed $17,630.

        http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

        I’m betting Apple will keep this smelly bit at arm’s length.

      • StevenDrost

        In my experience, the more someone makes, the more they spend. Anecdotally, I know quite a few people who make 6 figures and are continually “broke”.

      • Space Gorilla

        That is true. A business mentor of mine likes to say it isn’t what you make that matters, it’s what you spend. I’m probably the exception, being a farmer and also a self-employed consultant. From a very young age I learned to avoid debt and spend very little. That’s a big reason I’m an Apple customer, long term value and total cost of ownership. If you want to save money you really should be buying Apple.

    • BongBong

      Apple may not want to get into the banking industry as it would open them up to much more government oversight and regulation. Maybe if they open a bank in another country?

  • blenheimorange

    Better Apple be dominant in this business than Google. I’m sure that’s Apple’s thinking. That’s worth making only 200 million a year.

    • SockRolid

      It would be yet another feather in Apple’s cap. One that Google tried to grab but missed. I’ve seen Google Pay terminals at various establishments, but have never ever seen anyone use them. (Then again, I haven’t shopped around Mountain View much.)

      Google seems to be continually responding to Apple’s long, hard, relentless development with quick knee-jerk reactions. Their thinking was “Oh wow. Apple has Passbook on iOS now. Hey, let’s tell hardware partners to slap NFC stickers on their handsets and give away free Google Pay terminals.” Without thinking all the way through the problem. (Small matter of not having hundreds of millions of iTunes accounts with active credit cards, etc.)

      It really feels like everything that Google does (outside of banner ads, which generate 97% of their revenue) is just for PR purposes. Publicity stunts.

      • BongBong

        I’m betting unless Google makes more radical changes faster, they will lose their ad business to what Apple is planning very soon.

      • charly

        Apple has by design only a limit market, Google goes after the whole market so they would still be left with that part of the market Apple doesn’t want. I don’t see them loosing the ad market to Apple

      • BongBong

        Apple goes after the profitable portion of the market. Google is in the advertising business and mobile ads will be cut out of the loop further and further as Apple does not rely on advertising to make their profits.

  • peto1

    Horace, if Apple could perfect a way to secure payments processing from end-to-end (for example, by locating it within the secure enclave on the chip inside every iPhone) then maybe they could both earn the required trust and simplify the currently complex risk management process. That would create the value necessary to profit handsomely from doing the job that needs to get done (even after reducing the fees that merchants are currently paying). Doesn’t Apple have enough cash to underwrite the whole process? And wouldn’t using their cash as the foundation of an iOS-based payments business not only burnish the ecosystem’s aura but earn Apple a better return than it’s earning for them now?

    • aardman

      If Apple, using iCloud, iOS, and biometric authentication can set up a transaction verification and clearance system that financial institutions are plugged into, they would eliminate identity theft. That would be huge.

      • charly

        It also eliminate identity impersonation. You can’t use your husband/wife credit card even if it is an approved use

      • AC88

        Of course you can. You only need to have one of your fingerprints connected to your spouse’s device.

  • stefnagel

    And health comes from the transport of creation, not its value. Said as I listen to Barber’s Adagio for Strings.

    • peto1

      Hilarious …

  • SockRolid

    “… being a (payment) bit pipe is not a particularly profitable business. It will undoubtedly bind value to the iOS devices which make it possible …”‘

    Agree completely. Mobile contactless payments, through iPhone / iWatch / iPod / iPad probably won’t be a huge revenue stream for Apple. But it will add enormous value to the iOS ecosystem for users who choose to use the “iWallet” feature. And it will firmly establish Apple as the leader in smartphone / smartwatch contactless payments. Especially when security is factored in.

    • charly

      Samsung & LG have a big home court advantage because they own (consumer) banks. I don’t see how payment services can be an advantage for Apple.

  • stefnagel

    Apple has used cheap and bountiful digital media, in the form of tunes, apps, shows, games, and books. to fuel the iPod, iPhone, and iPad. Without them, these devices would have never gotten off the launch pad.

    Money is an ultimate or primordial form of digital media. Does it share the other characteristics as fuel? I guess that’s what Horace is saying. No.

    • peto1

      I see your point. Thanks …

  • stefnagel

    Blockbuster profited mainly from late fees, it’s said. When Blockbuster wilted, I enjoyed its demise very much.

    I’m guessing the credit industry does the same: Profit from debt carried on our cards. About $7000 per card in the US. It’s a sad, sick business.

    Why would Apple want anything to do with debt collection? I cannot imagine a quicker way to destroy its UX than money mongering.

    • robdk

      Well, Apple sits on the top 20% of the market globally and 50% in many developed markets. The iWallet would be used by the richest sectors of society. Risk would be minimal, giving lower costs. Meanwhile the existing players would be saddled with the debt wridden poorer portions of society, thus increasing their risks and costs. Apple will probably leave that sector to Android!

      • StevenDrost

        The problem is most people spend what they make. When you think about someone who makes 2-4X your salary, it’s easy to imagine them as having a silo filled with gold (Scrooge Mcduck style), but the truth is they are just as likely to be loaded with credit card debt. Stefnagel’s point is just as valid for the wealth as poor.

      • charly

        It is not the poorer portions of society that are from a business perspective the riskiest part to lend money to. They don’t laywer-up to not pay

    • Davel

      That is a good point, Apple does not want to be a debt collector

  • Walter Milliken

    Hmmm… if Apple is really getting lowered transaction fees (per http://bankinnovation.net/2014…), it occurs to me that if this is passed on to the merchants actually making the sales, it becomes a huge incentive for the merchants to climb onto the iOS payments bandwagon. They both make (slightly) more money and lower their risks of having to deal with chargebacks, by supporting Apple’s higher-security payment system.

    The next question is whether Apple has some kind of hard-to-duplicate special sauce in the payment system design, that might make it hard for Samsung and the rest to copy it. Clearly one thing that fits that description is Touch ID. If Touch ID is considered reliable, and the few other fingerprint or biometric ID in the Android world are *not* trusted by the banks, or reliable enough to use regularly, then there will be a definite advantage to using Apple’s system that will be hard to overcome (since Apple owns Authentec, which owns the patents on the improved fingerprint scanner used in Touch ID).

    So far, Apple’s had poor luck with using patents to stop copying, but something like the Authentec hardware patents would make a lot clearer case than the various iPhone software and design patents. Either the hardware component violates the patents, or it doesn’t. They might actually get injunctions against component vendors violating such a patent.

    Another hard-to-copy piece may lie in Apple’s A7/A8 chip design with the secure enclave. This is a crucial security feature, and the copyists will have a hard time duplicating it, though they’re likely to cook up something that looks similar. Again, Apple may hold patents on this that might make a clearer case for injunctions against any chip makers that tried to copy the crucial features, though.

    Apple may also have multiple protocols in use rather than just the basic NFC payments mechanism, but this takes support from the card terminals, which means merchants have to buy the specific feature support in a new terminal. And that’s a hard sell to the merchants. But again, if the merchant gets a lower card transaction fee and thus makes more money, it may be worth going to an Apple-specific terminal built using Apple patents. And Apple has patented multi-protocol schemes for payment systems, I believe. Again, I suspect it’s much easier to stop someone making a patented transaction terminal than to stop someone copying a few features from your multi-purpose phone/handheld computer.

    It will be very interesting to see how the payment system design actually works. I’m betting Apple’s got some anti-copying tricks buried in there to make smooth, safe payment transactions an iOS-exclusive feature, one that will take the copyists several years to catch up with.

    • Davel

      There have been consistent reports linking NFC to Apple.

      I wonder why Apple , or perhaps more precisely how, they will implement NFC to facilitate mobile payments when NFC has huge security issues that are architectural.

      • Space Gorilla

        If Apple uses NFC that means it’s the best solution for the problem they’re trying to solve. No company is perfect of course but Apple has an excellent track record of doing what works best. If NFC is the best solution, they’ll use it. If it isn’t they won’t. It really is that simple.

      • Walter Milliken

        My suspicion is that NFC is only part of the mechanism, not all of it. That gives Apple a chance to fix the security problems of NFC. The NFC component may be nothing more than a trigger, or another confirmation that the expected user is in the expected place, with the crucial crypto mechanisms actually handled over Bluetooth, WiFi, or cellular, where there is more processing power for crypto. I’m also wondering if the NFC may be more related to pairing the iWatch with its iPhone than with payments.

        However, I think existing NFC payments terminals will probably interact with the new Apple payments mechanism, somehow. For example, suppose a standard NFC interaction simply triggers a notification to your iPhone to confirm the purchase with Touch ID? That takes software work in the payment terminals, but not as much as adding Bluetooth and/or WiFi hardware to them. The workflow is worse than a simple touch-and-go NFC payment, but also a *lot* more secure.

        There’s lots of room for Apple to play here, without adopting standard NFC payments technology lock, stock, and barrel.

    • StevenDrost

      Samsung already has a fingerprint sensor but it’s not nearly as fast, easy and accurate as Apples. That matters, because the payment system is not competing against Apple it’s competing against credit cards. My guess is, if it does not work as fast and as accurate as swiping a credit card then it will fail. I you look at the usage rates of the fingerprint sensor, Apple has around 80% choosing to use it vs Samsung has less than 30%, that tells you all you need to know.

  • DesDizzy

    Anybody see Apple buying Square as a next step?

    • Tim Flores

      What would they be getting with Square? We will have a clearer picture soon enough but with whats rumored I expect Apple to bypass Square completely.

      • StevenDrost

        Have to agree, if it would have happened by now. Only reasoning I could see would be for patents, they can build their own tech.

    • BongBong

      Square is about to get disintermediated.

    • Walt French

      More likely, Square will start supplying NFC-type terminals for Pay.

  • http://www.isophist.com/ Emilio Orione

    “You might disagree pointing out that payments are big business and banking bigger still. But those businesses are not hired to simply funnel low friction payments around. They are proxies for trust and complex risk management”

    Latest rumors says Apple is taking is part of the risk management entering biometric info and accurate gps positioning in the equation and lowering the risk of a false payment. So Apple could really be in for the bigger cake.

  • Walt French

    The benefit is not in shuffling money, but in providing security and identity as appropriate. The former is obvious. The latter, as the popularity of bitcoin shows, is sometimes carefully avoided, sometimes very desirable (eg in buying a plane ticket to credit my frequent flier miles and to get thru security).

    I don’t think Apple will lean very hard on it, but a key part of the value of its wearable has to be about its ability to control how you relate to the world of Things — door locks, car seats that know how you like the settings — sort of an electronic persona. It’s not who you are inside, and it’s only a part of what you present to the world at large (although in talking about apparel, Horace strongly emphasizes its signaling value, its part of our persona).

    Transactions are only a part of our day-to-day interactions, albeit ones that are very amenable to computerization (as banking has shown for over half a decade). An Apple ID guarantee doesn’t immediately appear to disrupt the existing transactions systems, merely to strengthen and facilitate security and banking that is already in place.

  • Walt French

    I saw a couple of tweets recently how Apple was just copying Google Wallet, doing it better. But the differences are night-v-day.
    .
    Apple has forged a partnership with many banks and card systems to do not NFC, but secure, damned-near-unhackable payments using one-use card numbers that can’t be stolen from the merchant, nor re-used if somehow the NFC communications are intercepted. This tech is a nice extension of the single-use card numbers that have had some hacks because the store could submit multiple times (inside job, or ineptitude at store).
    .
    Google Wallet had no such ambitions for high security; rather, they took their typical approach of throwing something out there, and basically abandoning it when phone makers didn’t run with it (the chicken & egg problem). The GWallet support page shows 3 supported, NFC-capable devices, and iOS gets equal billing to Android 4.[?] as functioning without NFC.
    .
    Rather than threatening to replace banks, Apple has sought their participation; Pay is a sustaining innovation from the viewpoint of card-issuing banks. Google threatened to replace credit cards; sweet words to customers who wanted to capture more discount but I can’t see Google EVER attempted to build the necessary infrastructure.
    .
    Just like how their several TV attempts were going to put the cable cos out of business, as long as all the content producers that today utterly depend on cable, would help them.
    .
    Google is NOT tackling even a shred of the market. They made a moonshot with just the first stage of the engine working; it’s the old…

    . 1. Moonshot!
    . 2. ???
    . 3. Profit!

    joke, perpetrated by Google, on themselves.
    .
    Something like 35%–40% of Americans own iPhones, and in two years they’ll all be Pay compatible. Of Android phones, only Samsung has models with fingerprint security, and their efforts to convince business partners that they have a secure system is going very slowly…mostly, because users can still download apps that can hijack every feature of the phone. There isn’t a security person on the planet who couldn’t rattle off a half dozen vulnerabilities in the GWallet paradigm.
    .
    So Apple is likely to have the market utterly sewn up before a Google-based system is in the starting blocks.
    .
    I personally think Pay is likely to be extremely attractive to users for convenience and security concerns, and therefore infectious. It’s insignificant for everyday coffee-shop purchases (where *I* use cash anyway), but will be favored for any bigger-ticket items. But even if the network effects are minor, and I’m wildly over-optimistic, Apple should have quite a run before others figure out how to commoditize away the important parts of the system.