Juan Pablo Vazques has an article in Harvard Business Review about how Apple Pay’s reliance upon credit cards is ultimately iterative, but not disruptive. He writes:
Apple executives could have negotiated with retail banks, just as it did with the recording labels, to launch Apple Pay. If it had, Apple Pay would have been a substitute for credit cards, and would truly be disruptive to the credit card industry. Instead, Apple negotiated with the credit card companies, which is why you need to introduce your credit card number, instead of your bank account number, to configure the application. That merely positions Apple Pay at the end of the existing credit distribution value chain, as a reseller for the credit card companies.
Vazques draws the comparison between the inception of iTunes – wherein Apple inked aggressive deals with music labels – and the potential for it to have engineered comparable deals with banks. The thinking is, Apple could have cut out credit card companies entirely, and just engineered a system that withdrew funds from a consumer’s bank account and deposited it into the merchant’s, taking a cut smaller than Visa or American Express.
He is, in theory, correct. Apple is one of the few companies whose customers are ubiquitous, loyal, and tech-savvy enough to have conceivably gone through the steps of linking their checking account to their Apple Pay account (the others are Amazon, Google, and maybe Facebook). But there are a few roadblocks that rightfully prevented Apple from taking that leap:
1. Record labels and credit card companies aren’t in the same strategic positions. When Apple approached record companies in the early-00s, the labels were desperate to combat the effects of file-sharing and piracy. And not unreasonably. Single-song downloads presented far more convenience than piracy, and far less cost than a full CD. Credit card companies are not in the same position. Both Visa and American Express have had years of solid growth, and the legitimate cybersecurity threats they face are not existential in the same way piracy was a mortal threat to the music industry. Apple may have been able to use its massive user base as clout, but it’s not nearly as certain a case as it was fifteen years ago.
2. Fraud, fraud, fraud. The way things stand now, credit card companies absorb the cost of illegitimate charges on users’ cards. Unless Apple Pay were completely airtight, Apple would not enter the business of shouldering consumers’ risk, and doesn’t have the technical infrastructure to spot unusual spending, or the procedural means of chasing down fraudsters the way Visa and Amex have been doing for fifty years. The excellent podcast Exponent covers this aspect in depth.
3. Apple’s not in the value game. Cutting out credit card companies might save merchants – and eventually, customers – 5% or so on transactions. It would take a considerable amount of risk, and capital, for Apple to see meaningful revenue on Apple Pay transactions. And Apple doesn’t do low margin. If Apple were getting into the transaction processing game, it would likely want a higher percentage than retailers would be willing to concede.
I agree with Vasquez’s fundamental premise, but not his castigation of Cupertino. In the literal sense, Apple missed an opportunity to reimagine the mechanics behind mobile payments. But I think that Apple is a more conservative entrant to the mobile payments space, and that it is rightfully hesitant to expand from consumer electronics – and now, fashion – to financial services. It is eminently possible that, down the line, Apple will attempt to squeeze Visa and American Express out of the value chain. But I think that as long as fraud is a legitimate concern, Apple will sooner play it safe than play it cheap.