ApplePay Just Co-opted a Multi-Trillion-Dollar Market

…and it’s awesome!

In my opinion, while most of the media focus on this week’s product launch was around iPhone6 or the potential of AppleWatch, the real long term opportunity is in ApplePay. In one fell swoop, I think Apple has now positioned itself to completely disrupt the US (and potentially international) banking infrastructure in the next 10–20 years and make many trillion (yes, trillion) dollars of incremental revenue doing it. Here’s how:

Step 1:

Co-opt the existing infrastructure

By working with Visa/MC/Amex, Apple has replayed its masterstroke with the music labels that seeded their iPod and eventual iPhone business lines. Apple has convinced these major entities to support a system that today will enable more seamless payments, validate existing rails and continue to allow Visa/MC/Amex to validate their existence to issuing banks. But over time, what they’ve really done is co-opt these companies in a way that will render issuing banks as just a set of merchant acquirers — which probably isn’t a business that can create the margins that banks would need to support their current overhead.

Step 2:

Get broad deployment of terminals

Because of their support for the existing infrastructure, they eliminate the barriers that could prevent 3rd parties, VARs, etc from pushing the adoption of the payment terminals needed to support Apple Pay.

Step 3:

Disintermediate Point-of-Sale all together

Why do we need a POS in a few years if the phones, themselves are more secure? I suspect that in a few years (or earlier), Apple will unveil a way for the phone to act as a terminal and accept payment from another phone. This would dramatically accelerate the adoption of NFC payment terminals as any merchant with an iPhone (or iPad) would immediately be able to accept ApplePay by going through a simple online on-boarding versus a convoluted, time consuming merchant acquisition process.

Step 4:

Warehouse money flows

This is the arguably the most difficult but most profitable step. If Step 3 takes place, then Apple has a very simple decision to make: what value exists by using the existing rails to essentially transfer money from one iTunes account to another (ie: a user on one iPhone buying something from someone else on another iPhone)? Instead, they would quickly realize that they could entirely eliminate interchange by simply being the centralized database of these transactions and eliminating the concept of a credit card all-together. they can still use the banks to offload and manage risk but they then are consolidating the writing of transactions from disparate banks (and DBs) to one “bank” (Apple) and its DB (iTunes).

Step 5:

Take risk

If Apple does any of this, then taking risk and underwriting the transaction itself could become very profitable and obvious. They have your phone, your fingerprint, data on where you are, what you do, what you buy etc so presumably they could do, at a minimum, as good a job as existing players, but most likely a much better job of understanding the risk of every single transaction. in that world, they become a competing “issuer.”

Meanwhile, online:

What role does Stripe, Braintree, Paypal play in any iOS experience? likely little to none even if these API players integrate with ApplePay. They still have a critical role to play in Android but the iOS opportunity seems quite limited in value. the only issue is the fee that developers would be willing to pay Apple but the tradeoff is simple to model — how much are you willing to pay Apple vs the lift you get from a streamlined purchase flow. if apple is smart and long-term thinking, which i think they are, they will create massive incentives to adopt ApplePay by taking little to no rake so that their fee structure is better for developers/merchants than existing alternatives — another reason why iOS is scorched earth for 3rd parties. when you think about the fact that 30%+ of all mobile traffic in the US is Safari and app traffic from iOS is at least 50%, this is a huge portion of the mobile operating ecosystem that Apple has taken back from 3rd parties.

Lastly, I suspect that as ApplePay rolls out, we start to see a market consolidation with Google being the most aggressive acquirer. Google will need to figure out which components it would need as a platform layer in Android and go and buy those as it seems they haven’t been able to build those thusfar. Stripe for abstractions; Square for merchant acquisition etc.

No matter what, ApplePay is a big positive for consumers who should ultimately benefit from more seamless transaction experiences both offline and online, better risk management, better loyalty programs and lower fraud potential. And Apple benefits by creating something awesome and giving themselves the option value to completely take over a trillion dollar market in a few years.