Apple CEO Tim Cook. (AP Photo/Damian Dovarganes)
OBSERVATIONS FROM THE FINTECH SNARK TANK
Bloomberg reported that Apple is launching an initiative code-named “Breakout” to bring more financial services capabilities—like payment processing, risk and fraud analysis, credit checks, and customer service—in-house. According to the article:
“The push would turn the company into a bigger force in financial services, building on a lineup that includes a credit card, peer-to-peer payments, the Wallet app and a mechanism for merchants to accept credit cards from an iPhone. Apple is also working on its own subscription service for hardware and a buy now, pay later feature for Apple Pay transactions.”
Well, that helps explain why Apple acquired Credit Kudos, a UK-based open banking company that helps lending streamline and improve their loan underwriting efforts.
But why the broader push to bring financial capabilities like payment processing and customer service functions in-house? Tom Noyes, CEO and founder of Acc3pt and longtime payments industry insider, speculates that with Breakout, Apple wants to:
- Own the payments supply chain and minimize any external vendors and partners touching consumer data.
- Launch a buy now, pay later (BNPL) feature to jumpstart the Apple Card in various markets.
- Reduce network costs and improve integration into local schemes (e.g., see ApplePay India’s UPI integration).
- Improve the consumer experience by deploying Apple Cash in every market, connecting to local schemes, and enabling P2P payments on Apple phones.
- Expand iPhone sales (with payments and financing) to demographics and geographies with poor consumer credit facilities.
Apple is Playing Catch Up in the Commerce Platform War
Bloomberg states its sources as “people with knowledge of the matter…who asked not to be identified because the plans aren’t public.” Ha! Apple knows who these “people” are and would fire them immediately if it didn’t want these plans made public.
The plans were leaked because Apple is signaling to the market its intentions to compete with commerce platforms like Square, PayPal, Google, and Klarna.
Apple’s penetration and control in the consumer market is incredibly strong, but until recently, it’s had little presence on the merchant side. Apple realizes that it needs to pursue a platform business model to protect and grow its market position.
Apple’s Two-sided Ecosystem
Other commerce platforms have been aggressively building out two-sided capabilities for sometime. Recent forays include:
- A Google/Square partnership. In a June 2021, Square announced a partnership with Google’s Merchant Center to enable Square sellers to reach new customers through direct product listings on Google.
Square’s 2-sided ecosystem
- Stripe’s launch of Stripe Treasury. In late 2020, Stripe announced Stripe Treasury which enabled it to expand its: 1) partnership with Shopify to create Shopify Balance, a business checking account specifically for independent businesses and entrepreneurs, and 2) bank partner network to include Goldman Sachs and Evolve Bank as US partners to enable standardized access to banking capabilities via APIs.
- PayPal’s acquisition of Honey. The 2019 acquisition provided PayPal with the ability to offer targeted and more personalized promotions to consumers as a means of acquiring new business and driving increased sales. More importantly, it gave the payments company the opportunity to provide their merchant partners with these capabiities.
PayPal’s commerce platform
- Klarna’s decade-long ecosystem growth. Stop thinking of Klarna as just a “buy now, pay later” company. Through its acquisitions and investments, the company is becoming a commerce powerhouse.
Klarna’s commerce ecosystem
Apple’s Payments Shortcomings
In a May 2021 article titled Apple Card Grows To 6.4 Million Cardholders Thanks To Women, I wrote:
“Credit card issuers compete on rewards (who offers the most, tailored to cardholders’ preferences) or interest rate (for cardholders who typically revolve card balances). Apple’s strategy is different: Apple competes on ecosystem.”
This is becoming truer by the day. But Apple has some payments shortcomings that is likely influencing the acceleration of the Breakout initiative:
- Apple Pay usage lags. According to a Q1 2022 consumer survey I fielded for Cornerstone Advisors, roughly half (52%) of consumers with a checking account and smartphone make mobile person-to-person (P2P) payments. Apple Pay’s share of this segment is 26%, in contrast to CashApp’s 43% share and PayPal’s 76% penetration.
- Apple Card growth is anemic. After seeing a doubling of Apple Card holders in 2020, growth in 2021 slowed to a crawl. The Cornerstone survey found that the number of consumers with an Apple Card grew from 6.4 million at the beginning of 2021 to just 6.7 million at the start of 2022. This suggests that some (if not many) Apple Card holders voluntarily or involuntarily discontinued their cards in 2021.
Fintech Snark Tank take: Apple is betting that a platform approach will help stimulate Apple Pay and Apple Card growth better (and maybe even faster) than its current marketing approaches.
The Revenge of the Payments Nerds
A while back, I was warned by a colleague who had worked in a bank for many years:
“Try to avoid the payments people—they’re really smart, but they’re weird and nerdy.”
You can judge for yourself if she was right or not, but payments are becoming more key competitive differentiators.
Students of marketing learn about the “4 Ps of Marketing:” Product, Place, Price, and Promotion. According to the 4 Ps creator Northwestern professor Philip Kotler:
“The marketing mix is the set of controllable variables that the firm can use to influence the buyer’s response. The four variables help a company develop a unique selling point as well as a brand image.”
Payments have become an important element of the selling proposition and should be considered the 5th P of marketing.
Varying payment terms—for example, spreading payments for a purchase over a period of time—or providing credit before or during the shopping process, marketers can influence consumers’ likelihood to buy.
Personalizing payment terms is another way for merchants to influence consumers’ choice of products and providers—and it’s the commerce platforms who have the data, analytical capabilities, and connectivity to make this happen.
Apple, Square, Klarna, and Shopify know that reducing friction and cost in the payment process influences purchase behavior. As a result, having a superior payments experience is critical to building the commerce platform for the 2020s.