Prediction: Apple will become a bank, credit card issuer, and credit card processor
Apple Pay is a huge deal – much bigger than iWatch – and no one is talking about it enough. Apple Pay is Apple’s new feature that allows iPhone users to pay for things with their iPhone, by pre-loading credit cards and using their fingerprint as their signature. Apple gets .15% of all Apple Pay transactions.
Right now, Apple Pay is just a payment conduit for other banks and credit cards, but I think it is the first step to Apple becoming a full-fledged bank, credit card issuer, and merchant processor of its own.
By providing banking, credit cards, and merchant processing in-house, Apple will completely disrupt Visa, Mastercard, American Express, Paypal, and traditional retail banks. My back-of-the-envelope calculation puts the credit card opportunity alone worth $90B annually.
If I ran a financial services company, I would be terrified. I’m certainly not an expert on Apple, Visa, or retail banks, but if I were running Apple, this would seem like the obvious move for their next huge growth opportunity. These are the stages in which I see this whole thing playing out:
Step 1: Early Consumer and Merchant Adoption
The first thing Apple needs to pursue this strategy is widespread adoption of Apple Pay by consumers and merchants, which they will accomplish.
Apple will make Apple Pay an appealing option for consumers because:
- Using your phone is more convenient than taking out your wallet. Phones are usually already on the table or in your hand—plastic credit cards aren’t.
- Consumers will be delighted by the experience. Apple will find some way to make it feel cool and exciting.
- It will be a more secure and hopefully, quicker transaction.
Apple will make Apple Pay an appealing option for Merchants because:
- Fingerprint identification takes the fraud burden off their shoulders (in 2015, Merchants will be responsible for fraud, not credit card companies. This is new and a big deal.)
- Their customers will like them more for offering this convenience.
- It will hopefully be a quicker transaction (and probably provides merchants with better analytics, as a bonus).
At this stage, Apple will make about $900m/year, if you assume that their 500m iPhone users average $100/month in Apple Pay purchases, with Apple getting a .15% cut.
Stage 2: Advanced Consumer and Merchant Adoption
Same as before, but now Apple Pay is truly the payment standard instead of plastic credit card. At this stage, Apple will make about $4.5B/year (500m iPhone users x $500/month in Apple Pay transactions x .15%).
Step 3: Apple Credit Card and Merchant Services
Once consumers and merchants have adopted Apple Pay, why does anyone need Visa/MC/American Express as the intermediary between the consumer and the merchant? It would be easy for Apple to cut Visa/MC/AMEX out with its own integrated credit card/merchant processing solution (assuming Apple didn’t negotiate this option away with their current deal in exchange for .15%, which would be hilariously short-sighted .)
Want to know who hates Visa, Mastercard, and American Express? Every single business owner. The major processors take about 3% of every transaction, which may have made sense in 1984, but it is an absurd cut in the digital world of 2014.
If Apple Merchant Processing, which uses Apple Credit Cards, charges merchants 1.5% transaction fees (half the price of Visa/MC/AMEX), merchants would adopt Apple Merchant Processing and push their customers there in a second. Consumers just need to want to use their Apple Credit Card over Visa/MC/AMEX.
So, how does Apple get people to use an Apple Credit Card over a Visa/MC/AMEX?
Consumers use a credit card because they are bribed with 1) rewards points and cash back, and 2) the ability to spend money they don’t have.
1) How does Apple entice consumers away from their credit cards and compete with the bribes those card companies currently offer?
I don’t know the exact answer to this…but I know that for Visa/MC/AMEX, there are a lot of layers and middlemen, and a LOT of people need to get paid out of the 3% they charge merchants. Roughly 1/3 of that 3% goes to bribe the consumer through rewards and cash back (1% of the total transaction).
Apple could still bribe the consumer with the 1% rewards/cash kickback, throw in some digital products that have near zero marginal cost (“get an Apple Credit Card and get free unlimited iCloud storage!”), and have .5% left for their profit. Basically…Apple could figure how to undercut Visa/MC/AMEX on merchant pricing and still give the consumer superior benefits because of their superior cost structure.
2) How does Apple actually provide credit to consumers?
Again, I’m not an expert in this department, but Apple has two important things when it comes to providing credit: 1) TONS of data on its consumers, and 2) TONS of cash – $165B by last count… about half the cash of retail bank behemoth Wells Fargo, without even taking deposits. They can figure out how to be a credit card company and don’t need to rely on external financing to get it going.
Turning Apple Pay into an integrated credit card/merchant processing solution has massive financial potential. To get a back-of-the-envelope calculation, there are 3 main variables:
1) How many iPhone subscribers use Apple Pay?
2) How many dollars do they spend using Apple Pay?
3) What is Apple’s profit % on these transactions?
Here is how much Apple will make in various scenarios, assuming it continues to have 500m iPhone subscribers:
|Apple Pay Users||500,000,000|
|ANNUAL PROFIT||Monthly Spending Through Apple Pay|
|Apple’s Transaction Profit %|
Apple could make $90B/year if it can turn Apple Pay from a cute niche thing people use sometimes and get paid .15% (worth $900M) to the thing that people use ALL the time through their processing solution (worth $90B/year). 100x difference in outcome.
Step 4: Apple Bank
Once Apple issues credit cards and controls merchant processing, there is nothing stopping them from owning all the finance services in their customers’ lives, including their regular banking, with checking and savings accounts.
Right now, people have bank accounts at traditional retail banks, like Bank of America, because when they originally wanted to open up a bank account, there was a retail branch close to them that enabled them to open an account. In the past, there was some measure of paperwork and identity verification required to open a bank account, and a physical location made this easier to process.
Now? There is no need for a physical bank (I actually have a Schwab account, which has no physical locations, and I love it). Your verified fingerprint is your ID, or you can take a photo of your license. Cash is transferred digitally. Checks can be deposited with your iPhone.
The purpose of the retail location is to establish the relationship with the customer…but the thing is that for Apple, every one of their 500m iPhones is a bank branch. It already has an established and cozy relationship with a customer. They don’t need to entice people into their branch…they already live with people 24/7.
If you’re already using Apple Pay, have an Apple Credit Card, and love it, why not have your checking account with Apple as well? If you have an Apple Bank account, why not an Apple Mortgage…it goes on…
All this is based on my own speculation, without any detailed inside knowledge of any of the players involved. I would love to know if this scenario is impossible for some reason, or if I’m missing something. The financial services industry just seems too ripe for disruption, and this strikes me as a very practical way to go about it. Once Apple owns the payment transaction from end-to-end, the opportunities are limitless.