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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 % | |||||||
| 0.15% | $900M | $4.5B | $9B | $18B | $27B | ||
| 0.35% | $2.1B | $10.5B | $21B | $42B | $63B | ||
| 0.50% | $3B | $15B | $30B | $60B | $90B | ||
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.
Finn's Cave 
I think (cynically) that the Big Money entities that rely on Visa/Amex/MasterCard etc. would never allow it to really happen. They’ll start screaming ‘MONOPOLY!’ and try to break it up before it can become Planet Apple.
That said, I think you’re right in saying the financial industry needs disruption. It’s nearly 2015, after all, and banks that rely on physical locations and checks (checks, really?) are doomed, if we can dislodge them. Free up a lot of revenue for the average consumer, as well. I don’t have the hard figures at hand, but I’ve gone over them. Without the “credit cut” that Visa demands, things would be cheaper overall, because stores would be able to provide goods without paying additional charges for them. Trickle-down economics at their most pure form.
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Interesting predictions. I too think that the Big 4 (Visa/MC/Amex/Disc) may fight this. Also, there’s currently a Blu-Ray v HD fight going on between using Apple Pay and something called CurrentC/MCX that will allow the stores to maintain control by ensuring customers can electronically continue to use their store cards (which I hate, my wife has TOO many!!!) Should be interesting to see how things play out.
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I will fight against your predictions by never buying anything Apple, Mac, iPod, iPhone, iCreditCard, iAnything.
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Funny…I do the same thing with the other side. Nothing related to android or samsung…ever.
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Great article . I can tell you the banks in aus are really worried about this.
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Yeah, Apple has the Australian banks quivering in their boots—LOL …
And those major Australian banks are presently telling Apple to whistle for any fee from them …
And, once all the hype and hot air surrounding Apple Pay finally dissipates, look for the those other banks to start not renewing their Apple Pay fee arrangement with Apple. In reality, Apple should instead be paying the banks a fee for the banks allowing Apple to use the banks’ existing systems to add value to their new phones, How dumb can the U.S. banks be, allowing the Apple Dept of Spin to stampede them into this arrangement with Apple—the major Australian banks are much less lemming-like …
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Fascinating! I’d be curious to see if google comes up with “google pay” as a result – most of the folks I know are on Droid, not iPhone, so it seems logical to me.
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Although some Android phones already support something similar — to the extent that the new Android based Samsung phones enable fingerprint payments by linking with Paypal.
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The nut is there and just needs to be cracked. Paypay tried, made their success on internet purchases, but didn’t have the follow through for retail payment disruption. Bitcoin is/was another interesting financial solution to our modern ‘connected’ lifestyle. Apple has the technical and financial resources, clout, and consumer trust to offer the scenario you mention above… and I think they’ll make their profits. However to really crack the nut the “new thing” needs to be available to the majority of the population, not just iPhone users.
Could Apple make this available to all users?
WBW Request: Your take on Bitcoin
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I think Apple can make this available to all users once they get to the credit card/banking stage. I don’t really see why Apple Credit Cards would have to be tethered to Apple Pay…that said, I think Apple likes to own their entire ecosystem and has shown that they are perfectly happy with getting a smaller chunk of the market that skews affluent.
Re: Bitcoin…I’m honestly not sure if I’m smart enough or a creative enough futurist to see ALL the potential applications, but some very smart people seem to be pretty optimistic, so that’s a good start. It seems like a great hack to get around the stupidly high transaction costs associated with currency exchange, but it will also require a lot of liquidity and innovation on the UI side of things to be widely adopted.
Again, not my area of expertise, but my feeling is that national governments REALLY LIKE having control over currency, and if they start to feel like they are losing control, they will somehow kill Bitcoin. And if they aren’t killing Bitcoin, it is probably because they are using it as a way to spy on people (I mean gather intelligence!)
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This is fascinating in terms of the disruption of the credit card industry, and even more so from a fraud standpoint. Having biometric authentication will force Congress to make changes to the Fair Credit Billing Act and the Electronic Funds Transfer Act in order to determine who will be responsible for fraudulent charges.
Usually when innovation disrupts an older stratified financial industry it’s a win-win for consumers, but I remain skeptical in that collusion between the CC companies and Apple is probably still on the table.
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There is a gigantic amount of regulation around the financial services industry that would be a really huge barrier to entry. The other big point is that float ability isn’t based on how much cash you have on hand but rather the rest of your balance sheet. Banks have billions in deposits which they use to support revolvers and loans
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Sounds a lot like m-pesa for a phone company here in Kenya. We’ve been using it for a while now n yes… it is convenient.
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I feel like this will start off only in the US – while the consequence might be huge, I doubt it’ll ever come even close to the levels you describe here. The chance is almost nonexistant, and while I feel it might be worth going after (it’s Apple, after all), I very highly doubt things will turn out as prettily as you imagine.
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Dude, you should write more, Tim and you have different voices, and both are very enjoyable, really liked this post.
G
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This post is based on how things currently work in the U.S. You can’t really take all the 500M apple users from all over the world.. as financial handlings are different everywhere. Where I am from, using your creditcard is actually very rare unless you make a really large purchase.. for everything else people use their bank card or phone to pay already. (mainly bank card though)
As optimistically as you sketch it, I think is highly unlikely. I expect banks to provide phone pay services very soon.
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as usual all the fuss is about Apple.. but as a matter of fact all major telcos are moving in this direction.
european telcos have been working for years now trying to get an agreement with the credit circuits, major banks and governments in order to allow payments by SIM card. If I can remember well I think I read earlier this year that in some cities this is already allowed as a trial
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Could this also be a way to put all of the offshore earnings to use without re-patriotizing and incurring taxes? Could Apple fund all of the activities through an offshore account/bank and start putting that money to use, while continuing to earn the .15% on the apple pay portion?
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Apple Pay—the greatest media/marketing beat up yet of the 21st century!
Too bad all that hot air will soon enough cool …
Retail Payments—The Reality … http://bit.ly/1nSA1Zl
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1.Apple doesn’t have the majority of the US market, or even the world market.
2. Mobile payments are already established outside the US (where this might be where Apple will focus on) and the US has been highly resistant to adopting mobile payments.
3. Recent high profile cases of hacking, and especially on Apple’s own networks, is going to deflate some of that trust. Especially when we already have a LOT of issues with hacking and credit card fraud as is. If what you say about CC companies skipping out on accountability when it comes to fraud next/this year, then it’s only because they’re anxious as hell to get rid of the problems that they face while they get to basically tithe you on your income (most CC’s charge upwards of 10-20% interest, and most payments are via CC… not to mention as you had the 3-4% on the merchant’s end. The CC companies are really making a shitton of money on letting you basically use your own money)
Apple pay isn’t even going to register. What you want to keep your eye on is regulatory measures that will soon be handed down on the banks and CC companies to cut down on the nearly abusive charges they are getting away with.
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Indeed, the recent advent of the new biometric payment mechanisms may represent the start of a major revolution in payments — the power of your finances at your fingertips. If Apple can capture the market like it has others, that’s absolutely huge.
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I work for one of the above mentioned companies (not Apple). It’s a fascinating time to be in the payments industry as there is a lot happening, especially in the start-up world. One thing people commonly mistake is that companies like MasterCard, Discover and Visa are credit card companies, when in fact they are not. Those three companies are essentially operating a network, much like Verizon or AT&T. None of those companies issue credit cards, monitor or report credit scores or ‘bribe’ consumers with rewards or cash-back. With the exception of AMEX (they actually are a credit card company), banks issue credit cards, the big payments companies simply operate the rails for which digital transactions are processed.
Another common mistake or assumption that people make is that Apple invented Apple Pay. The technology used to make NFC payments in Apple Pay was developed by MasterCard and Visa for Apple. Apple gets the credit, consumers and merchants have a new and easy way to make and collect transactions, and we (the networks) get the increased transactions – everybody wins.
The release of Apple Pay does not make Apple a competitor to the payments brands any more than the release of the iPhone made them a competitor to Verizon or AT&T. That being said, it’s not impossible for Apple to one day be a competitor, but for many reasons that does not seem likely. What is more likely is that a company like PayPal will continue to evolve and acquire companies to become more of a true competitor to the big payments brands, but PayPal has it’s own challenges.
One last point, merchants don’t hate the payments brands. You could just as easily say merchants hate advertising because it is a costly expense, but that would completely miss the point. Merchants are not required to accept credit cards, but many of them do because they see the value accepting cards brings to their business.
I can see how you might come to the conclusion that a company like Apple could fairly easily disrupt this industry, but that is not likely to happen any time soon.
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Agree with most of your comment, but …
My understanding was that Discover, like Amex, is licensed as a “bank” and does issue its own cards and does supply credit …
PayPal is a clunky parasite riding on the back of the banks’ existing systems, and its “best by” date has passed, in my humble opinion … http://bit.ly/1nSA1Zl
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I use paypal a lot, and I know better than to apply my preferences as any kind of gospel about how the broader population lives… I also recognize that ecommerce is a small segment of the overall economic landscape. Still, it’s curious to me that while I have all of the card types and various options to pay, I find paypal to be the easiest, and that leads me to use it most frequently when buying electronically. There’s something to that which stretches beyond parasitic- I understand why someone would use that term, since they operate via others’ existing infrastructure… but at the same time, paypal has created a very functional payment experience that strips out the need for entering strings of text and numbers; a presumably under recognized burden for the user in almost every other online purchase system. The way one can pay so many merchants without entering an address over and over is a surprisingly valid service to the user. If they are a parasite to the banks and or card companies, it’s only because of this symbiosis with the account holders.
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I’ll rephrase that last paragraph of mine …
PayPal, on the other hand, is a clunky parasite (“a merchant of sorts”—PayPal’s own words) that rides, like a blood-sucking tick, on the back of the banks’ existing systems, and now that MasrterCard and Visa have launched their own “digital wallets” (“MasterPass” and “Visa Checkout”), the clunky PayPal’s “best by” date has passed …
And, it’s not the online “payers” that will dump PayPal; it’s the small–medium payees/merchants, that invariably bear the cost of PayPal’s habitual unprofessionalism, that will eventually force the issue in favour of the similar new “professional” services from MasterCard/Visa, “MasterPass” and “Visa Checkout” …
It’s only a matter oftime …
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Thanks, I appreciate the reply. It makes sense although I’m just not sure what the more proffesh version looks like yet functionally. In my experience it’s ease that drives most choices despite what people think or say about their own/others’ actions. Currently Paypal has done a fair job of curating ease, and through this carved a large enough niche to stay afloat. If proffesh is another way of saying these systems are elegantly fast and easy, well, I am on board with your logic 100%.
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Bear in mind that PayPal has had a 10-year head start, and an additional boost from its effectively mandated use on eBay. No doubt about it, PayPal made online purchases much easier, and one has to wonder why the elephants in the room did not step on it much sooner—possibly because ecommerce was (is still) a small fraction of retail commerce in total. However the two elephants (and their banking partners) have awoken and undoubtedly their new “online” services will eventually win the day, as they have always done, and will continue to do, at the physical point of sale …
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Thanks for sharing this. After reading it seems like facts I already understood but didn’t quite have strung together correctly. I wonder if you have perspective on why there seems to be two starkly different camps regarding the future of paypal- as made evident below.
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https://wikiwon.com/apple-app/iphone-application-development/ what about this?
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And there we have it: Apple Card!
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