Strategies: A Rumor a Day

Apple may be the most talked-about tech company that has yet to make a definitive move in payments. Is there any fire under the smoke?

By Lauri Giesen

When payments executives discuss the up-and-coming players in their industry, the names of high-tech companies such as Google, Intuit, Square, PayPal, and Amazon.com come up often.

One much-discussed name noticeably absent from this roster is Apple Inc., one of the top innovators in advanced technology for consumers. But many involved with payments believe that wonÕt be for long.

Although Apple, through a spokesperson, refused to make executives available to speak with Digital Transactions about any plans it may have for payments, innovative payment technology recently introduced within AppleÕs own stores as well as recent patent applications related to near-field communications (NFC), have caused speculation that the company has more than a passing interest in developing payment services.

Also fueling speculation about Cupertino, Calif.-based AppleÕs designs on payments are its considerable internal resources. Such resources include more than 200 million payment accounts linked to AppleÕs massive iTunes music and media sites as well as advanced capabilities that could be used for payments on AppleÕs iPhone, the smart phone that revolutionized the cell-phone business after its 2007 launch.

AppleÕs iconic co-founder, chairman, and former chief executive Steve Jobs died in October, and probably only members of his inner executive circle knew whether he had an interest in payments.

ÒApple has always been famously secretive about new business plans so we have to work from what we know about what they are already doing as well as what patents they have applied for,Ó says George Peabody, director of the Emerging Technologies Advisory Service at Maynard, Mass.-based Mercator Advisory Group Inc.

ÔDark HorseÕ

But if Apple does enter the payments arena it likely would be as not just as another player. Some of its in-house payments applications are unique. For example, a recently introduced system in Apple stores involving the use by customers of iPhones to pay for products while shopping in the aisles uses an alternative technology to NFC, which most payments companies are betting on to allow consumers to enable cell phones to pay for goods.

But just because the potential is there doesnÕt necessarily mean that Apple will jump into the payments business. Some point out that the profit margins in payments may not be lucrative enough for a company like Apple, which has traditionally pursued high-end, high-value businesses over such commodity businesses as payments.

And AppleÕs tradition of using closed systems contrasts sharply with the open technology and systems typical of the major electronic-payment systems.

Instead, some experts see Apple making innovative payment options available to customers shopping in its own stores or paying for music on iTunes, but not making those options available when they shop at other retailers.

Still, payments executives are paying a lot of attention to recent developments. TheyÕre fueling speculation that Apple is interested in more than just finding ways for its own customers to pay for goods. Some believe Apple has the potential to develop payment technology that could benefit other retailers in a manner similar to what Amazon.com Inc. or PayPal Inc. have done.

ÒI definitely think Apple will become a bigger player in payments,Ó says Mary Monahan, managing partner of Pleasanton, Calif.-based Javelin Strategy and Research. ÒIt has what it takes to be successful in payments. It has 225 million credit card accounts attached to iTunes and an installed base of 275 million devices that could be used for payments.Ó

The devices sheÕs referring to are the iPhone, about 149 million of which Apple has produced in four-plus years, and the iPod touch and iPad tablet computer, all of which run on the iOS mobile operating system.

Others agree. ÒIÕm not sure what the role of Apple is going to be long-term, but weÕve already seen Apple make an impact in the acceptance side of mobile POS,Ó says Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group.

When Jim Shanahan, president of Wilmington, Del.-based Shanahan & Associates LLC, attended a conference this fall on emerging payment technologies, he noted there was no mention of Apple. But, he notes, ÒIf Apple chooses to, it could be a dominant player in payments. I think Apple is the dark horse in this industry.Ó

Apple could easily enter the payments industry by drawing on its enormous hoard of cashÑnearly $82 billion at the end of its 2011 fiscal yearÑto simply buy an existing acquirer or processor. Payment experts, however, believe Apple would leverage its own technology resources to enter payments rather than acquire a processor.

ÔMassive BaseÕ

One program theyÕre keeping a close eye on is AppleÕs EasyPay self-checkout service, introduced this past fall. Available at AppleÕs 200-plus stores, EasyPay lets customers download an app to their iPhones and then scan the bar code on an item they are considering purchasing. More information about the product, such as customer reviews etc., comes up. Then, if a customer is ready to buy the item, she can use her phone again to enter her iTunes ID.

The purchase is charged to the credit card assigned to that account, and the customer can walk out of the store. To reduce losses, Apple currently limits the service to lower-ticket purchases such as earphones or iPhone cases.

Some payments experts believe Apple could make EasyPay available to other retailers, particularly high-end stores with tech offerings that are a good match for Apple customers.

ÒWhy wouldnÕt other retailers want to adopt this approach? It helps everyone and retailers should be able to yield higher tickets from it,Ó says Andy Schmidt, research director for Needham, Mass.-based TowerGroupÕs commercial banking and payment group.

MercatorÕs Peabody agrees that this technology could be valuable to other retailers that want to make it easy for customers to buy goods using mobile phones right in the aisles. But he thinks there could be some technical challenges to make it work.

ÒIt really depends on how sophisticated a merchantÕs own [point-of-sale] structure is in its ability to integrate to the Apple system. Some retailers have very sophisticated systems [where it] would not be difficult to integrate AppleÕs application to their POS terminals through software adjustments. But others might require more integration work than they would want to tackle,Ó Peabody says.

Schmidt, however, does not think the integration issue is a high hurdle. ÒMost systems are pretty flexible today and would only require some additional software be written, but it should not be too difficult,Ó he says.

A key component of AppleÕs offerings that could play a prominent role in payments is its iTunes account base. Apple in theory could allow customers to charge goods purchased at other retail locations to their iTunes accounts. Ablowitz believes the iTunes customer base might be desirable to other retailers, particularly high-end stores.

ÒThere are more than 200 million iTunes accounts. That is a massive base on which to build a business. And those accounts represent loyal users with demographic features which would be very appealing to other retailers,Ó Ablowitz says.

ÔAppleÕs WayÕ

The models that many experts use to describe how Apple could leverage iTunes into a payment solution are PayPal and Amazon. PayPal adapted the technology it developed to handle online auction payments for eBay Inc., now its parent company, and extended it first to accepting payments at other online retail sites and now at brick-and-mortar stores.

Meanwhile, Amazon.com has taken its own experience in handling payments and mitigating fraud and offered those services to other online retailers through its Amazon Payments unit.

ÒIf you look at how Amazon brought one-click shopping to other retailers and was able to leverage its fraud capabilities, you can see what Apple could do. I can imagine customers using their iTunes account to pay for store purchases or certainly for things like game purchases at other online sites,Ó says Peabody.

And iTunes represents a customer grouping other retailers might want to tap into. ÒITunes might be compared to AmEx [American Express Co.] in that it has an attractive and unique customer base that many retailers would want to attract as customers,Ó says Conrad Sheehan, vice president of Chicago-based The Revere Group, a consulting subsidiary of NTT Data that last June acquired SheehanÕs mobile-payments company mPayy Inc.

But Sheehan also notes a number of adjustments might be needed to allow Apple customers to charge outside purchases to an iTunes account. ÒApple is not a bank and it canÕt extend credit. Its model might not work for all purchases,Ó he says.

Indeed, TowerGroupÕs Schmidt argues that moving iTunes further into the online-payments world makes the most sense, especially in paying for games or other digital content that represent a logical extension of iTunes. He is not sure customers would be comfortable using an iTunes account to pay for goods in a store.

Schmidt also questions how much physical retailers would be willing to pay in terms of interchange rates or related fees, especially since iTunes accounts are secured with customersÕ credit cards. That means retailers using an Apple service ultimately would pay interchange in addition to any fees Apple would charge.

ÒFor virtual goods, the delivery cost is nil so providers might be willing to pay Apple high fees to drive additional businesses. But with the delivery of physical goods, it is more complicated,Ó Schmidt says.

Another obstacle to Apple becoming a force in payments is the closed nature of its operating systems.

ÒApple has always taken a closed-systems approach where it could control the standards. But the payments industry has always been more open. IÕm not sure how that would play out for Apple,Ó says Shanahan.

Indeed, AppleÕs reputation for being unique could make it hard for the company to sell payment services to other retailers. ÒApple would require retailers to do things the Apple way and that doesnÕt always work in the payments business,Ó says Rick Oglesby, senior analyst with Boston-based Aite Group LLC.

ÔRinky DinkÕ Payments

And there is more to offering payments than simply having credit cards on account and an innovative point-of-sale device. Schmidt points to the fact that Amazon got involved in offering retailers payment services only after it acquired extensive experience in areas such as fraud control, customer service, and product fulfillment.

Apple would lack a broad range of experience working on behalf of other merchants in some of these areas if it moved beyond providing payments for digital music, he says.

Even if Apple has the technology and expertise available to offer its internal payments capability to other retailers, and there is demand for it, many question whether the company would want to. Some wonder if the slim margins notorious in the payment-processing business would attract a company like Apple.

ÒApple has not moved much outside its core niches. This is not a company that chases money wherever it sees an opportunity. It chases what is right for Apple and the broad payments business may not be right,Ó says AiteÕs Oglesby.

But JavelinÕs Monahan thinks payments could be a desirable business for Apple. ÒThe stakes are so huge. There may be small margins but there are a lot of dollars. Even a small margin on a lot of dollars would add up.Ó

If Apple does go after payments, most experts donÕt believe it would follow the model of a traditional processor that generates revenue by charging on a per-transaction basis and requires significant volumes to be profitable.

ÒIÕve always heard that Steve Jobs had said he was not interested in payments because he considered it rinky-dink,Ó says Shanahan. But he adds that sentiment, if also held by AppleÕs current bosses, could now change. ÒIt depends on how they structure their business. This is not just about payments, but creating a mobile-shopping experience,Ó he says.

Rather than just moving transactions, Apple might have to focus on increasing sales to retailers through mobile marketing and loyalty services, somewhat akin to what Google Inc. is doing with its new Google Wallet.

ÒThe real value Apple would bring is mobile sales, not processing transactions. If it can show it can use mobile devices to drive consumers to a retailerÕs store, that retailer might be interested,Ó says Oglesby.

For example, if a customer could pick up a mobile phone and indicate a product or service desired, the phone could direct that customer to a particular retailer. Then, the same phone could be used to get additional product information and complete the sale. That capability would offer high value to the retailer and justify a higher fee, he explains.

ÔForget NFCÕ

An interesting aspect of AppleÕs current in-store application is that while it allows consumers to use iPhones to make purchases, it does not use NFC technology. Most payments companies interested in mobile systems have been investing in NFC.

With NFC, a chip in the mobile phone contains the customerÕs card information and communicates that information to a contactless POS reader via airwaves. The payment is then routed through existing processing networks. AppleÕs use of the iPhoneÕs camera, bar codes, and Internet interface takes a different approach.

ÒApple seems to be saying Ôforget NFCÕ and instead send information over a WiFi connection to the Internet,Ó says Oglesby.

But just because Apple is not using NFC now does not mean it is not interested in that technology. Several sources note that Apple has applied for patents on NFC technology, although how it might use those patentsÑand whether payments are even part of the planÑis not known.

Monahan believes Apple will get on the NFC bandwagon.

\”They have not come out with any NFC products, but I think they are just waiting a bit and will eventually come out with a working model that will blow everyone else out of the market. That is usually how they do things. They are usually not first in the market, but wait until there is some consumer acceptance of a technology and then come out and top the competition.\”