Jan 6th 2016

How Apple’s Trojan horse will eat the credit card industry

Apple Pay was launched last year, with lots of fanfare and support by the credit-card industry.  Partnering with the banks that issue credit cards overcame the resistance that early entrants in mobile payments had faced.  It also solved critical technology and infrastructure problems and offered the credit-card industry a new avenue for growth.  Apple Pay isn’t a household name yet, but it is growing steadily and is likely to become one.  Most recently, Apple announced a deal with China’s UnionPay, the state-run sole issuer of bankcards, to allow it to operate nation wide in the People’s Republic.

Apple Pay is, however, a Trojan horse.  Once Apple has established its platform, it won’t need the banks and credit cards any more.  It will be able take advantage of another new technology, the blockchain, to offer an alternative payment option.  Blockchain is the core technology behind Bitcoin, and functions as a transparent ledger of transactions, concurrently hosted on numerous computers around the world—allowing the creation of digital currencies and virtual banks.

Think about it: today you have a choice between American Express, MasterCard, and Visa, and they charge merchants roughly 2% of every transaction.  If you were given another payment option, let’s call it AppleCoin, which provided you with a rebate of this fee, and the transaction were easier and more secure than with a credit card, which would you pick?  I doubt many people would show loyalty to the credit-card industry.  After all, it extracts more than $100 billion in fees—a tax that we end up paying for—and gouges us the moment we miss a payment.  Apple would dominate this industry.

To be clear, Apple’s payment application has not taken off yet and works only on the latest model of its smartphones.  According to data from payments-industry tracker Pymnts.com, as of October 2015, only 15% of all iPhone 6/6s users had tried Apple Pay.  That is an increase from 9% in November 2014, but is hardly enough to set the world on fire.  More significantly, only 5.1% of all Apple Pay eligible transactions (meaning, in which the store has an Apple Pay terminal and the shopper has an iPhone 6/6s) are running through the service.  Because iPhone 6/6s models remain a small proportion of all iPhones in use, Apple Pay is capturing only a tiny volume of transactions.

But Apple has time on its side. And you can bet that Apple understands that the prize in play for global mobile payments is a larger market than that for phones, music, and computers combined.  In classic Apple fashion, it is positioning itself to be a disruptive broker.  According to industry newsletter The Nilson Report, the total of consumer and commercial purchases at merchants and cash obtained from credit and debit cards was $20.567 trillion in 2013.  The value to Apple isn’t just transaction fees; it is the massive treasure trove of user data.  So yes, Apple is going to continue to improve on Apple Pay for quite a while.

Apple’s advantages are that the iPhone has a cult-like following.  And every time users buy a new phone or upgrade to a new version of iOS, Apple has a chance to convince them to try Apple Pay.  In no other business does an incumbent have so many opportunities to entice upgrades.  This is particularly important considering that the major reason Apple Pay-eligible users give for not using the service is that they simply forget it exists.  Changing habits takes time, and Apple has plenty of that with these users.

Financially, too, Apple also has many levers that it can push.  It could offer credits on purchases of an iPhone and at the iTunes store, as well as exclusive discounts.  The rebates for credit-card fees could be used to buy music on iTunes, movies on Apple TV, or iPhone accessories.  True, there are presently very few outlets that accept Apple Pay; but once it gains momentum, practically every retailer will find it necessary to install an Apple Pay terminal or an add-on to their iPhones that will act as one.

The credit-card companies have not done themselves a favor in forcing merchants to install a new chip-and-pin technology.  The merchants are already complaining that reading the computer chips on credit cards takes a long time, annoying shoppers and costing money in lost transactions.  This is bitter medicine for merchants who, with the new system, are now being forced to swallow liabilities for fraud that previously lay with the banks and credit cards.  And, though chip-and-pin transactions in Europe require both the chip in the card and a passcode, in the U.S., terminals only require the chip.  So the new format may reduce some card fraud, but is not all that much more secure than the old.

Compare this triple negative with an Apple Pay experience.  Being lightning fast, it may slice 30 seconds off a chip-and-pin credit-card transaction.  The fingerprint it uses as the second factor of authentication (aside from the chip in the iPhone) not only is more secure than the four-digit passcode; it also requires less work and cannot be stolen easily or leaked wholesale, due to biometrics’ cryptographic storage.  And Apple does not store the entire credit-card number on the phone, so if the phone is stolen, that information is not taken with it.

Let’s just take it as a given that Apple Pay achieves significant market penetration.  What then?  Another upstart payments company, Square, gives us a flavor of what is possible when technology companies control the payments infrastructure.  Square is now offering loans to its merchants without the merchant’s even requesting it.  What’s more, it is basing the loan offering on the transaction volume it sees the merchant processing.  And Square is taking repayment directly out of the transaction stream.  Apple could easily do something like this, either for consumers or for merchants.  With data and coverage come insights and smarter ways to do business.

All of this will hurt the credit-card industry, but will be a boon for consumers.  Technology is enabling entrenched interests, the middlemen, to be sidelined.  This will mean lower fees, better service, and faster transactions—and not having to deal with those annoying credit-card offers in the mail. Best of all, we won’t need to carry paper money and credit cards any more.




For Vivek Wadhwa's site, please click here.

To follow Vivek Wadhwa on Twitter, please click here.


TO FOLLOW WHAT'S NEW ON FACTS & ARTS, PLEASE CLICK HERE!


  

Browse articles by author

More Essays

Jul 31st 2020
EXTRACT: "From a Kantian standpoint discrimination based on race – or religion, or gender – is fundamentally wrong. It is wrong, first of all, because it is dehumanizing, a denial of human dignity. When I racially discriminate, I am denying the person’s intrinsic self-worth, I am, in fact, denying their very right to exist, whether I know it or not. The moral law demands that I treat every individual as a free person equal to everyone else. If the moral law grants each of us a kind of infinite worth, it does not grant someone greater worth than anyone else."
Jul 12th 2020
EXTRACT: "Remember, your wellbeing is extremely important when supporting someone with depression. Take time for self-care so you can model positive behaviours and be replenished enough to provide this crucial support."
Jul 4th 2020
EXTRACT: "--- Nobody is more dangerous than he who imagines himself pure in heart, for his purity, by definition, is unassailable. --- Author James Baldwin’s words, written in the America of the late 1950s."
Jun 29th 2020
EXTRACT: "Numerous studies have shown that children who grow up in more deprived neighbourhoods tend to have worse physical health as adults compared to those raised in more affluent areas. This is the case even when researchers take into account family income and education, and whether or not parents have major illnesses. In order to address this health disparity, researchers need to understand how those living in disadvantaged neighbourhoods end up with worse health outcomes. Our team’s latest study has highlighted one potential way your childhood neighbourhood may influence your health for years to come. It might do so through changing how the activity of your genes is regulated."
Jun 29th 2020
EXTRACT: "Ruth Poniarski is a painter and the author of Journey of the Self: Memoir of an Artist (Warren Publishing, 2020), in which she tells the story of her decade long struggle with mental illness, a “spiraling malady” which led her into a “pattern of psychosis”. I recently had the opportunity to talk with Poniarski about her life and work, and how she eventually overcame her demons."
Jun 27th 2020
EXTRACT: "I know I’m good in a couple of things, really good in a few things, and that’s enough. My confidence is big enough that I can really let people grow next to me, it’s no problem. I need experts around me. It’s really very important that you are empathetic, that you try to understand the people around you, and that you give real support to the people around you."
Jun 27th 2020
An essay about the "the enormously influential 1940 'Head of Christ' painting by evangelical Warner E. Sallman" pictured below.
Jun 17th 2020
EXTRACT: "The diverse, non-human life forms that live in our guts – known as our microbiome – are crucial to our health. A disrupted balance of these contribute to a range of disorders and diseases, including obesity, diabetes, inflammatory bowel disease. It could even affect our mental health..... It’s well known that the microbes living in our guts are altered through diet. For example, including dietary fibre and dairy products in our diets encourages the growth of beneficial bacteria. But mounting evidence suggests that exercise can also modify the types of bacteria that reside within our guts."
Jun 13th 2020
EXTRACT: "Bonhoeffer’s life holds an important lesson for us today, regardless of our religious affiliation or lack thereof. And simply put it is this: you are called upon; you are called on behalf of your neighbor. When you are called to be responsible that is not an obligation which you can decline, discharge or acquit yourself of – it is an infinite responsibility, a “forever commitment” as Charles Blow recently put it. And we all must be prepared to make any sacrifice necessary when we are called."
Jun 11th 2020
EXTRACT: "People differ substantially in how much they’re affected by experiences in their lives. Some people seem to be more affected by daily stress, or the loss of someone close to them. On the other hand, some people seem to get through the same experiences relatively unscathed. Similarly, some people benefit strongly from counselling, or having a support system of close family and friends. Others seem better able to manage on their own. But understanding why some people are more sensitive than others isn’t just a question of how they were raised, and the experiences they’ve been through. In fact, previous research has found that some people in general seem more sensitive to what they experience – and some are generally less sensitive."
Jun 7th 2020
EXTRACT: " The root causes of anthropogenic climate change – which has led to the endangering of countless species across the globe – cannot be adequately grasped in isolation from the technological application of modern science. While Swedish activist Greta Thunberg was certainly justified in calling upon American legislators to “unite behind the science,” neither can we overlook the culpability of science in bringing about the environmental crisis. "
May 23rd 2020
EXTRACT: "The QAnon movement began in 2017 after someone known only as Q posted a series of conspiracy theories about Trump on the internet forum 4chan. QAnon followers believe global elites are seeking to bring down Trump, whom they see as the world’s only hope to defeat the “deep state.” OKM is part of a network of independent congregations (or ekklesia) called Home Congregations Worldwide (HCW). The organization’s spiritual adviser is Mark Taylor, a self-proclaimed “Trump Prophet” and QAnon influencer with a large social media following on Twitter and YouTube."
May 23rd 2020
EXTRACT: "The aim of my research for the Understanding Unbelief programme was to investigate the worldviews of non-believers, since little is known about the diversity of these non-religious beliefs, and what psychological functions they serve. I wanted to explore the idea that while non-believers may not hold religious beliefs, they still hold distinct ontological, epistemological and ethical beliefs about reality, and the idea that these secular beliefs and worldviews provide the non-religious with equivalent sources of meaning, or similar coping mechanisms, as the supernatural beliefs of religious individuals."
May 22nd 2020
EXTRACT: "Psalm 91, for example, reassures believers that God will protect them from “the pestilence that walketh in darkness… A thousand shall fall at thy side, and ten thousand at thy right hand; but it shall not come nigh thee”.............Luther was a devout believer but insisted that religious faith had to be joined with practical, physical defences against sickness. It was a good Christian’s duty to work to keep themselves and others safe, rather than relying solely on the protection of God. "
May 22nd 2020
EXTRACT: "Evidence from this study shows clearly that eating foods rich in flavonoids over your lifetime is significantly linked to reducing Alzheimer’s disease risk. However, their consumption will be even more beneficial alongside other lifestyle changes, such as quitting smoking, managing a healthy weight and exercising."
May 5th 2020
EXTRACT: "It’s possible that the answers to questions like, “how do I live a virtuous life?” or “how do we build a good society?” are not the same as they were a few weeks ago."
May 2nd 2020
EXTRACT: "Strangely, those with strong beliefs tend to be admired. The human mind hates uncertainty, so it is comforting to be told what to think, and to form settled opinions. But it is not rational. As the philosopher Bertrand Russell wrote: “The fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.”
Apr 21st 2020
Extract: "Humans, Boccaccio seems to be saying, can think of themselves as upstanding and moral – but unawares, they may show indifference to others. We see this in the 10 storytellers themselves: They make a pact to live virtuously in their well-appointed retreats. Yet while they pamper themselves, they indulge in some stories that illustrate brutality, betrayal and exploitation. Boccaccio wanted to challenge his readers, and make them think about their responsibilities to others. “The Decameron” raises the questions: How do the rich relate to the poor during times of widespread suffering? What is the value of a life? In our own pandemic, with millions unemployed due to a virus that has killed thousands, these issues are strikingly relevant.
Apr 20th 2020
Extract: "If we do not seize this crisis as a moment for transformation, then we will have lost the war. If doing so requires reviving notions of collective guilt and responsibility – including the admittedly uncomfortable view that every one of us is infinitely responsible, then so be it; as long we do not morally cop out by blaming some group as the true bearers of sin, guilt, and God’s heavy judgment. A pandemic clarifies the nature of action: that with our every act we answer to each other. In that light, we have a duty to seize this public crisis as an opportunity to reframe our mutual responsibility to one another and the world."
Apr 16th 2020
EXTRACT: "Death is the common experience which can make all members of the human race feel their common bonds and their common humanity."