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Banking on Apple

Apple enthusiasts aren’t shy about showing their affection for the brand, as we saw earlier this month when the iPhone X release again prompted devotees to camp outside the Apple store in Sydney — and around the world.

But one Apple announcement passed largely under the radar in Australian media. Just a few days ago, Apple began its soft-launch of a peer-to-peer payments platform, as part of the Apple Pay Cash beta. Online peer-to-peer payments are electronic transfers of money between one individual and another. The program is currently available in the US, and we can expect it to expand worldwide.

Users can already make merchant payments through Apple Pay. This announcement goes further: iPhone users will be able to transact with any other iPhone user to make payments, receive payments, and use the card associated with their Apple Pay Cash account as a store of value — without any friction.

In short, Apple has transformed itself into a bank — a barebones, simple bank, but what amounts to a bank nonetheless.

It’s a “bank” that has a significant competitive advantage compared to existing peer to peer payments platforms like Venmo, PayPal and Monzo, because:

  • Peer to peer payments are free

  • Merchant payments will be free on debit cards — Apple will only charge the industry standard on credit cards

  • Apple Pay is already integrated with messages and emoji — your iPhone will know when you’re talking about money that a friend owes you, and direct you to the payments system

  • Most importantly, the product will be automatically available to Apple’s vast network of iPhone users — just last year, the company announced that it was selling its billionth iPhone since the series was launched in 2007. Apple can instantly enable payments for all of those users, creating a ready-made market for its product.

If you have an iPhone, you’re three quarters of the way to being a customer.

The American mobile payments market is expected to more than triple in size by 2021. Apple has positioned itself in the driver’s seat to take over that market.

This means more consumers will be looking to pay for products and services on their iPhone, instead of their physical credit or debit card.

This is fintech on a massive global scale.

Most importantly, Apple’s proving that fintech needn’t come from a garage or a college dorm room. Apple is the world’s most valuable company, and it’s rapidly moving into a high-margin, high-opportunity industry. It’s not just about peer-to-peer:

Apple knows that this fast, simple and safe way to pay a friend will encourage people to use the platform for other, more valuable transactions.

We should be learning three things from Apple’s play.

1. The scope of digital competition is broadening — rapidly

Some used to think of financial services as an industry that wasn’t fit for digitisation. It’s so tightly regulated that it’s difficult to imagine radically new business models developing, not to mention quickly finding scale.

A decade ago, as Apple was buying up patents for payments infrastructure and e-commerce, many were betting on Apple pursuing a banking licence, and needing to run through the gauntlet of regulation required to become a digital bank. Apple’s choice not to do so makes a lot of sense now.

Apple has been able to establish itself as a payments provider fulfilling many of the important functions of a bank, without needing to get a banking licence or build the infrastructure with the associated overheads. This is a similar strategy to Monzo, which first established itself by issuing a card as a store of value, without needing to go through the onerous regulatory procedures associated with being a bank.

People rely heavily on trust and absolute stability when they make payments: they don’t want to gamble. That’s part of the reason why a small number of established banks are able to dominate the market in Australia.

Apple is proving that trust is essential, and that it doesn’t have to be trust in an established bank.

If you’re accustomed to working on MacBooks, playing on iPhones and watching movies on Apple TV, it’s natural to trust Apple to handle payments and confidential financial information — particularly when the company has jealously guarded its reputation for protecting users’ privacy, even from the FBI.

As APRA Chairman Wayne Byres said recently, his kids ‘wouldn't have a clue about the four major banks that we have here… [but] they have accounts with Apple.’

Digital competition has already taken over in industries that are easily digitised: think of the impact of entrants on media (Amazon Prime Video and Netflix), dating (Tinder and Grindr) and popular culture (4chan and Tumblr).

Apple’s move proves that the scope of digital competition is no longer cowed by complex and highly regulated industries.

The boundaries between industries are becoming more porous: the breakthrough hardware computer retailer of the 1980s has already set itself up as a music and entertainment company, and is now looking further afield — just as Amazon has gone from bookseller to insurer and cloud computing provider.

2. Apple knows that this is a winner-takes-all game

It’s not often that a company’s share price will rise after it announces what looks like a pro bono project: peer-to-peer transactions that will, in many cases, be free, or at most won’t exceed standard merchant fees on credit cards.

Apple may benefit from float on its holdings of money in accounts, but it’s unlikely Apple Pay Cash will be a star earner for Apple.

Apple knows that the nature of platform economics means that, once it achieves scale in the market, there’s an immense potential for profitability. Network effects mean that, once a payments provider saturates the market, it’ll be very difficult to dislodge.

Making a payment to someone requires a double coincidence of platforms — the buyer’s preferred payment method has to coincide with the seller’s — so it’ll be very difficult for a new provider to disrupt Apple, if it can establish a strong grip on the market.

Apple is taking a leaf out of Alibaba’s book. Estimates of the volume of Chinese mobile transactions vary wildly from The Economists’s figure of $8.6 trillion to Kleiner Perkins’ estimate of being just over $5 trillion; in either case, the Chinese market dwarfs the nascent American market, which was just $112 billion in volume last year. Apple knows that, if it can act now to dominate this sector, it has an incredible opportunity to generate revenue from a massive global market in five or ten years’ time.

3. Apple’s pursuing competition — not collaboration

The meme of ‘competitive collaboration’ has been around for a few years now; by 2015, Smart Company reported that collaboration was the second most used business buzzword in online publications, both in Australia and internationally.

Competitive collaboration lingo has even infected academia. Earlier this year, the University of Sydney Business School’s Digital Disruption Research Group partnered with Capgemini Australia to release The Fintech Advantage, a report arguing that successful Fintech start-ups should work with with existing firms, rather than compete for market share.

Ironically, the Digital Disruption Research Group’s advice was to avoid being disruptive.

Apple has firmly rejected that advice. After three of the four big banks sought to form a negotiating bloc in their discussions with Apple over Apple Pay, and took them before the ACCC to resolve the issue, it’s not surprising that Apple didn’t go to them to ask for their help in setting up a payments system. They knew that, if they built up a critical mass of users, nobody would be able to keep them out of the market.

And Apple intends to own that market.

Apple knows that more than 70% of millennials would rather visit their dentist than listen to their bank. They see the traditional financial services sector as ripe for competition.

This is real fintech, designed to change consumption patterns and the shape of entire industry, in the same way that Amazon’s disrupting retail.

The future of innovation is now

Apple’s move isn’t just a shot across the bow to the banks: it’s a message that should be heard by all incumbent Australian businesses.

Paul Shetler is Expert in Residence at Stone & Chalk and an adviser to governments and organisations around the world who are transforming their business. He is a speaker on digital transformation and organisational change.

Paul was the CEO of the Digital Transformation Office and the Chief Digital Officer of the Australian Government’s Digital Transformation Agency.

You can follow Paul on LinkedIn, on Twitter at @paul_shetler and stay in touch with his work at paulshetler.com