Apple’s latest announcement on payments has sparked some interesting debate but also a fair share of breathless pronouncements on a “revolution" in mobile payments.
To be clear - Apple Pay is a step forward in terms of end user experience - but it simply entrenches a fundamentally broken card payment network and layers on even more cost.
Apple have long been masters of user experience - and Apple Pay does makes significant strides forward in that area. The point-of-sale experience is good, but not much better than contactless cards that have been common in Europe for years. The real leap forwards is in-app payments - new apps installed on an iPhone will have access to payment details without the user having to type in card details for every new purchase. Instead, customers will be prompted to scan a fingerprint, and the payment will be processed - that’s a pretty big leap forward in terms of experience.
There’s been speculation that this new payment mechanism might lead to the virtualization of credit cards. But what does that really mean? Apple is not killing the credit card. They’re killing the little piece of plastic that gets sent in the mail. Again, a big user experience improvement, but a trivial improvement at the payments level - payments are still going across the card networks. Fundamentally, having to switch out a card to access a different credit product seems wrong-headed.
All this talk of “frictionless credit cards” presupposes that cards and card networks are necessary in the first place. Perhaps a more interesting question is "frictionless credit”.
To understand how this might work, we need to break down a payment transaction to see where credit fits in:
A customer presents a card to merchant for payment, perhaps entering a PIN in a terminal.
The terminal sends transaction details up a line from the merchant to a payment processor.
The processor forwards transaction details to the card company’s network.
The card company routes transaction details to card issuer (the customer’s bank, or an independent financing company) for authorization. Is there credit available? Ie, is customer within agreed balance or overdraft limits?
Issuer approves transaction and sends confirmation back through same channels.
The customer gets their item from the shop and leaves.
The “credit” in credit card is not related to the plastic card, or even the card network. It’s simply debt financing that’s offered by a financial institution at the other end of a series of pipes. Visa & co provide those pipes, but charge a pretty heft fee for doing so. Thanks to the existing 4-party system, merchants are paying around 2-3% of every transaction as a tax levied by those incumbents, who add little value in return. Apple now makes that a 5-party system, adding extra cost in exchange for a slick user experience.
With Apple Pay, instead of a user inserting a card and entering a pin, they’d present their iPhone and touch their thumb to a fingerprint reader. Their iPhone passes up credit card details via the card processor (or, more precisely, it passes up a token that allows the card networks to access card details from Apple’s servers a little way down the line), and the process continues as normal. The metaphor of Apple Pay as a simple “wallet” works well - it simply provides a mechanism for storing your cards, and presenting them to merchants when you want to pay. They aren’t actually processing any payments themselves., unlike PayPal or Google Wallet.
Apple Pay entrenches a fundamentally broken card payment network, and layers on even more cost. Apple has struck deals with Payment Networks and Issuing banks, and as part of those deals, it is taking a cut of the fee. It’s now another mouth to feed.
What we should be aiming at is frictionless payment over a different series of pipes - the public internet, and existing inter-bank electronic clearing systems. If Banks opened up their platforms to allow multiple credit providers, we’d have competition to offer consumers credit financing on competitive terms. Whether you need an overdraft, a fixed-term loan or individual-item financing, you should get the best rate available in the market. The idea of having to switch payment card to get access to the best rates is crazy.
By decoupling the issue of “credit” is from "payment network”, we expose the card networks for the rent-seeking oligopoly they are.