Sam Shawki is the CEO of Magic cube — a trusted software execution environment that offers the same levels of security as hardware.
Steve Jobs is credited with saying, “It’s better to be a pirate than to join the Navy.” This quote came to mind when I read the Bloomberg story suggesting that Apple is working to bring financial services in-house. The gist of this – Apple potentially bypassing major financial institutions and processors across all of its financial services, including the upcoming Tap to Pay acceptance offer – is consistent with my experience with Apple. I believe the company is happy to partner to start something new, but wants to contractually and strategically keep its options open to bring any service or technology in-house to increase its share of the value created over time.
I suspect that when Apple’s Tap to Pay hits the market, it will connect directly to Visa and Mastercard. Both Visa and Mastercard have versions of a “direct-to-merchant-connect” solution that already bypasses acquirers for authorization connectivity. This acceptance model is currently used by some larger retailers who don’t want to risk losing a sale because of a possible delay in connecting with the acquirer. It can be suggested that this same model could be applied in a new way by Apple.
However, if Apple’s plan is to disintermediate acquiring banks, that raises a question: who will bear the merchant risk in this model? Two scenarios come to mind. In the first, Apple itself would assume the risk and apply the predictive algorithms it already uses on the data it has to evaluate merchant data – a possibility reinforced by the acquisition of Credit Kudos.
In another scenario, Apple would partner with acquirers that already take this kind of risk, such as Square and Stripe. We already know that Stripe is involved in Apple’s Tap to Pay plans, and I previously predicted that Square could become a partner as well.
Enabling off-the-shelf devices to become payment acceptance terminals has always been a threat to legacy point-of-sale device manufacturers. Replacing these devices is also the goal of our first product, i-Accept. In this move, however, Apple could also be betting on big payment processors. What does that mean?
In any store acceptance program, you usually have the following players.
• Device manufacturers. Companies like Ingenico, Verifone or Clover make the hardware where you slide, dip or tap your card.
• The acquirer. The financial institution assumes the financial risk of the merchants that honor its transactions. That entity could be a bank like Chase or Bank of America – which is often the case for large retailers – or an “aggregator” like Square or Stripe, which often takes the financial risk of smaller merchants that big banks tend to avoid.
• The processor. Whether Chase or Square acquires the merchant, once a transaction takes place it needs to be routed to the right card brand such as Visa, Mastercard and Amex. That’s where a processor comes in. Payment processing is big business led by companies like First Data/Fiserv and Global Payments/TSYS, among others.
• The brand of the card. Companies like Visa and Mastercard authorize the transaction forwarded to them by the processor with the bank that issued the card.
If Apple is really going to connect directly to card brands, processors will need to figure out a way to stop Apple from disintermediating them. The question is how.
Hide and seek
It is an industry consensus that Apple Pay dominates the wallet space. However, all wallets collectively account for around 5% of all payments in the US
Apple Pay didn’t achieve instant success when it launched – in fact, Apple Pay’s market share remains small compared to other payment methods. For very similar reasons, I believe Apple’s Tap to Pay can follow suit. We hope that, like us, Apple will reduce the cost of traditional hardware by charging a fraction of a dollar per active mobile device connected to your plan and a few cents per transaction. However, some questions remain:
• For example, consider the market penetration of iOS versus Android. I believe it’s possible that the recent news about Apple potentially leasing its hardware through a subscription model could be Apple’s way of making iOS devices easier into commercial business. ZDNet calculates that an iPhone subscription would cost approximately $600 a year – which is comparable to or more expensive than traditional terminals. If Apple offered devices for free to gain market share in the commerce business, would the transaction volumes make up for lost hardware profit?
• There is the issue of additional fees that micro-traders can accept but large retailers cannot.
• There is also negative regulatory attention related to Apple blocking NFC access from other players on its devices. There’s no telling how this battle will play out or how long it might last.
pirates vs. navy
While Apple’s entry into the payments acceptance space was a huge confirmation that there is a business case for disrupting the more than $70 billion that retailers everywhere spend every year on dedicated, single-use hardware to accept digital payments, I’m not sure Apple Tap to Pay will be the instant hit that some experts seem to believe it will be. I believe there are real advantages to being device and operating system independent, as well as collaborating with the ecosystem of players already on the market.
There’s no doubt that being a pirate can pay off in some industries. However, when it comes to payments, I believe that ubiquity, open platforms and collaboration with the ecosystem are the real keys to success. I’ll be betting on the Navy this time.
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