Apple Pay, Passbook, and the Convergence of Payments and Marketing



1. Mobile wallets are as much about commerce and advertising as payments; a chip, unlike a mag-stripe, is a messaging device as well as a storage medium for card credentials and so catalyzes the integration of payments and marketing. It is not a coincidence that Apple Pay is implemented through the Passbook app which AAPL is positioning as a repository for digital payments content ( e.g. e-coupons and loyalty rewards) in the same way that iTunes is positioned as a repository for digital entertainment content.

2. Consumers are not likely to adopt mobile wallets unless integrated into an app that adds value beyond the payment; otherwise, apart from security, a phone tap is no better than a card swipe (or, in the case of chip-cards, a slot).

3. Retailers are adopting app-and-mortar strategies to pushback against digital brands; payments-enabled apps support this by digitizing in-store workflows (including e-receipts which, unlike in current approaches such as WMT Savings Catcher, can be integrated into the payments stream) and catalyzing the convergence of physical and digital commerce around and through “omni-channel” strategies.

4. Payments processing margins are low (Apple is reportedly getting 15bps from banks for biometrics), but digital advertising margins are high; Apple Pay emulates a card at point-of-sale and so does not capture transaction details but, through the intermediating API for online transactions, can collect “payment sheet” data.

5. Unlike Android (through host card emulation or “HCE”), iOS controls access to the secure element of theiPhone through the Passbook app, so that issuers cannot push their card to front-of-wallet even in their own apps; this is a drawback for issuers including MCX which is looking to make its payments solution front-of-wallet if not exclusive, and to push network-branded credit cards to the back, if not entirely out, of the wallet.

6. Apple Pay is branding a user experience and, while it has improved the chance of successful launch by working with rather than around the incumbent networks, will likely evolve (as PayPal did) to encompass a variety of payment methods (e.g. ACH) and interfaces (e.g. QR).

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