Quick Thoughts – Apple Pay as a Catalyst for Mobile Advertising and Other Updates
Below, we address some investor questions that have arisen since Apple Pay was announced on September 9th:
- Apple Pay is a Catalyst for Mobile Advertising: The card swipe is broken because it does not provide easy authentication for m-commerce purchases (accounting for approximately one-third of online purchases in the US); entering card credentials, even for PayPal or Visa Checkout, is inconvenient on a small screen leading to cart abandonment. TouchID, on the other hand, allows for one-touch checkout via online apps (through, for example, integration with Like2Buy which TGT has adopted for its Instagram feed). These checkouts allow purchases to be tracked back to triggering deals or offers, and hence can catalyze: (i) mobile advertising (a global market pegged by eMarketer at $30bn in 2014 expected to double by 2016 – see Exhibit); and (ii) the app-and-mortar response of retailers to the challenge of digital brands such as AMZN (see our research note of August 25th “Payments and the Convergence of Physical and Digital Commerce”).
- Expect Apple Pay to be Integrated with e-Couponing and Loyalty Balances: Apple launched Apple Pay by aligning with the networks and, to a lesser but nonetheless sufficient extent, issuers; it will now pivot to retailers so as to integrate the basic NFC-enabled “contactless” payments with the longer-range Bluetooth-enabled location-sensitivity of the Passbook app and, hence, links to loyalty balances and targeted e-coupons (see our research note of September 18th “Apple Pay, Passbook, and CurrentC from MCX”). Macy’s has already announced the national rollout of an in-store program where Bluetooth-enabled “beacons” will communicate in real-time with shoppers based on location and app browsing behavior; the program is implemented by the beacon-network developer, Shopkick, covers both iOS and Android ‘phones, and supports Apple Pay for iOS devices. Apple, PayPal, and Capital One (through Pushpoint) each provide platforms for retailers to integrate beacon-enabled marketing into customer relationship management.
- PayPal will adopt Apple Pay Framework for Card-Present Pricing in 2015: Apple Pay is the first implementation of the network tokenization solution which allows card-present or “CP” rates for mobile purchases at point-of-sale (not in-app purchases which are still considered card-not-present or “CNP”), and we expect PayPal and other wallet-providers to look to achieve these rates in 2015 by migrating their models from the current card-on-file format to the token-on-file format used by Apple; formally, these wallet-providers will become “token requestors” under the EMV Tokenization Specifications. The broader context is that card pricing is evolving from the CP/CNP duality to one where, at least in the case of mobile transactions, there will be risk-based pricing based on the strength of authentication. MA has commented that “card present has nothing to do with cards and nothing to do with presence; it’s just one of the terms we use to confuse ourselves”, and V that “there may be a series of rates [for a mobile-authenticated transaction] depending on how many factors of authentication you use”. Apple Pay, of course, uses biometrics for authentication and MA is looking to add “EKG” cardiac profiles as an additional factor.
- Tokenization Does not Cement Position of V and MA: We do not expect the networks to generate meaningful net revenues from tokenization in the near-term, and V has waived tokenization fees through end-2015. The longer-run pricing challenge is that, while Apple Pay relies on V and MA as token service providers or “TSP”, the EMV specifications allow for other TSPs and, as V has commented, “the large issuers are developing their own token vaults [although, for the time being, that information is mirrored at Visa as TSP responsible for resolving tokens to PANs]”. Furthermore, notwithstanding their current duopoly role as TSP providers, the networks will continue to lose processing share in debit, including to direct-routing between large banks and retailers, and this will show up as an increasing gap in the US between growth of processed transactions (which includes only network-processed volume) and of purchase volumes (which includes all volumes on the network brand however processed). MA has commented that the economics of PIN debit are thin involving “less than pennies or fractions of a penny per transaction” and that they are “not going to chase all PIN debit transactions”.
- Apple Pay Allows for Durbin Compliance on Debit: There were some early reports that Apple Pay was not Durbin-compliant for debit because it did not allow for dual-routing; since the dual-routing requirement applies only for point-of-sale, and not e-commerce purchases, this would have created the confusing possibility that a debit card was active for in-app purchases but not in-store purchases. In practice, Apple Pay allows for Durbin-compliance with BAC, for example, announcing a program to allow customers to provision-in debit cards that are active both in-store and in-app. The reason is that Visa can act as “token service provider” (i.e. responsible for issuing tokens and resolving them back to primary account numbers or PANs) whether or not it processes a transaction; indeed, this interoperability was a key motivation for the collaboration between the “major” networks on industry-wide token standards (so that, for example, a Visa debit token can be routed over MasterCard’s Maestro PIN debit network), and this interoperability is being extended to the “minor” PIN-debit networks (including STAR, owned by First Data, in the case of the BAC debit program).