Why Apple Wants to Get Into the Unprofitable World of Payments Between Friends
Silicon Valley is obsessed with a particular part of the finance business that involves sending cash to friends using an app. That’s led to a flurry of options that often aren’t profitable because they charge little to no transaction fees. PayPal and its subsidiary, Venmo, are among the most popular, though they face a growing list of competitors, including Google, Facebook, and Square.
Apple plans to get in on the action, too. The world’s most valuable technology company has been talking with banks about introducing its own feature to Apple Pay that will allow users to send money to friends, a person familiar with the plans told Bloomberg last month. If Apple hopes to compete, it will also need to make its service free to use with debit cards, according to analysts.
Person-to-person payment services aren’t cheap to operate, and Apple may lose money on many transactions, said research firm Crone Consulting. Setting up and validating a new account, usually tied to a debit card, will cost Apple 50¢ to $3 apiece, plus at least 25¢ per transaction, the firm said. Companies don’t generate much revenue from payments users make to friends, said Will Stofega, an analyst at researcher IDC. “I am a little puzzled how you monetize it.”
Apple isn’t likely to find a way to profit directly from the feature. Instead, the company will probably use it to increase adoption of Apple Pay in stores. The mobile tap-to-pay option hasn’t taken off as quickly as expected since it debuted about a year ago. Owners of newer iPhone models used Apple Pay in 2.7 percent of Black Friday transactions at stores that support the feature, compared with 4.9 percent on the same day last year, according to data from tracking firm InfoScout.
Meanwhile, PayPal said Venmo processed $2.1 billion in transactions last quarter as people used the app to split the bill at restaurants, pay roommates for rent, or reimburse friends for movie tickets. “We think of it as an engagement play; there’s a monetization aspect that comes second,” said Jo Lambert, a vice president at PayPal. “Our P2P customers are some of our most engaged customers across the board, in other actions as well. They spend more with PayPal, and they spend more with us overall.” Venmo also plans to experiment with in-store payments this month.
Adding the ability for owners of newer iPhone models to send each other money could double usage of Apple Pay by those customers in 18 to 24 months, said Richard Crone, chief executive officer at Crone Consulting. That could be a moneymaker for Apple, which charges banks fees each time customers tap their phones to pay in stores. “Apple is hoping to stem the tide of slow adoption for Apple Pay with user-funded incentives for P2P payments,” Crone said. “If I send you $50, and you are not on Apple Pay P2P service, you have to enroll in it. It's a viral application.”
Apple didn’t respond to requests for comment. Apple Pay may get a major boost even before the company releases the money-transfer feature, which will come as soon as next year, said the person familiar with the plans, who asked not to be named because the talks are private. Apple has reached a preliminary agreement with China UnionPay, the nation’s largest payment and clearing network, to introduce Apple Pay at cash registers in China, people familiar with the matter said last week.
While there’s no shortage of apps in the $7.5 billion U.S. market for sending money to friends using a phone, analysts are bullish on Apple’s prospects—so much so that some anticipate fallout for credit card providers and ATM makers. Money-transfer apps could reduce the need to hit the cash machine. “You’ll see ATMs impacted because people won't have the necessity to get cash out,” said Matt Wilcox, senior vice president of marketing strategy and innovation at Fiserv, which sells services to banks.
That would be bad news for ATM makers, such as NCR, as well as Diebold, which announced plans last week to acquire rival Wincor for about 1.8 billion euros ($1.9 billion). NCR said it’s embracing mobile payments by experimenting with options to withdraw such transfers from an ATM, for example. Cardtronics, which manages ATM networks, dismissed concerns that apps could challenge its business. “It is important to make the distinction between theoretical and actual behavior,” Nick Pappathopoulos, a spokesman for the company, wrote in an e-mail. "Cash is widely used, even where other payment options are typically available.”
If iPhone users start connecting Apple Pay to their bank accounts, they could bypass credit cards entirely when sending money to friends and potentially for in-store payments, cutting out middlemen. “It could short-circuit the existing players,” said Crone, from the consulting firm. “In three to five years, it could take 20 percent of credit transactions.” Visa, which runs the world’s largest retail electronic payments network, didn’t respond to a request for comment.
It’s almost impossible to predict how long such a shift would take. But Talie Baker, an analyst at researcher Aite Group who relies on Chase QuickPay to exchange money with friends at least once a week, sees a cashless future as inevitable: “I can’t wait for the day when it’s just a lipstick and a phone in your pocket, and that’s all you need.”