What Apple Pay Adds to the Electronic Payments Landscape

Apple’s announcement of Apple Pay is just one example of the trend of new players investing in the electronic payment sphere and eager to take on an intermediation role between banks and their clients and to replace cash with electronic payments.

The motivation of these new players is quite simple: There is an enormous amount of money on the table. According to the Bank for International Settlements, USD$12.9 trillion in value is processed via card transactions, and another estimated USD$4.6 trillion in cash and coins is in circulation – a huge value that could be serviced by new players in the electronic payments landscape. Disintermediation, supported by both existing and new technologies, is enabling new business models and agreements that are shrinking the value chain. Many players are questioning the other players’ value proposition and assuming they are able to take their role. Everyone wants a share of the market (and the profit). Everyone wants to “own” the client.

Apple is known for its ability to understand customers’ behavior and expectations. In the case of the Apple Pay mobile wallet integrated into the iPhone 6 (using a biometric fingerprint to confirm transactions) and the new Apple Watch, it accomplished that using existing NFC technology. The new feature will work regardless of the telco provider. Apple’s interesting agreement with banks, 220,000 retailers, and brand acceptance networks will redefine the mobile payments standard. Furthermore, being able to immediately manage the connection with the financial data held in its 800 million iTunes accounts may give this mobile wallet a good start.

Important players such as Google, Facebook, Microsoft, PayPal, and Amazon are sure to propose their own solutions that will reshape existing business models. Their solutions may well include strategic alliances to compete and cooperate in the digital payments space.

Solutions Need to Fit the Situation

Mobile money, such as that promised by Apple Pay, is not the only game changer in the value chain. The fast track to a cashless society is providing other alternatives to the traditional scenarios.

For example, the use of prepaid cards combined with credit cards offers an alternative to conventional checking and overdraft accounts. Combining companion card and mobile payments is another option. Both of these models support financial inclusion and offer a learning curve that should result in customers feeling more confident with the technology. Only when a technology is accepted as secure, convenient, and easy to use will it be adopted.

There is no “one size fits all” solution. Physical and digital payments require different approaches. In the physical payments sphere, NFC, QR codes, SMS, and USSD may not require physical infrastructure. Solutions that work in developed economies do not necessarily apply to developing countries.

Banks’ Role in an Increasingly Disintermediated World

Today’s innovative technologies have created the conditions for disintermediation, effectively reshaping existing arrangements in the digital payments space. One can draw an analogy to the disintermediation brick-and-mortar retailers experienced when confronted with e-commerce competitors. But the competition is more difficult in the payments sector and for banks in particular. Banks have only intangible services to sell – services that can just as easily be offered by a digital bank as by the branch bank on the corner.

It seems reasonable to assume that the role of the digital bank will increase, while the physical bank will have to refocus on becoming a relationship business developer. This will be particularly true in cultures that value personal, face-to-face relationships.

Momentum Cannot Be Denied

Whatever the solution, we need to look beyond technology. It would be a great risk and an invitation to failure to underestimate fundamental aspects such as operational issues, usability, fraud risks, and the role of regulation.

All players need to consider many drivers as they seek to define an optimal business model. These include scalability, the financial volumes that may be shifted to electronic cash, the number of potential customers, technological and physical infrastructure, the physical and digital payment environment, monetization of Big Data opportunities (geo-location applications, customer behavior models), and the education level and wealth distribution of the target populations, just to name a few.

While the search for a reliable replacement for cash is not easy, the momentum of the search cannot be denied. Success will come when the proposed solutions offer a better value proposition and are more convenient, easy to use, and secure than cash itself. Despite the apparent disorder in the sector, we are getting there. All of the players and their solutions aim to replace cash, which is a common position they can come together to achieve.