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Why Only Apple Has What It Takes To Disrupt Our Wallets

Sep 03, 2014

Apple's September 9 event is quickly approaching, and there is widespread consensus that the Cupertino computer giant will release a new iPhone, a smart watch, and, perhaps most unexpectedly, a mobile payments platform.

The iWatch has gotten the lion's share of the media's attention so far, but it's mobile payments that might ultimately be Apple's most important announcement next Thursday. The future has brought us fancy touch-screen phones and video chat, but we're still paying for things in roughly the same way we did 25 years ago: by putting it on the plastic. Tech lovers have been waiting years for a digital wallet or other service that could dislodge the old system. And while many have tried, Apple may be the only company that has a real shot at succeeding.

Crowded Market, But Few Successes

If Apple actually does announce a mobile payment service—likely powered by a near-field communication (NFC) chip in the company's newest iPhone that will allow users to "swipe" their devices at checkout—it certainly won't be the first to promise a new and better way to pay for things.

Square, a San Francisco startup headed by one of Twitter's founders, in 2011 introduced the Square Wallet app, which promised to let users connect their credit cards and pay for merchandise at participating retailers simply by giving their name. LevelUp, another mobile app, also connects to a shopper's credit card; users then scan a QR code at checkout to pay for their purchases. Even mobile carriers have gotten in on the act. AT&T, Verizon, and T-Mobile have banded together to create their own payment system, Isis Wallet. The service works through NFC and ships with certain smartphone models.

But none of those businesses has managed to make the mobile payment dream come true. Square Wallet was retired in May of this year, and LevelUp lingers in obscurity. Isis, for its part, has not only failed to catch on, but might be responsible for torpedoing Google Wallet—another mobile payment effort—out of the gate when Verizon, in an effort to protect its own platform, blocked Google's service from using NFC components on its devices.

Why have these efforts failed? Two key reasons: Processing payments isn't a good model, and even if it were, none of these players has enough market clout to get businesses on board. Luckily for Apple, its service will be immune to both of these issues.

Great Feature, Bad Business

Being a middleman in a transaction sounds like a great business model. Billions of smartphone users spend money every day, meaning even a small slice of that commerce could be extremely lucrative. Unfortunately, those slices are generally too small to create a profitable company. Ben Thompson, founder of the technology news site Stratechery, points out that most of Square's 2.75% transaction fee actually goes to credit card companies or the card-issuing bank, leaving Square with just 43 cents on a $50 transaction. With margins that low, it should come as no surprise that Square lost about $100 million in 2013. In mobile payments, just breaking even is a win.

That's good for Apple, though, because the iPhone maker would be adding mobile payments as a feature, not making them its central business. Like iTunes, which until recently was run at cost, and iCloud, which gives out five gigabytes of storage for free, a payments service wouldn't be expected to turn a profit. Instead, it would simply be a nice feature that helps sell more iPhones. That's where Apple actually makes its money.

Too Big to Fail

Most mobile payment companies run into the problem of scale. It's hard to get merchants to adopt a new technology if they aren't sure a lot of their customers will use it, and the mobile payments market has been too fractured to accumulate a critical mass of users. Enter Apple, and the roughly 400 million credit cards that are tied to its iTunes service. That's quadruple the amount of payment information Amazon holds, according to Business Insider.

In one fell swoop, Apple could become the dominant player in mobile payments and turn a confusing, splintered industry into one merchants can't afford to ignore.

It's all speculation for now, but the strategy adds up. Apple's no stranger to industry disruption, and come September 9, we'll find out whether our wallets are next on the company's hit list.

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