Tipping Point for Plastic (Card)?

Will Visa Acceptance Cloud (VAC) be a watershed event that simplifies merchant acceptance and embedding payments into iOT?

Will Visa Acceptance Cloud (VAC) be a watershed event that simplifies merchant acceptance and embedding payments into iOT? Changing the merchant side of the network has been a nightmare for all. VAC enables a radical expansion of merchant network capacity with one big asterisk. (Sorry for Typos)

Tipping point for Plastic (cards)? 

Just as ApplePay was the launch platform for network tokenization (see 2014 blog), Apple’s forthcoming launch of phone Acceptance is the launch platform for Visa’s Acceptance Cloud (VAC – see yesterday’s blog).  Will this kill SQ, Clover, Toast, …? Of course not… but making card acceptance part of the platform (iOS) makes it very easy for any app to build the supporting services for a merchant (ex menu, staffing/hours, …). Payments were embedded in the consumer side of devices.. Now ACCEPTANCE will become embedded in iOS devices AND VAC enables acceptance in iOT use cases. 

If Apple (and Google) can create a few great consumer experiences, with a critical mass of app developers in mobile and iOT, this could be the tipping point that begins the long overdue death of plastic (in a 10 yr view). Today, 100% of all new smartphones have contactless embedded. However in the US, less than 6% of consumers use ApplePay at POS (see study). Behavior won’t change unless I can ditch my card. If I need a piece of plastic just once a week.. I must still keep it (think parking meter). 

When assessing anything with Apple the key is to determine what new experiences they plan to enable. Clearly Apple is not looking to replace Square as a merchant POS. SQ tried for the first 7 yrs of its life to be acquired by Apple, and Apple passed consistently. They did not want the headache of sales and operations. Apple wants to be an enabling platform. 

Examples

The vending machine/gas pump examples are the most straightforward. Integrating an Ingenico payments device into a vending machine or gas pump was both costly and time consuming. The devices took a year to develop, 2 years to certify (not joking) and then 18 months to deploy through their processor.  If plastic cards could be abandoned (contactless only), the devices become much simpler AND there is no certification process. Processor key injection activities would also be greatly streamlined. 

Vending machines and Gas pumps begin to deploy with payment acceptance embedded into their software (see Embedding Payments). This feat was impossible before because of the device certification requirements. Any processor/acquirer can enable this new standard equipment. Now expand this example into a few more categories

  • Vehicle charging
  • Parking meters
  • Electric Scooters
  • Interactive billboards
  • A rental car’s wi-fi
  • … any device where you need temporary service
  • … any device where you would use plastic

iOS Platform

At the consumer level, ApplePay in App and in Safari is the best payment experience hands down. ApplePay has become a consumer brand (a topic for future blog) that has a consumer experience tied to it. Every App enables ApplePay. 

Acceptance will have the same potential for great experiences on the merchant side. The developer community will support globally. The elimination of specializes hardware is a major factor in throttling network growth in emerging markets. For example, a GoJek driver in Indonesia now only needs his phone to accept tourist payments (Visa is an investor in GoJek). Acceptance will also drive the sale of Apple devices, although I’m sure Bill Ready and team at Google will be very fast followers here. 

My guess is that Apple (and their PayFac) are starting small with merchants, and will expand to any consumer requesting ability to accept payments by 2023. Apple has always sought a P2P platform. Google and Facebook have also sought P2P, but were willing to create at no cost to support increase platform interaction. Apple wants to make money from P2P.. the card platform is their only option (for ubiquity). This is logically the way they should move.. But it is just one of many services I see in near term. 

Tipping point? The last major redesign of Card acceptance was the PayFac model driven by Square. Changing the merchant side of the network has been a nightmare for all. VAC enables a radical expansion of merchant network capacity with one big asterisk. IF we can get consumers to abandon plastic. Integrating contactless into everything and giving consumers the ability to abandon plastic is the asterisk. Use is well ingrained, so it will not be a near term development. I see first movers in GenZ and markets with low acceptance rates as key areas to watch.  

Investor View

I’m not an Apple expert, so will not cover impact, other than to say Apple will likely charge acquirers their “15bps” as a cost to participate. Think about that.. Apple will get paid on BOTH SIDES of a card transaction.

The value of VAC to V/MA networks relates to network size AND the transaction volume within the network. How does VAC impact network? Quick thoughts:

  1. Elimination of specializes hardware (if contactless only)
    1. Merchant Growth
    2. Embedding payment in iOT 
  2. Developer community to support 
    1. App Ecosystem
    2. Simplified Time to market – reduce requirement for Payment “expertise””
  3. Elimination of plastic
    1. Consumer behavior shift to contactless
    2. Decreases user switching costs
    3. Impacts existing device manufacturers
  4. Increased hurdles to compete with V/MA
    1. Battle becomes to get into the Apple/Google Wallets
    2. VAC requires tokenization and operating rules
    3. V/MA become the rails for iOT and embedding payments
    4. V/MA create new community of developers and FinTech’s working to embed payment acceptance. Think of how hard it will be for SEPA, FedNow or any other payment scheme to mirror. It can be done technically, but V/MA have an operating model with revenue to drive an ecosystem. 

Thoughts appreciated

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6 thoughts on “Tipping Point for Plastic (Card)?”

  1. Thanks for this… great post as always. One thought I had (and a possible explanation why this is not as big of a threat to Square as others think) — for merchants, the Square toolkit is more than just “payment acceptance”; it’s the suite of analytics and software that offers higher utility due to the line of sight into merchants’ transaction history. Do you think we will see a spurt of new apps centered around IoT that integrate directly into transaction history?

  2. Great post. Which businesses will want to use iPhones or iPads to accept payments? Plenty I’m sure but my guess is that only micro merchants would find that appealing/useful. For more permanent/fixed PoS, using Apple devices is going to be more expensive than subsidised hardware from Square etc, right?

  3. Thanks for the post Tom.

    If this helps drive more habitual ApplePay offline/omni usage, do you expect it to improve ApplePay’s online penetration, undermining PayPal’s online business?

  4. Very interesting for sure, but Apple Pay uptake still isn’t that great and the reason isn’t all due to merchant acceptance. It’s mostly consumers and their muscle memory. People don’t hate cards in brick and mortar locations. Without a carrot to change, the penetration will continue to be slow.

    Plastic is dead. Long live plastic!

  5. Surely the rumour in Bloomberg about Apple devices becoming acceptance devices is nothing more than what has been done on Android for some time now. The VAC facilitates this by making acceptance easier for the merchant meaning only an app needs to be downloaded onto the phone. Plastic will eventually be replaced (by wallets) but the more interesting question is whether V/MA is being disintermediated. I think not, as mPOS still uses V/MA rails and the economics for V/MA and their issuers is the same as for a traditional POS transaction.

  6. Why do you think acquirers will pay 15bps?

    Apple’s experience in UX wil likely make this a very compelling proposition for consumers and the iPhone could display a rich set of at checkout options e.g. BNPL. With their ownership of mobile + browsers, the ability to create the same UX for payments across web and mobile will be difficult to beat.

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