Apple – Project Breakout

Last week Bloomberg reported on Project Breakout: Apple’s effort to bring financial services in house. So what is it? Here is my 60% confidence bet.

Most readers are fellow payments geeks. We think about networks, ApplePay, the 15bps they get from issuers, or how Square tried to get Apple to buy them for 7 yrs. What do we forget about? (see 2014 blog):

    • The world’s greatest consumer products company, 
    • The inventor of new product categories, 
    • Maker of the world’s best, most secure, phone
    • Orchestrator of the most profitable mobile ecosystem
    • The most profitable Customer demographic, 
    • The #2 brand in the world, 
    • The top performing physical retailer ($/sq ft), 
    • Top eCommerce retailer (~$600B – App Store, ~$100B – Forbes Article
    • …etc.

Lets focus on this last bullet: Top “eCommerce” Retailer. There are 3 components here:

    1. App Store Sales – Direct Revenue: ~$60B
    2. App Store Sales – Pass Through – ~$643B in 174 Markets (2020 Apple PR)
    3. Sales – Sale of hardware – 31% of sales are direct, of which 70% is online 

So who is the largest online retailer in the US? Apple by a LONG shot with almost $800B in direct and pass through GDV, per Forbes (2020)

Payment Operations and Financial Services

Apple is not only the largest “online” retailer in the world, it is also one of the best. The Apple team is amazing and certainly one of the best in fighting fraud, managing operations and integrating into local payment systems. Payments is core to Apple’s $124B in direct sales and $520B in App Store pass through. Apple Pay is just a small app that earns about $100M.. It is an afterthought. 

Just as Apple looks to own the entire handset (ex new M1 Chip), they are working to do the same with their core payments operations. Apple’s customers trust them with making this work well, secure their data and be “an invisible enabler”. Apple has the team and expertise to build what they need, and thus any external vendor or service provider will undergo new scrutiny. The drivers are not only cost, but also: 1) customer experience, 2) quality control, 3) data control and 4) security. 

Financial services and payments are both a substantial cost of the business, and a key business growth opportunity. On the cost side, Apple’s $124B in sales results in interchange payments of approximately $400M-$500M alone. Adding in $643B of pass through App Store sales leads represents another ~$2B in costs. Now you can see the power of Apple in the payment networks. More payments are processed by Apple than any other company. Small changes here are reflected across $800B, or 5%, of card GDV today and perhaps 10% by 2025. 

No I don’t think Apple is creating their own payment network. They recognize that to create a great experience, they must enable consumers in HOW THE CONSUMER WANTS TO PAY.  They do however want costs to be in line with the value they provide, and they do seek special treatment (ex launch customer of tokenization). The short story is that while cards are a costs, they are also a substantial growth opportunity. 

For example, equipment financing is a core element of sales and consumer experience. While precise Apple Card performance is closely held (see Forbes) The Apple Card has been the #1 performing card for MA, the highest in customer satisfaction and has been called the most successful credit card launch of all time (GS CEO) with around ~7M US card holders. In January, Tim Cook hinted at international expansion plans

Logically, purchase financing/ credit availability are key for any successful retailer. Expansion of Apple Credit internationally is a very large project, both in issuing and operational risk management. Both require substantial consumer data. Apple is very unique in their broad strategy on consumer data. They know that any card partner will gain substantially from data insight.  In eCom, Apple (as merchant) has built fraud and risk utilities that scale. Thus they look to be an atypical issuer/co-brand: owning the consumer data for risk decisions and to prevent leakage to partners (ie who seek to monetize it).  I see this as a key area for innovation (think BNPL vs Card).  

Project Breakout

I’m a tad lucky in guessing ApplePay (2014)  and Apple’s card acceptance (2021) prior to launch. Thus I’m certainly due to be wrong! Not withstanding the odds,  my educated guess on Project Break Out focus:

    1. Own the Payments “supply chain”. Minimize any external vendors (software) and partners touching consumer data. 
    2. Enable Apple Card expansion. This may look like BNPL in some markets. Note that Apple acquired UK based Credit Kudos last month a small BNPL platform.  
    3. Reduce network costs/improve integration into local schemes. See ApplePay India’s UPI integration
    4. Improve consumer experience – Enable Apple Cash in every market. Connect to local schemes. P2P payments on apple phones 
    5. Enable iPhone expansion (with payment/financing) to demographics/geographies without credit card or poor consumer credit facilities.

To head off any obvious questions in Twitter. Apple will NOT:

    • Start their own bank or payment network. The closest will be the P2P scheme they seek to enable on Apple Cash
    • Buy a bank
    • Buy a BNPL provider
    • Steer consumers away from V/MA (remember Apple makes 15bps and gains broad access to consumer credit). 
    • Take the massively successful Apple Card away from GS. With the card, Apple both makes the cake and eats it. One of the most powerful data charts on this topic is from Ron Shevlin (2020)

App Store in the EU

Per my 2020 blog on likely changes to the App Store in the EU, the EU announced new rules for tech giants 3 weeks ago. These rules impact Apple Pay App Store precisely how I outlined.  With respect to NFC this will be much much harder to implement and I suspect Apple will tell the EU that hardware changes will be required. If I were Apple I would ask Qualcom (maker of the NFC chip inside apple’s phones) to create a duel radio for the EU in the same form factor. One would be controlled by Apple’s secure enclave (as it is today). The other accessible by iOS, an “unsecure” NFC which could also leverage a SIM secure element. Then give the consumer option of which one they want to enable. 

Thoughts appreciated.

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10 thoughts on “Apple – Project Breakout”

  1. A good piece as usual. However, I scratch my head about how you came up with your estimate of interchange paid by Apple- they cannot be paying 40bps yet that’s what 500M/124B . How did you calculate your numbers?

  2. I agree with this analysis, especially the lack of will to bypass V/MC. However, you don’t mention the legal attacks on the App Store model, which could be a driver of this strategy. I have long noted that it is curious how upset merchants get about 3%+ interchange on cards, in contrast to the order of magnitude worse treatment they get on the App Store of 30%. It seems the Europeans are quite determined to end this by forcing Apple to allow merchants on the App Store to accept payments through their preferred provider. If Apple loses its monopoly on App Store payments, it will need to get a lot more efficient to compete, and having fewer middlemen in the acquiring space will help them get there.

    I wonder how the Europeans will feel about that, though? Apple owning its own payments stack arguably moves in the opposite direction from where they want the company to go, which is to basically get out of payments altogether and confine themselves to security, UI, and hardware. I’d be interested in your thoughts on this.

    1. I covered this in my blog 2 yrs ago App Store in the EU
      “The high cost, combined with the restriction/mandate does not impair consumer choice but it does materially limit merchant options. My view is that Apple will likely be required to either drop the in-App purchase fee or to open other in-app payment methods.”

  3. Not sure about the $643bn in passthrough payments. Sounds too high – perhaps the analyst grossed up the payments to Google. I think its significantly lower than this.

  4. It was my project that I built with Mobeewave and Samsung that Apple ended up buying. Let me tell you it was a wild 3 years I spent with the team at Mobeewave and the Card brands trying to bring it to market. There’s a few things they are likely still to add to the platform too…

    Based off of what I know I would say that your five points are likely bang on. If you want to go even deeper look to their model with the Wireless Carriers. They see the carriers as a service provider to their customers nothing more. Apple worked really hard to cut out the carriers as much as possible, offering swaps and rate plans in store and online. As far as I know the carriers still don’t even get much of a break on price either, paying almost full value for each handset.

    I also see Apple dramatically changing the Merchant Account experience. Potentially allowing a Merchant to easily move from one provider to another. Apple can do some amazing things in this area.

      1. No problem, when it was announced it was interesting to read what everyone thought about the acquisition and it’s impact. I probably read 100 or so different articles and really only one stood out to me as hitting the nail on the head at the time. – Since reading this back in 2020, Christoffer is definitely a great person to follow, really knowledge in general.

        You can add your post to the list now too, very few people actually have gotten it right in my opinion.

  5. Can you expand on why you don’t think Apple will create its own closed loop payments network?

    With Apple Cash and Apple Card it has deep consumer ties already. With “Tap to Pay” it seems to be making a push into merchants. Why go to all this work if not to create a closed loop system (like Venmo and Square seem to be doing) and capture more economics and control of the UX?

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