The Apple Pay Threat Facing Banks

A friend was preparing for a once-in-a-lifetime yoga retreat to a fancy resort in Malaysia. The trip was a long one with stopovers in Qatar and two days in Kuala Lumpur. The tour guide suggested that she put her debit and credit cards from her physical wallet into her Apple Pay wallet to keep them safe. In the event her purse or wallet was stolen, she could easily cancel cards and have them reissued virtually on her phone, they told her, and she would be able to use her Apple Pay wallet to pay. As a long-time iPhone and occasional Apple Pay user, the idea never occurred to her. Now all the cards she uses frequently are organized inside of her Apple Pay wallet for use on that trip — and everywhere else once she returns.

It took me less than five minutes this weekend to do the same thing. Until then, my Apple Pay Wallet included only my Apple Card and my Apple Cash card. Out of curiously, I checked my transaction history using Apple Pay over the last few years, since I felt instinctively my use of it had increased.

In 2021, I had 37 Apple Pay transactions; in 2022 I had 40. In 2023, I had 119 transactions — and so far in Jan and Feb of 2024, I have completed nearly half the number of all my 2023 transactions combined. My use of Apple Pay is exclusively in-app and, until this weekend, using my Apple Card.

The increase in use comes at the expense of PayPal and my bank account as funding sources — and as card on file at merchants I now shop using their app. There are exceptions like when I shop on Amazon, at department stores where I use my store card for rewards, and when I shop using my laptop.

But as my transaction history suggests, my increased use of Apple Pay reflects a shift in how and where I shop, which is increasingly using my phone/tablet and apps. Two clicks on the side of the phone and the transaction is done. Paying my Apple Card bill is easy inside the Wallet. Now, with the addition of my oft-used cards, I have payments choice before I double click. That might have the effect of reducing my use of the Apple Card, but probably not my use of the Apple Wallet when I am shopping in an app on my mobile device when it is available.

It’s not just me.

Digital wallets are how consumers seem to want to manage the everyday transactional parts of their lives — how they pay, who they pay, how much they spend, and how much they have left to spend. It’s one of the reasons so many consumers gravitate to the everyday app concept. According to PYMNTS Intelligence, three quarters of consumers say they want the convenience and simplicity of such an experience. Their bank is on the list of providers they trust to do that, but not at the top.

Aggregators, whether it is a platform like Amazon or Instacart or DoorDash or OpenTable, generally offer the one-stop experience with a number of choices and an end-to-end transactional experience. Digital wallets can play a similar role for consumers across the payments and banking spectrum. Apple Pay’s integration creates a sticky behavior that increases usage and can drive preference. Consumers don’t see their banks as being that aggregator, at least not now. A typical bank mobile and web app, even with Zelle integrated into it, doesn’t make it easy to do what Apple Pay does on the iPhone.

This behavior is a sobering reality for issuers that risk becoming invisible inside of a Big Tech digital intermediary whose branding is front and center for the consumer when checking out. Banks will probably have to pay more when consumers use their cards in that wallet. Apple Pay may charge them more as they face pressure to raise revenue in the face of slumping iPhone sales. Or because they must spend more to drive top-of-wallet preference in that wallet. That will be increasingly true as more transactions move to mobile devices — and especially to iPhones, which will capture the bulk of the spending in the U.S. and other developed countries.

The Same Digital Wallet Story, but with a Difference

The friction between banks and digital wallet intermediaries is nothing new.

PayPal rubbed the issuers and card networks the wrong way once it started to get traction, and rubbed users the wrong way when it made adding forms of payment other than a bank account a friction-filled experience. It would take until 2016 for PayPal, card networks and issuers to find common ground and make choice an easier and more visible option for consumers using the PayPal wallet. That decision helped to drive the growth and expansion of PayPal as an online digital option at checkout over the next several years and more volume on issuers’ cards stored in it.

Apple Pay will celebrate its tenth birthday in about six months. It’s a mobile payments intermediary that issuers weren’t all that enthusiastic about in 2014, given the Apple Pay tax levied on every transaction initiated in the wallet. Since Apple Pay at that time was mostly to be used in stores, and in store use was (and still is) nascent, there didn’t seem to be much collateral damage.

Apple Pay is a different digital intermediary now even though the overall use of the Apple Pay Wallet in the U.S. remains small. It has its own credit card in that wallet and offers an integrated Pay Later option at checkout. The user experience is slick, and managing transactions is easy. Cash back on purchases is automatically deposited to the Apple Cash card, which can be spent or transferred to a bank account. Integration with messaging makes P2P payments just like sending a text.

It is becoming the aggregator for virtual cards that consumers have in their physical wallets today or get from brands that aren’t their bank, including those issued by brands that are not a bank.

Apple now offers a high-yield savings account on balances of up to $1 million as a feature in its wallet. It has a disproportionate share of high earners as iPhone customers here in the U.S. and, by extension, those who drive spend using that wallet and the cards in it. According to PYMNTS Intelligence, 54% of Apple Pay Users earn more than $100,000 a year and nearly half (45%) of iPhone users do.

A digital wallet that was more or less a dud at the physical checkout in the store for most of its post-launch life, Apple Pay has become a more material potential competitor to the banks as more transactions move in-app and on mobile phones and tablets — with Apple Pay offered as a friction-free alternative to checking out.  And Apple adds new banking and payments features to create more utility for its users when transacting in app, as it will surely do.

Those use cases might extend to a reinvention of how consumers check out in store, Apple’s initial payments target, which has been slow to gain momentum.

One of the biggest innovations for physical checkout is to replicate the digital experience for consumers who are standing inside of a store. The Click-and-Mortar™ shopper is here to stay, as PYMNTS Intelligence research, done in collaboration with Visa Acceptance, shows. Click-and-Mortar™ shoppers are the fastest-growing shopping segment worldwide, as consumers see the store as just another place to use their mobile devices to shop and pay. Customer satisfaction is higher with merchants who offer such an experience — and with satisfaction comes preference, and with preference comes more sales. Digital wallets, with payments choice, can be a bridge to the reinvented checkout experience. Whose digital wallet depends on who can deliver the better experience.

Maybe this is where banks and merchants could find common digital wallet ground.

The Digital Wallet Prisoner’s Dilemma

Stay with me. There is a point to this anecdote.

Sam Bankman Fried’s sentencing for his role in the collapse of FTX is set for March 28^th. Last week, we heard prosecutors argue for a 40-to-50-year sentence at the same time SBF’s defense team said 5 to 6 years should be the max. The three closest FTX colleagues who testified against their former boss will be sentenced later. Each of them made the decision, independently, to plead guilty and cooperate with the government in hope of a more lenient sentence.

They did so even though each could have pleaded not guilty with the hope that their group silence would make it tough for the prosecutors to win. The prisoner’s dilemma a year ago was whether to gamble that one of them would spill the beans in the hopes of a reduced sentence or hope that everyone would hang tough and maybe get little to no jail time.

The prisoner’s dilemma dynamic is evident in business almost every day even though we don’t call it that, and the outcome isn’t about whether anyone will serve time behind bars. But it is the essence of decisions that impact business outcomes — often in material ways.

A prisoner’s dilemma is about deciding whether it is more advantageous to just follow one’s self interest or collaborate with an adversary to achieve a better outcome. In a very connected digital economy, where competition and cooperation now define business, these scenarios have become more the rule than the exception.

It’s also a fitting way to describe the dynamic now between banks and digital wallets, and in particular Apple Pay.

The issue for banks, and the biggest ones with the largest card bases, is how to become more than just a feature in a wallet where they don’t control the experience, the acceptance or the cost to them of a consumer using it.

These decisions are being weighed while Apple is under pressure to boost revenues as iPhone sales globally fall and competitive (and geopolitical) pressures in China increase. This Bloomberg article suggests Apple is less like a Big Tech innovator and more like a value stock, citing Coca Cola as a relevant comparison. The writer says its lack of AI chops is to blame. The bigger point is that Apple has been largely unsuccessful at bringing a slew of blockbuster products to market under Tim Cook’s reign.

So, all attention is focused on Services revenue now to drive revenues and margin.  Apple Pay transactions are very likely in the consideration set of assets for Cupertino to monetize in new ways.

Banks, of course, know this. The big banks behind Zelle have banded together to create a bank-only competitor, Payz, as a digital wallet alternative to Apple Pay. It has little chance of being a competitor or getting any traction for all the reasons I outlined when it first launched.

We witnessed the challenges of getting a bank-operated payments consortia to scale in the U.S. with real-time payments and TCH. Business model failures hindered ubiquitous acceptance, coupled with a lack of clarity on use cases that would create the adoption and usage to get a flywheel going. The very adversaries that TCH was intended to unseat, the card networks, have only become stronger real-time competitors with push-to-card options that deliver a streamlined and ubiquitous consumer experience and consumer preference. If we think that getting real-time, account to account payments to ignite in the U.S. was challenging, which we are still working to do, just sit back and watch how painful it will be for Payz to try and do the same.

Friend, Foe or Somewhere in Between

Deciding what’s in the self-interest of banks, especially the biggest ones, when it comes to their digital wallet strategy is more complicated than it was when Apple Pay first launched. Consumer preferences have changed, and Apple Pay seems to have momentum in-app. Apple also has an incentive to figure out how to make more high earners stickier, and to be the aggregator of the payments and transactional banking elements that consumers value in order to bolster its own bottom line. Almost anything could be in play.

At the same time, Apple is only half of the smartphone population in the U.S. — and even smaller globally — at a time when the smartphone landscape is going through its own digital transformation. GenAI will usher in a new generation of devices and operating systems; Open AI and ex-Apple iPhone visionary Jony Ive is working on such a device now. So is Google. Commerce and payments will move to a more distributed network of devices that are voice-activated and where smartphones and apps may be the receivers, and not the initiators, of transactions. Amazon isn’t going to sit back and watch the GenAI commerce train pass it by either.

The same banks that helped build Apple Pay success now find Apple to be the gatekeeper for the use of their cards inside of it.

In that world, determining who’s the real adversary won’t be that easy. Neither is figuring out whether a collaborator today may be an adversary in the future. Apple faces many of the same decisions in its core business. Just today, we read that they are contemplating a partnership with Google to license its Gemini product to fast track its own AI capabilities.