Technically, Apple operates the largest mobile payment ecosystem in the world – iTunes.  Linked to debit and credit card accounts, at latest count Apple have almost half a billion iTunes “users” and while not all accounts are linked to a mobile device, it still represents a significant proportion of the population of the planet.  Through the iTunes ecosystem, users can purchase music, videos, books, apps, digital content, game credits and other digital goods and services through in-app purchases.

Classifying iTunes as a mobile payment ecosystem may be drawing a long bow.  However, it is no more ridiculous than the broad-based inclusion of smartphone banking within the generic category of mobile payment.  From a users perspective, smartphone banking via a downloadable app provides the same level of functionality to that of ordinary Internet banking.  Click here for earlier blog articles on this topic.

NFC and the iPhone

There is constant (and misguided) sideline commentary that Apple will soon launch a mobile payment product.  Why?  They already have one – it is called iTunes.  Apple were also heavily criticised for not including NFC in the iPhone 5.  Apple CEO Tim Cook recently responded to this and other speculation on Apples future direction with regard to mobile payments in an interview earlier this month.

Why should Apple include NFC in the iPhone?  The value proposition for integrating NFC with mobile payment is not yet clear and any move to race and adopt NFC as a standard for mobile payment is possibly premature as Tim Cook points out.  Fundamentally, NFC is simply one form of enablement technology limited to proximity payments only.  Click here for an earlier blog post on this topic.

NFC is (Not) For mobile Commerce

iTunes is a cloud payment system linked to over 500 million devices which do not require any physical retail infrastructure to facilitate a payment.  There is a line of thinking with some analysis and commentators that the only way for Apple to enter the retail mobile payment space is to incorporate NFC into the iPhone with an assumption that it will somehow magically integrate with existing retail Point Of Sale payment infrastructure.  Those of us familiar with retail (mobile) payments know the misguided, naïve and uniformed simplistic thinking of this romantic ideal.

Demonstrating customer value using NFC as a payment method for retail payments is extremely difficult which are why there have been very few successes with this approach apart from closed payment systems in mass-transit applications.

Why would Apple want to integrate with the retail-banking sector?  Surely the most obvious model would be to directly provide retail merchants with an iTunes merchant facility.  This approach would bypass the need for any banking infrastructure altogether.  Consumers could then transact solely within the iTunes cloud.

One reason why we do not see wide-spread payment disruption of the retail Point Of Sale space is the strong relationship that retail businesses have with their banks.  Retail business banking services go well beyond transactional payment only and often include integrated business loans, cash-flow management tools and other forms of business assistance.  It is these specialist-banking services that limit new (mobile) payment operators from providing anything beyond basic transactional (mobile) payments.  The banking sector is unlikely to disrupt itself and so if it does not directly provide innovative mobile payment solutions, they are unlikely to emerge.

simple business economics

A second and often overlooked reason why Apple may be in no rush to stampede into mobile payments is because of simple business economics.  The margin Apple current makes on digital purchases via their app store is around 30%.  Equating this to a “transaction fee”, when compared with around 2% (or less) of most mobile payment service, represents 15 times greater margin.  Granted that a significant number of apps are “free” which Apple “subsidise”, by any standards it still represents a phenomenal business model.

One might well ask – why would Apple move from a 30% margin business to a 2% margin business plus deal with the headache of real-world physical infrastructure such as Point Of Sale system integration?  Aside from the practicality, transitioning from a digital payment ecosystem to a physical bricks-and-mortar retail environment would be economically difficult – even for Apple.

Would a business be willing to move from a 2% transaction fee to a 30% transaction fee?  Could this be passed on to the consumer?  Unlikely.

Would I like to pay for my coffee using my iTunes account?  Sure!  Would I be willing to pay 30% more?  Unlikely.

Something would clearly have to give.

banks benefit anyway

At the end of the day the card I use to fund my iTunes purchases is linked to an account managed by my bank. Through the complex hierarchy of transaction acquirer and issuer arrangements, my bank makes money every time I make a purchase using my card regardless of the channel or method used including iTunes.  So why should my bank bother with (re) building fabulous new mobile payment infrastructure?

beyond digital goods

What is clear is that physical goods purchases with real cost-of-goods components are still a long way from being transacted through both Mobile Network Operator premium billing and iTunes digital goods transaction models.

So why would Apple want to rush into payments or expand it’s current offering beyond digital goods?