Visa, Mastercard, or iPhone?

Posted July 9, 2010

Google and Apple will soon compete with Visa and Mastercard to process your payments in stores, restaurants, and online. Both companies will be pulled into payment processing because both have built two valuable networks: one of developers who build apps, the other of consumers who buy them. But the developer network has diminishing returns, whereas consumers who trust Apple or Google with their credit cards is a valuable, scalable asset.

To grow and maintain the developer network, both companies constantly upgrade their devices to reach more consumers with more applications. They will continually improve the tools they provide developers and provide them with specialized training and certification. They may create specialized tools for features like localization or security, for devices like the iPad, or even for big verticals like health care. Apple is either doing these things, or considering doing them, and we can safely presume that Google is too.

But applications deliver diminishing returns. The issue is not simply that most apps fail, sometimes after a brief success. The problem is that the first ten thousand applications make a device like the iPhone incredibly useful. But if the iPhone goes from a quarter million applications to a half million, it matters a lot less. At some point, good filters in the App store are more important than good applications.

So increasingly, Apple and Google will look at their global network of consumers who trust them to process payments as an even more strategic asset than their developer network. At this point, both companies will look for more payments to process.

This is likely to happen in stages.

Initially both companies process payments for media and online sales. Apple started with songs, books, films, and apps (not coincidentally, the same long-tail products that launched e-commerce in the late nineties) and is moving into payments for time, tokens, or avatars for online games. Google started processing payments and is launching a book, music, and movie store for Android.
Both Google and Apple can make their payment processing businesses ad-supported. Both Google and Apple have the scale needed to clear payments directly with banks and presumably both can monetize the information contained in the purchase data and offer merchants much lower fees than Visa or Mastercard.
Finally, both companies will go after Visa and Mastercard by providing merchants with a POS (point of sale) solution based on optical scanners that read a bar code tied to your bank or credit account. Apple is testing this with Starbucks now, as the adjoining screen shots show. Developers will come up with clever ways of showing you your current balance and even budget variances, so that as you pay for a bag of groceries you will know exactly where you stand financially.

Apple could attack this market quickly by waiving fees for transactions between iPhones. The opportunities to integrate this offering with mobile advertising will not escape Apple — or Google). The barcode technology is not a challenge: you can already board flights at many airports with a boarding pass sent to your iPhone. Obviously the payment application needs to be PINned, but consumers already access bank balances and pay bills from their phones, so the necessary trust and security are already in place. Last week, Chase introduced an iPhone application that lets consumers deposit a check electronically by submitting a photo of it – so both banks and consumers are getting comfortable with paperless banking.

Like PayPal, Apple or Google could avoid the most burdensome of state and federal regulations by not accepting deposits and not becoming a bank. Widely varying country regulations make payment processing a complex business to scale globally however, so Apple might logically acquire a business in this space, possibly including PayPal.

Both Apple and Google will be drawn increasingly deeply into payment processing — an industry plagued by a low b/c ratio that is ripe for disruption. Consumers and merchants can only hope that they hurry.