Mercator Blog

Will Apple Be the New Entrant in Prepaid Financial Services?
Date: July 29, 2014
Tim Sloane
VP, Payments Innovation
Rumor has it that Apple is talking to Visa about creating a new mobile payment solution, but what might such a solution look like?
   
Apple’s business model is to command higher prices by delivering reconceptualized and better designed products or services that are tightly integrated into the Apple ecosystem. This passion for design creates an environment that is tightly controlled by Apple, so tightly controlled that even Apple’s new CEO admits the company needs to become more open. However, as of today Apple is well known for tightly controlling all aspects of its value chain, especially hardware and network protocols.

But a mobile payment solution must interact with external environments to be useful since it must have access to funds in the funding account and be able to move those funds to the merchant account, which will be outside of the iBeacon ecosystem. This suggests a new purpose for iTune prepaid accounts.

Apple is said to have more than 600 million cards on file, compared to Amazon’s 224 million. Mercator recognizes that many of these accounts are outside of the United States, dormant, or both, and that not all of these accounts are being auto-reloaded; still, these iTunes accounts are an asset worth leveraging.

If Apple has watched how American Express has successfully created a new customer base through the introduction of BlueBird and Serve, then this may suggest a model for Apple that will leverage these 600 million accounts and loyal Apple customers.

American Express has used its brand, combined with innovative packaging and pricing, to quickly penetrate markets where it had no presence previously. BlueBird targets the unbanked and underserved market, which American Express can graduate to credit accounts if it deems cardholders have become creditworthy. Serve targets millennials, a demographic that had eluded American Express in the past. So will Apple apply these lessons and establish a new product for its existing customers and also create a financial service offering that may attract new customers? Apple could redesigning financial services to produce products that are aligned with the Apple design philosophy.

If Apple embeds a branded network payment instrument into an iPhone, it would be uncharacteristic of Apple to enable that instrument to be accessed by just any financial institution—since that would open the value chain to meddling by others and reduce the control Apple wields over the environment. Given that Apple always wants to tightly control the design and performance of its products and services. it is more likely that Apple will partner with a financial institution so Apple can control all of the consumer’s interactions with the payments environment—a prepaid BIN sponsoring bank’s dream.

The Apple brand, combined with Apple’s finesse for a seamless and totally integrated solution, would almost certainly appeal to a reasonable percentage of Apples customers, who would be willing to give the Apple prepaid card a try. As Apple deploys iBeacon technology, those card holders will receive a payment experience that becomes more compelling, as long as the merchant adopts the Apple infrastructure.

Even if this never comes to fruition, such a scenario should drive traditional financial institutions to think more like Apple and American Express, asking how they can differentiate themselves in an increasingly commoditized payment industry.