From Apple Pay To Apple Paid

Apple’s announcement about turning iPhones into point-of-sale devices is about more than payments.

In the relatively unexciting world of point-of-sale (POS) terminals, things are getting interesting. And that’s because the future of payments isn’t really about digital money, it’s about digital identity.

As more and more merchants, more and more SMEs, more and more micro enterprises move away from cash, so there is a growing demand for cheaper and more flexible technologies than the traditional hardware devices that you see at the Walmart checkout.

One particular trend, driven by the interlinked evolution of tap-and-go payment cards, contactless terminals and smartphones with contactless interfaces is toward software POS (SoftPOS) solutions. These are applications that enable mobile devices to accept contactless payments using the built-in antenna, with no need to connect an external “dongle” via USB or Bluetooth and the demand for such solutions is significant.

(Note that SoftPOS is often connected with PIN-on-glass, or PIN on COTS – commercial off-the-shelf devices – which is PIN entry on the touchscreen of an off-the-shelf commercial smartphone or tablet connected to a card reader. In the UK, the contactless payment limit is £100, so if the payment is for more than that, the consumer needs to enter a PIN or use something like Apple Pay with a CDCVM – customer device cardholder verification method – where the customer has already logged in using their face or fingerprint so there is no need for a PIN.)

Payment Cards & Mobile (PCM) ‘s research identifies huge demand in this segment. They estimate that Europe’s POS estate grew by eight percent last year and will grow by almost a third in the next five years. All of these new terminals will have contactless interfaces, but a great many of them with will be phones and tablets. According to Market Research Futures, the SoftPOS market will grow around a quarter per annum to reach $76 billion in 2025.

Swerve 

Frankly, these figures could be underestimates because Apple is about to transform the POS market for good. A couple of years ago they bought a small Canadian company called Mobeewave for $100m. Mobeewave made SoftPOS applications, and it was assumed that at some point in the future Apple would integrate this functionality into their operating system. Well, they have just announced they will do so in the spring. Apple will provide the APIs to allow apps to securely access the NFC hardware and other relevant iPhone technologies. A variety of providers will step up to use those APIs to deliver the payment acceptance service to merchants and consumers. Apple have already announced that Stripe will be the first payment platform to offer SoftPOS on iPhone to their business customers, including the Shopify POS app. Additional payment platforms and apps will follow later this year.

Why do payments people see this as such a big deal? After all, there have been SoftPOS solutions on Android for a while (eg, Phos). Well, as always, it’s not just because of Apple’s massive market share, but because Apple’s entry into the market validates the segment. Small businesses, micro enterprises, gig economy workers around the world are going to see this and start using their mobile phones to take card payments.

There are half a billion Apple Pay users worldwide (half of all the iPhones out there, basically) and they are people with money to spend. Having said that, not all of them use it. US figures seem to show that only around one in twenty Apple Pay-enabled iPhone owners actually bother to use it in store, but that’s because (I suggest) it doesn’t offer them anything over using the contactless credit card that are used to using: it doesn’t combine the payment with loyalty or coupons, for example, which merchants are doing with their own apps.

(Rather interestingly, Apple Pay use is much higher in the UK than it is in the US, which is presumably related to the general popularity of contactless payments in the UK, where more than 90% of all card payments are already contactless. )

Contactless Chess

What if Apple succeeds in getting traction on the merchant side as well as the consumer side? The guy who fixed my Mac recently probably takes half a dozen payments per day, and his iPhone is never far from his hand. Why not just tap my Apple Pay on his Apple Paid (or whatever they will call it) and whether the payment is for £1 or £1,000… that’s it. No need for dongles and, because Apple Pay uses CDCVM, no need for PIN pads or PIN-COTS either.

(Tapping phones together to pay isn’t new, by the way. Anyone here remember Bump? Back in 2010, PayPal used the Bump API to allow PayPal app users to initiate transfers by physically colliding their phones. PayPal later dropped the functionality from its app and Bump – funded by Y Combinator, Sequoia Captial, Andreessen Horowitz and many others – went on to launch a standalone BumpPay app a decade ago.)

If you think this is something of interest only to cards nerds, you are wrong. Apple are playing contactless chess and are a few moves ahead. Right now, payments run over the decades-old card rails to implement decades-old payments that were invented in a time when consumers, banks and merchants were not permanently connected. I might wave my Apple Pay, contactless card or payment ring over a terminal and feel like I’m living in the future, but deep down below there are ISO 8583 messages, clearing and settlement.

Extending this thought further, you have to wonder whether Apple will stimulate stakeholders to just forget about the hello-1950s payment cards and hello-1970s terminals completely? As has been clear from the day of the Mobeewave purchase, if Apple have both the consumer and merchant side, they could in theory bypass traditional payment schemes and banking infrastructure, and process their own payments (Apple Cash or Apple Coin, who knows!) or trigger payments via open banking APIs.

Now that’s where things get interesting. Remember, this is all about identity: it’s all about Apple knowing that Merchant Alice has requested a payment and Consumer Bob wants to complete it. And when you know who the counterparties to transactions are, the entire rest of the payments business is just about updating some spreadsheets (or blockchains).

Darlene Honey

As Alastair Johnson wrote here in Forbes a couple of year ago, merging payments and ID gives the industry a means to solve a number of significant problems in the payments sector (eg, fraud) as well as opening up the doors to a major new wave of innovation. Indeed. Just as Apple makes life easy for me by making up an alias identity for me to use at web sites, they could just as easily make up an alias identity for me to use in shops and thus protect my privacy across the universe and the metaverse.

Merchants want to know who you are so that they can connect you to their loyalty schemes and give you personalised service. Customers want to know that the merchants are real and that someone has verified them before they start taking money! Think about what this might mean in practice for the typical consumer… I go to the Osage Beach farmers market, excited to buy some of Darlene Snell’s delicious organic honey. She holds out her iPhone and I tap it with my iPhone and Apple provide both the payment token necessary to complete the transaction together with an alias email address that goes into the SME app that Darlene is using.

This means that she gets her money and a unique identifier and can later send me special offers, news about developments in the organic honey world and a collection of delicious honey recipes. Darlene gets a valuable entry for her CRM database and I get delicious honey, comfortable in the knowledge that the Snell’s don’t know who I am, where I live or what my bank account is.

I have no inside information of the breath of Apple’s POS plans, of course, but it seems to me that if you think this is about making cards a little easier to use at the farmer’s market, you are not paying attention.