How Apple Might Become The Largest Merchant Acquirer on Their Way to Eliminating Payments Margin

With the Chinese chip shortage and the FBI raiding PAX, anyone in the payments acquiring business know that hardware has not only become hard to come by, it’s also ridiculously overpriced.

Seriously, look at this for a second.

This is a Lane 7000 device from Ingenico.

All it does is accepts cards with a color screen.

It retails for $600.

$600!

You know what other hardware you can buy for $600?

The new iPad mini runs $500.

A conventional iPad with 64GB of storage costs a meager $329.

Not into mobile devices?

Then how about you buy an entire desktop workstation with 8GB of memory and 1TB of storage for less than $600?

Worse still is the fact that many of these payment devices are thrown away.

Whenever you accept payments, your processor’s frontend has to approve the device. Want to switch processors because service sucks, or you’re just flat out getting boned?

Well, better get ready to pony up for overpriced hardware, because unless you can re-key those terminals (which processors make hard to do so you have a large CAPEX expense in moving off their processing), you’re going to have to buy all new ones.

But it looks like Apple might save the day here.

Apple is a huge, public company.

Being a public company, Apple needs to show 10% annual growth.

That gets pretty hard when everyone in the world who can own an iPhone already has one.

It’s doubly hard when your market cap is nearly $3T.

10% growth is $300B a year.

$300B is a massive number.

That’s like minting 2.5 Snowflakes a year.

But you know what makes a lot of money and takes minimal effort?

Payments processing.

Especially on SMB merchants who can’t do math.

And wouldn’t you know, Apple has tens of millions of devices deployed in the pockets of SMBs all around the world.

Apple bought a company called Mobeewave for $100M in 2020.

Not-so-secretly, the intent of the purchase was to turn every Apple device into a payment terminal.

The implications in this shift are HUGE. Let us break this down.

Bye-bye payment devices

First, say goodbye to overpriced payment devices.

Merchants will save billions a year in useless spend, and the planet will get cleaner as purposely-limited payments hardware doesn’t go in the trash.

Bye-bye acquirers

Second, merchant acquirers will be shitting their pants.

From a technical perspective Apple can allow any Apple application to call Apple Payments on their device. Apple could become their own acquirer – written directly to the networks if not on top of Adyen or Stripe – to power these payments.

Here’s an example.

Imagine you use the Square app as a merchant. Time for a customer to checkout? They can open some Apple Pay app on their iphone, pay with a QR code, and the revenue bypasses Square entirely.

Zoom.

Don’t feel bad for the acquirers though, because they’re basically a bunch of crooks.

It got so bad that Europe decided to regulate the fees the processing ecosystem could charge in 2015. And it worked: the fees the card networks and issuing banks made plunged.

According to the European Central Bank, the total interchange fee paid by acquirers to issuers for consumer card transactions within the EU was about 7.8B EUR, and even after the effect of the IFR market cap, where interchange fees decreased by 2.7B EUR, the revenue pool for interchange fees is still significant…

Buuuuuut…

One interesting finding from the study is that while Issuers have lost revenue of 2.95B EUR per year. Acquirers, instead, have GAINED revenue of 1.2B EUR coming from lower interchange fees. Not surprisingly this is the part of the value chain that Apple targets through their newly acquired POS capabilities.

https://www.finextra.com/newsarticle/36346/what-does-apples-acquisition-of-mobeewave-mean-for-banks

Just like the Durbin Amendment in America, the acquirers passed on zero of the cost savings that came with a regulated lower interchange.

See?

Crooks.

They won’t go to zero as fast as the hardware manufacturers, but this will be a huge hit.

Bye-bye issuing revenue

Apple is just going to become its own bank. They partnered with Goldman Sachs to issue their Apple Card through Mastercard, but it’s not that hard to spin up a banking division to issue your own cards.

Especially when you have $200B of cash on hand and Goldman’s market cap is $125B.

Apple will undoubtedly entice consumers to use Apple’s payment products through their payment interfaces.

Maybe it’s more rewards, like cash back or pre-access to the latest Apple releases. Hell, it could be something as easy as preferential booking times at a Genius Bar.

Competing issuing banks needs to be nervous.

Bye-bye network revenue and conventional payments ecosystem

The issue with ACH as a payment method is that it’s really inconvenient for card present transactions.

In ecommerce, multiple players are embedding payment buttons at checkout that take advantage of instant bank-to-bank transfer schemes promulgated by countries looking to get off the expensive, anachronistic card payment rails of the 1960’s.

And we think Buy Now, Pay Later (BNPL) will just become another tool to move consumers off of card payments eventually.

But what Apple could do here is legitimately turn the mobile device into a consumer’s first choice for payments, much how UPI has ushered the change in India.

In this scenario why not just have a consumer connect their Apple bank account to their phone and eliminate the 3% tax altogether?

The only problem with this approach is that lends itself to a company with a data culture, and that feels much more like Google than it does Apple.

In our view Google is much better equipped to turn the data exhaust from this new payments ecosystem into products that are more enticing than those Apple could invent.

It’s not that Apple couldn’t build competing products, it’s just that given their stance on privacy (which, let’s be honest, is a total ruse to push more of their overpriced hardware since they aren’t reliant on customer data – like Google and Facebook – to make earnings) the trophy will go to Google before Apple.

Still, neither of these companies like supporting small merchants, and that’s a huge cultural shift relative to their status quo operations.

Either way, the conventional payments ecosystem can’t support these assaults forever, and it looks like we’re going to see what Apple has been working on in their next iOS update.