A Brief History of Apple’s Payment Revolution
Though Apple only launched its brand new credit card in the U.S. last week, the company has been gearing up for a move into finance for more than 5 years now.
Apple (NASDAQ: AAPL) is nothing if not an enigma. Like its sometime rival Amazon (NASDAQ: AMZN), the company has conquered one sector after another throughout its lifespan, often working in secrecy for years before announcing a world-changing technological innovation. With the release of its new state-of-the-art Apple Card, many investors, commentators, and fans are looking back on the impact the iPhone-maker has had on one industry in particular: the highly lucrative payments space.
Apple’s involvement in the world of payments formally began back in 2014, but the company had been preparing for its big debut for years beforehand. After acquiring a number of startups and filing patents related to payments, Apple took a leap in 2013 by joining forces with three of the biggest names in the industry: Visa (NYSE: V), MasterCard (NYSE: MA), and American Express (NYSE: AXP). All three companies had been independently looking at replacing the traditional information-sharing transaction system with single-use digital ‘tokens.’ Apple, with its enormous brand power, as well as its unmatched presence in hardware and software, proved to be the perfect unifying force.
Even more impressively, the tech giant went on that summer to approach some of the biggest banks in the U.S. to help bring the venture to fruition. The negotiations were highly secretive: one major client, JPMorgan Chase (NYSE: JPM), set up a bunker-like “war room” in its headquarters where 300 people worked tirelessly on the project, of whom only about a third knew the partner was Apple.
The result of all of this, Apple Pay, was unveiled by CEO Tim Cook in September 2014. At the company’s iPhone 6 event, Cook described the traditional card payment process as outdated and insecure, relying as it did on a “vulnerable magnetic interface” that made loss and theft far too easy. Apple’s alternative allowed customers to pay directly with their devices through Apple Wallet, a corresponding mobile app. The initiative gained worldwide attention, and within a few years, the likes of Starbucks (NASDAQ: SBUX), KFC (NYSE: YUM), and J.C. Penney (NYSE: JCP) had all begun accepting Apple Pay.
But Cook’s ambitions didn’t end there. As Apple Pay began spreading throughout markets across the globe, the company ramped up its focus on security. The move to ‘tokenization’ that had started with the Visa/Mastercard collaborations has been developed and perfected over the years to produce an unprecedentedly secure form of payment. Simply put, a ‘token’ refers to the substitution of sensitive information, such as one’s banking details, with non-sensitive data. Apple’s brilliant innovation was creating a single-use credit card number that could safely verify a transaction while at the same time, owing to its ephemerality, proving to be all but useless to criminals.
A key motivation for Apple’s investment in payments -- as well as in health, gaming, news, and streaming -- can be found in a company-wide directional shift. Last year’s fourth-quarter earnings report revealed that the firm had seen its first decline in profits and revenues for over a decade. A slowdown in iPhone sales, as well as a spate of antitrust complaints and investigations, caused widespread concern that the brand’s glory days were over. In March of this year, however, Apple confirmed rumors when it officially announced that it would intensify its push into services. To phrase it simplistically, the company was saying that from now on it would focus less on selling gadgets and more on amassing subscribers.
The release this month of the Apple Card is one of many steps in this direction. It also adds a new layer of security to digital transactions, and -- thanks to the product’s elegant platinum design that recalls premium cards issued by banks -- brings the six-year payment venture full-circle, at least in design terms. The extra security comes from the ease with which an Apple customer can cancel a card if he or she encounters a problem. Any old-fashioned cardholder will know the pain of losing their primary source of payment, the frustration of calling their bank to report the loss, and the worrisome wait to have a replacement sent to them. The Apple Card eliminates these concerns. Since an Apple credit card number is essentially virtual, a user can revoke a corrupted card within seconds through their app and have a new number issued immediately. It has been well-received so far, with one commentator calling it ‘insanely great.’
In addition to this, Apple is well-positioned to gain a serious market share in the space. The company revealed recently that there are 1.4 billion active Apple devices in circulation. As a user base, this places Apple between the twin payment giants, Visa (with 3.3 billion cards in circulation) and MasterCard (875 million).
While the card represents a major step forward for Apple Pay, the company is still encouraging customers to use their device as their primary form of payment. For one thing, the card is expensive to manufacture, and for another, it can be quite easily damaged. The company was teased on social media for warning physical cardholders that they’ll need to take special care with the product, including keeping it was from “hard surfaces or materials” and “potentially abrasive objects.” In order to ensure that the card is used minimally (and that Apple devices are used more commonly), Apple is offering customers a superior cashback incentive for paying with a device.
Tim Cook turned heads back in January when he announced that Apple’s “greatest contribution to mankind” would take place not in mobile technology but in the realm of healthcare. This may prove to be true, but the revolution it has stirred in the world of digital transactions and payments may well end up being a very close second.
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