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November 18, 2015

Apple and Peer-to-Peer Payments

The Next Battleground of Disruption

It’s become a cliché to suggest that Apple is playing a different game from everyone else in the Tech industry, but their new foray into peer-to-peer digital payments is an indication of how they continue to enter into – and disrupt – new markets.

My colleague, Charlie Schoenthaler, last week wrote about how Venmo has become a verb among Millennials. This week, however, the key part of speech related to Venmo isn’t a verb, but rather an expletive – Oh $hit!

Apple Upends Payments Space Again

Apple, you see, is developing a new product that will allow consumers to send cash directly to each other, integrated into their ecosystem, straight from their bank accounts. I haven’t seen details of how it works yet, but my guess is that it will be as easy as sending an iChat message to your friends, family, or colleagues.

But this won’t just disrupt Venmo, which is itself a disruptor. With the incredible scale and the network effects that Apple has with its devices; Apple has the power and the possibility to disrupt the entire digital payments space — that means Venmo and Square Cash, but also includes VISA, MasterCard, and AMEX.

How? The credit card business is based on the premise that merchants pay a small percentage – roughly 3 percent – for the ability to accept credit card payments. And for a long time, Apple was happy to play nicely within this ecosystem. All of our iTunes accounts, for instance, are linked to our credit cards. Even the commercial digital payment service that Apple rolled out last year had the credit card at its foundation.

But if the stories about a new Apple peer-to-peer payment service are true, it could be the biggest game-changer since Bank of America rolled out the general purpose credit card (which later became VISA) in 1966.

Apple’s size and scale makes a peer-to-peer system a direct threat to the existing structure. Today, it will be a simple matter of sending a message to a friend. But who knows what they will do tomorrow? It doesn’t take a rocket scientist to figure out how to adapt a fully scaled out peer-to-peer system to the commercial world. Consumers would love it. Merchants would absolutely love it (since they could save up to 3%). And it could turn credit card companies into modern day Blockbuster Videos. It won’t happen overnight, but it could very well happen over the next decade.

Apple has the power and the possibility to disrupt the entire digital payments space — that means Venmo and Square Cash, but also includes VISA, MasterCard, and AMEX.

To be sure, Apple’s entrée into this market is not without great peril. There is much more at stake than with Apple Maps. It’s their first foray into a highly regulated market. There would be major hurdles to overcome, not the least of which is preventing fraud and protecting consumers. That’s the expertise of the credit card companies. Getting security and privacy right, as we’ve seen, is incredibly difficult and incredibly important.

And what will this mean for the Politics of Disruption?

The market for these services are so big and so lucrative that there is likely going to be a massive battle, fought on the business, policy, legal, communications, and regulatory levels, all at the same time.

The disruptors will argue that we need to allow innovation to flourish and that requires a level playing field; while the disrupted will make arguments about safety and security and use all legal, policy, and regulatory means at their disposal to try to out-move and out-match its opponents.

Each side will need to develop a core position, be thought leaders in the space, and execute a top-to-bottom business strategy that takes advantage of its strengths, and defends against its weaknesses.

We’ve seen these battles in other spaces – bookselling, music, video, transportation, hotels and more. Now, these fights are moving into the financial and health care sectors, where the stakes are higher and the battles will be fiercer.

Hold on to your iPhones because this one is going to be a bumpy ride.

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