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Digging a Wider Moat: Apple Shifts to Loyalty

Wallet

Apple eschewed banks for a retailer focus onstage at their Worldwide Developers Conference (WWDC) when it spoke to payments. I sense this is an intentional shift – now that stateside, you have support from all four networks and all the major issuers – Apple understands that it needs to shift the focus on signing up more merchants, and everything we heard drove home that note. That includes Square’s support for NFC, as well as the announcements around Kohls, JCPenney and BJ’s. MasterCard’s Digital Enablement Service (MDES) – opposite Visa’s Token Service – is the tokenization service that has enabled these partnerships specifically through MasterCard’s partners such as Synchrony – (former GE Capital) which brought on JCPenney, Alliance Data which brought on BJ’s, and CapitalOne which enabled Kohls.

Within payments common sense questions such as: “Why isn’t NFC just another radio that transmits payment info?” or “Why aren’t retailer friendly payment choices using NFC?” have been met with contemptuous stares. As I have written umpteen times (here), payments has been a source of misalignment between merchants and banks. Thus – conversations that hinged on NFC have been a non-starter, for a merchant that views it as more than a radio – and instead, as a trojan horse for Visa/MA bearing higher costs. When Android opened up access to NFC through Host Card Emulation (HCE) and networks supported it through tokenization, merchants had a legitimate pathway to getting Private label cards on NFC. So far, very few indeed have done that (Tim Hortons is the best example). But between the top two department store chains (Macy’s and Kohls) – we have a thawing of said position, to begin to view technologies pragmatically and without morbid fear.

It must be said that Google is clearly chasing Apple on the retailer front, and Apple is doing all that it can, to dig a wider moat by emphasizing privacy and transparency in its cause. It is proving to be quite effective, and Google will have to “apologize beforehand” prior to any merchant agreement – especially now that retailers have control over which wallets they want to work with – and how. This control inherits from the structures set alongside the Visa and MasterCard tokenization agreements – and retailers with co-brand/private label cards can lean on them through their bank partners. Thus, Google has to focus on two fronts – first to incentivize merchants to partner so that they bring their cards to Android Pay, while trying to navigate through the turbulence Apple has left in its wake, untangling the “customer privacy” knot.

For merchants, at the end of the day, the questions that remain are about operating costs, and control. Does participation in MDES and VEDP tokenization services through bank partners, infer a higher cost for play – for private label cards? I doubt if Apple’s 15bps “skim off the top” revenue play translates to Private Label, especially when Apple’s fee is tied to “Fraud Protection” and Fraud in Private Label is non-existent due to its closed loop nature. Still – there could be an acquisitions cost, or Apple may plan a long game. Further, when you look at token issuance and lifecycle management costs, they aren’t trivial when you take in to context the size of portfolio for some of these merchants. That said, Kohls participation affords some clarity to all.

Second, Merchants want to bring payments inside apps – just like they are able to do so through in-app payments in mobile, or on online. Forcing consumers through a Wallet app – is counter to that intent, and undesirable in the long scheme. Loyalty as a construct is tangled up in payments today – and merchants who have achieved a clean separation (very few) or can afford to avoid it (those with large Private label portfolios that are really ‘loyalty programs w/ payments tacked on’) – benefit for now. But soon, they will need to fold in the payment interaction in to their app, or Apple must streamline the clunky swap. The auto-prompt of rewards cards in Wallet is a good step, but that feels more like jerry rigging vs the correct approach. Wallet still feels very v1.5 from a merchant integration point of view.

Wallet not Passbook.

Finally, Apple branding Passbook to Wallet is a subtle and yet important step. A “bank wallet” or a “Credit Union wallet” is a misnomer. No one bank can hope to build a wallet – because my payment choices aren’t confined to a single bank. And even where banks have promoted “open wallets” and incentivized peers to participate – response has been crickets at best. On the flip side, an ecosystem player that touches more than a device, a handful of experiential services in entertainment and commerce, a million and a half apps – all with an underpinning of identity, can call itself a true wallet – because they are solving for the complete definition of that term vs pieces of what constitutes it. Thus – Google & Apple.

So the re-branding while being inevitable, finds a firm footing in payments, looks toward loyalty and what lies beyond. Solving for those challenges has less to do with getting there first, but putting the right pieces in play. And Apple’s emphasis (or posturing – depending on who you listen to) on privacy has its roots in what Apple wants to become, and access, and store on our behalf. Being the custodian of a bank issued identity is one thing. Being a responsible custodian for consumer’s digital health, behavior and identity trifecta has never been entirely attempted. It requires pushing on all fronts, and a careful articulation of Apple’s purpose to the public must be preceded by the conviction found in such emphasis/posturing.

Make sure to read our perspective paper to see why emerging channels call for advanced fraud identification techniques