Should Bankers Fear Apple’s Future Growth Strategy?

Jim Marous:
Hello, and welcome to Banking Transformed, the top podcast in banking. I'm your host, Jim Marous, Owner and CEO of the Digital Bank Report and Co-Publisher of The Financial Brand. Bloomberg recently reported that Apple is launching an initiative codename Breakout, to bring more financial services capabilities in house. It is believed that Apple wants to own the entire payment supply chain, minimizing external vendors and partners touching consumer data, thereby reducing cost and improve the customer experience. This would also allow them to compete more directly with platforms like Square, PayPal, Google, and Klarna. We are fortunate to have Dr. Efi Pylarinous, global FinTech influencer based in Switzerland, on the Banking Transformed podcast. She will discuss why Apple has announced a Breakout initiative and several other payments related services and partnerships, and whether Apple aims to become a bank.

Jim Marous:
Apple's FinTech ambitions have not really been a very big secret. They've been dropping several clues over the last couple years, suggesting that adding more Apple native payments and financial services components is part of a larger strategy. One that could lay the groundwork for Apple as a financial ecosystem player, or certainly having payments leadership. That said Apple's track record in payments hasn't been as great as many people assume it is. According to research, 94% of U.S. consumers who could use Apple Pay to check out in the physical store still don't. To help peel this back, we have Efi Pylarinous, a FinTech influencer and global strategist. Efi, thanks for being on the show today, to sort some of these things out. Can you share with our audience why Apple may be making increased overtures in the payments and financial services spaces.

Efi Pylarinou:
Jim, thank you so much for having me with you today. I'm I'm delighted. Apple, there's so much talk out there, will it become a bank? What's happening? So many announcements and really it just triggered for me a deep look into why is this happening? Why are they doing this? I'm glad that we have the time to discuss this. For me, we have to take a step back and look at Apple, it's the first $1 trillion company, right? Market value. Its revenues are 130 billion, what does that mean in terms of payment fees? That's about $2 billion worth of payment fees. Just to put things in perspective. Let me add another number, App Store sales or transactions or value is over $500 billion. This is huge. We're not talking about Apple Pay. Don't think Apple Pay, think Apple as an ecosystem. What player are they? They're not just the first trillion dollar company, they are the number one online retail commerce platform.

Efi Pylarinou:
Honestly, Jim, I didn't know this before the recent announcement. I thought honestly that it was Amazon, but looking into the figures and trying to understand what has triggered this sudden, I would say, we have so many announcements around payments from Apple. It's not only Breakout, it's so many other things and I'm sure we'll have the opportunity to discuss them. At a very high level, this is not about Apple Pay, this is about Apple, the company, the ecosystem, and where it's going.

Jim Marous:
Yeah. You mentioned that whole dynamic about the eCommerce size of Apple, and we forget about the App Store, but we also forget about the fact that a high percentage of their sales of devices is done online. So it's the eCommerce play for their devices, it's eCommerce play for all their products and services and software, but their App Store is a machine. What's interesting is their partners get twice as much money in return for sales there than an Amazon partner for instance gets on their sales. Again, we keep on thinking as Amazon is being the eCommerce king, but when you look at Apple, it's amazing how much is done. And so of it is done in services and in technology and in software, not in hard devices, the products per se. You had an extraordinarily strong blog on Apple in the last week. I suggest to everybody look under Efi's name and pick up that great article she wrote on it on LinkedIn. In that article, you connect the dots with an Atari video game called Breakout. Could you tell us a story and other related stories that relate to that?

Efi Pylarinou:
Yeah. I love stories, Jim. The initiative as we all know of Apple, of building their own payment rails is called Breakout. But Breakout is no random name, it was a video game that was actually very successful that Steve Wozniak with Steve Jobs worked on and launched exactly in 1976, which is the year that the Apple company was founded. Actually they included the clone version of this video game, which is those video games of the '70s with the bricks. They included it in the first version of the iPod. For me, this is not any random name, Breakout. I want to tell you a really related story that is not in the gaming world, but is related to Apple, actually two stories. One is, did you know that Apple tried to buy Square in 2014, when square was value that $2 billion and Apple offered them a price of $3 billion? So 50% up and Square refused. Amazing.

Efi Pylarinou:
Why do you think that Apple in 2014 wanted to buy Square? Fast forward to today and connect it to their Tap to Pay offering, which is essentially a software version of what Square is doing with their Square dongles and enabling merchants to do that. A third story and we'll connect that is that four years ago, Amazon launched a Square dongle like Square, exactly the same in black color and was offering it to be bought by the merchants at a 30% lower price and with full customer service that Square didn't have. They competed basically directly with Square, what happened, the end of the story? They were not successful at all. They decided to shut down the Amazon dongle after two years, and what they did is they sent all the customers, the Amazon customers that were using the Amazon dongle to Square.

Efi Pylarinou:
What is important to understand is that Amazon that dongle did not succeed, why? Because it wasn't an ecosystem play. It didn't have the ecosystem that Square had around that hardware. To connect all these dots, it's all about the ecosystem. Apple its moves that seem disconnected, Breakout initiative, the Tap to Pay partnerships with Adyen and so on, their own ecosystem place, building within the ecosystem and strengthening the ecosystem. Of course, there's economics and we should talk about that, the costs.

Jim Marous:
Yeah. To that point, you followed Apple for quite some time, and as with many of the quite obscure announcements by Apple, you believe it's best to follow the money. Can you connect the dots a little bit on how the interchange fees today play a role in the latest announcement? That may be the biggest part of the announcement where they're really trying to change the dynamics of how the cost of delivery needs to be adjusted.

Efi Pylarinou:
Yeah, that's a good point because with all the embedded finance and all the partnerships, the FinTech partnerships that are happening in the market, we forget to ask ourselves, how are the interchange fees split among all the entities that are involved in whatever deal? You have a tech company or an eCommerce company and then you have a bank or a banking as a service provider, you have the card issuers, all these entities obviously are going to share these interchange fees. There is a usual split of who gets what from the interchange fees, but in the case of Apple, it is very well known that they don't follow the usual standards, so they always try to negotiate better fees and so on. What I found in my research, and as you mentioned, I was discussing in my latest article is that there was a conflict really brewing between Apple and the card networks, Visa and MasterCard. Why?

Efi Pylarinou:
Because the banks, the U.S. banks were pressuring the card networks to stop sharing interchange fees with Apple, for recurring payments. Apparently Visa and MasterCard were ready to implement that change. What that means is they had prepared a special token that would block sharing interchange fees when there were recurring payments. Now that is significant, especially because it is clear from the figures that Apple is trying to move towards more subscription services, more recurring payments, especially in their software business. If we look, Jim, at the numbers, roughly would say that revenues are 80%, a little bit more from hardware and 20% from software, but that 20% is double from last year. So it was approximately 10%, these are rounded figures. What is clear is that Apple wants to increase the mix of software versus hardware services for many reasons, one of them is that the margins in the software part are much higher than in the hardware part.

Efi Pylarinou:
I also think there're other reasons, and the reason is that if you look at the way digitization across industries are evolving, we are going towards a world where hardware is becoming smarter and in a way is tomorrow's software. So there's more to be offered in the software and the service business rather than the hardware business. In Apple's case, even if you look at the geographic split of their revenues, there're many big areas like India, for example, where they don't have enough presence, they would try to increase their presence. In those countries, I think that they will try to increase sales by offering bundled hardware and software packages, especially in credit poor countries, but also for businesses. For businesses, it makes a lot of sense to offer them more hardware and software services as a bundle. What that means is that Apple, as an ecosystem needs to have the flexibility to offer what I would call more contextualized and personalized payment experiences.

Efi Pylarinou:
How does that sound to you? You know a lot about what that means in the financial world. I don't see Apple as trying to become a financial services provider, but I do see them as one of the most successful experienced companies being more interested and more focused on these bundled software, hardware services with contextualize personalized payment experiences.

Jim Marous:
It's interesting, you talk about those payment experiences and it even goes deeper than that. I think Apple's a trusted name and they've done a lot of things recently around privacy and other areas that really make it even more of a consumer play, a consumer product company that people tend to love, but they give more and more reasons to love the experiences. That's really, when you talk about engagement, when you talk about building loyalty over time, you need trust. You need to be on the consumer side, and you have to prove that you're trying to do things on behalf of the consumer. I think to your point, taking over some of the back office of payments makes it so they can control the experience even more than they have before at the same time as lowering their costs, which ends up in many cases, especially with Apple, there tends to be a trickle down of the effect to that where the consumer's going to benefit from that reduced cost as well. But Apple has had other recent announcements.

Jim Marous:
They took over Credit Karma, or they acquired Credit Karma out of the UK, which is like an open banking ecosystem play in the payment space. They also had announcement around Tap to Pay and Adyen, and what's interesting when you look at this, does it appear to you that they're trying to be a competitor to Square, or is it more of a consumer play or a merchant play from your perspective? And where do you see this whole payments ecosystem going for Apple at a time when, as we said at the very beginning, Apple Pay has really not been despite Mr. Cook's announcements on ongoing base by how successful it is? The fact that people can do it, they are not doing it at the POS level with Apple Pay. How do you see this all playing out from the standpoint of trying to build this ecosystem, is it more of a customer experience play? Is it more of a revenue play?

Efi Pylarinou:
I really think that this is an ecosystem play. They're really trying to grow this dual ecosystem that is really the backbone of what Square has done. Think of it, they have a retail consumer ecosystem, if you want, and a business ecosystem that start with the small businesses and has moved up the scale, and they've connected those two and continue to connect and strengthen them. I see Apple doing something similar with their ecosystem and at the same time, changing their business model in terms of monetization and bundled packages of hardware and software. For me, that's it, plus they want to be able to increase their presence and their business in certain areas. As I mentioned, India is a very good example, where they can penetrate those markets with a different mix of offerings. So again, an ecosystem play.

Jim Marous:
Efi, what's interesting is we talk about Apple wanting to become a better ecosystem play in the payments area, but really at the end of the day, we're talking about data and insights. Every payments transaction creates more insights that Apple can use in an overall ability to maybe get into commerce, to get into other financial services and do other things as much as any other player in the tech marketplace and in the banking marketplace. The amount of insight that they collect on a daily basis, even with the app site I put in and pay for on a regular basis, there's more, more knowledge about who I am, what I like, what I use. They know all of that, and by taking more of this inside, they really get a positioning where they're going to know the consumer as well, or better than any other player.

Jim Marous:
So, is there a chance that in one sense, they could be biting the hand and feeds them, trying to break up with many of the FinTech partners that provide back office services for them today? There may not be a big deal there, but do you foresee challenges that they may face because of these fragmented relationships now?

Efi Pylarinou:
Well, Jim, Apple is not known for being excellent in partnerships, their reputation there is fairly poor, and they're also known for not following industry standards. If you think of it, on the one hand, there are different stance in terms of privacy of data in the phone industry has served them well. They have built and earned the trust because of that. On the other hand, honestly, I don't think that what they are planning to do, and we don't know details about Breakout. We see the other initiatives with Adyen and Tap to Pay and so on. I don't think that they will break up with Goldman, for example. Because I'm sure that, first of all, it's been a successful partnership and it really doesn't interfere with this vision that we discussed earlier about building a dual ecosystem with the merchants and being able to implement different bundles of hardware and software services and offering flexible payment experiences, depending on the region, depending on the group.

Efi Pylarinou:
I think that they will keep that. I don't see it as a problem. Actually because of their earned trust in the privacy data aspect, I think that Apple is going to be, or have rather a lot of potential in the metaverse space. I might be taking you elsewhere on a tangent, but we do have to ask ourselves this question, the metaverse is here in a way, right? We have other big tech companies positioning themselves. I'm sure that Apple must be thinking about what the opportunities are there and where they want to position themselves. Starting with what I would call programmable money, which in its first version means customized programmable payment experiences, I think that Apple is very well positioned to offer that. Let's not forget that they recently integrated with MetaMask.

Efi Pylarinou:
This is their first step into crypto land. Basically, if I understand correctly, you can buy with Apple Pay, which is connected with whatever credit card up to $400 through MetaMask, which is the doorway to dapps, decentralized apps in the crypto world, you can buy crypto. I can see there that Apple is experimenting and then we have to ask ourselves, what's going on with games? What position will Apple take in the future of gaming? Up to now they have been very conservative and not growing the business there, what are they going to do with in-app purchases? There're games that my 19 year old son is buying through the App Store and the games, will the Apple Wallet, for example, enable my son to keep his games in there and those are the digital assets that he owns and will Apple be earning fees for that and so on? There's a lot going on here and I think Apple really understands the fact that they should controlling the processing of transactions within their ecosystem while they're growing and evolving their ecosystem.

Jim Marous:
Finally, Efi, when we look, let's say three years down the road, will you see Apple as simply a slightly different version of itself today? Will we see it as a super app? Will we see Apple as a primary payments provider? Will we see them as a financial services company or something else?

Efi Pylarinou:
I don't think it will be a financial services company. I don't think that people talk about it becoming a bank or anything like that. I see it shifting the mix between hardware and software and smart hardware. Changing that mix in what we know today, this 80/20 will become 50/50 or 40/60, and there they're going to be introducing new experiences that are in the convergence of hardware and software. I don't know how it will look, but I can imagine smarter services that we already know are out there. I can think of how they're going to integrate their self-driving cars as a smart ecosystem there too. It's in that direction that I see them evolving.

Jim Marous:
It's interesting from my perspective, I keep on looking, not just at the money, but at the data. There's no organization that probably knows more about my personality, what I like than Apple, especially because of all the apps that I have that have I've acquired through my Apple relationship. So they not only know what I buy, which just what Amazon knows. They not only know my financial relationship because of what I've got through my Apple card, but more importantly, they know what my interests are on a daily basis. They know I'm a bike rider because I download this Strava app. They know I'm into fitness and measuring my performance over time [inaudible 00:28:43] of other apps I've downloaded. They understand my interest in sports because of my downloading of sports apps. When you look at this all together, the ability to position themselves as a super app is probably as strong as any player out there, that's the direction they want to go.

Jim Marous:
As you said, and I agree wanting to be a bank it's not just about the data, it's about the regulations and they don't want to get deeper into the regulatory environment. But they're probably better positioned than most from the standpoint of how they view privacy, how they view the customer relationship and their customer experience. I think you really nailed it at the end. I think the biggest play we have here is they are continually striving to give a better customer experience based on what they know about you and what they can take care of themselves. If they own the process that's in the back office, they can make sure the experience is great, which makes it so that your engagement goes higher. I think one thing is for sure, I go to my phone on an ongoing basis and download new things. My engagement level with them is probably highest as any player I have in the marketplace.

Jim Marous:
I think this will serve them well in the payments area and in the super ecosystem area, as they look at what they want on to do next. They won't lose, they're sitting on a whole lot of cast as well that plays into that. Efi, thank you so much for being on the show today. I really appreciate your time.

Efi Pylarinou:
Thank you so much, Jim, for the opportunity to chat with you today.

Jim Marous:
Thanks for listening to Banking Transformed, winner of three international awards for podcast excellence. If you enjoy what we're doing, please give us a review on your favorite podcast platform. Finally, be sure to catch my recent articles on The Financial Brand and the research we're doing for the Digital Bank Report. This has been a production of Evergreen Podcasts, a special thank you to our producer, Leah Longbrake, audio engineer, Sean Rule-Hoffman, and video producer Will Pritts. I'm your host, Jim Marous. Remember until next time, never underestimate the power of a brand that people love as opposed to simply accept.