It’s easy to assume Apple Pay is one in a long line of disruptive innovations from the master of serial disruption. But this time that’s not the case. Apple isn’t behaving as a disruptor here; it’s acting as a reseller.
This seems like an easy distinction to spot, but that’s not always so. Like disruptors, resellers can enter an industry with a different business model and target customers unattractive to established firms. But they extend an industry’s distribution structure rather than disrupt it. So for instance, independent insurance agents (who, unlike an insurance company’s own agents, can direct customers to a wide variety of insurers in search of the best deal), act as an additional sales channel for the industry, particularly at the price-conscious margins, not as an disruptive alternative. They would be disruptive if they were selling insurance from a company new to the industry using an independent, low-cost distribution
such as direct to the customer, either by phone or online.
To illustrate this distinction, let’s compare how Apple launched Apple Pay and iTunes. The introduction of iTunes in 2003 was disruptive relative to the big four music-recording labels Universal Music Group, Sony BMG, EMI Group, and Warner Music Group. In classical fashion, iTunes targeted the industry’s least attractive customers — people who downloaded music online for free. What’s more, iTunes had a different revenue model, selling music per song, instead of per album, and positioned itself as a substitute product. Once you have the song you want, you don’t need to buy or listen to the rest of the album. As usually happens with disruptive companies, music labels didn’t react very aggressively to iTunes, if they reacted at all. By targeting one group of customers at a time and by making deals that Steve Jobs personally negotiated with recording labels, iTunes was able to slowly but relentlessly disrupt the entire music distribution industry, and today it enjoys a whopping 63% market share.
Surprisingly, the architecture of the payments industry looks a lot like the pre-disrupted music industry. Before Apple entered the scene, musicans wrote and performed songs, which were aggregated into albums and published by recording labels in the form of albums. These in turn were sold through retailers like Musicland, which needed to go through the music labels to gain access to the musicians’ work. In the payments industry, ordinary people put money into retail banks, which distribute their credit services through credit card companies, like Visa, American Express, and MasterCard, which likewise go through the banks to get access to their customers.
There’s no technical reason why the banks need to go through the credit card companies to offer credit services to their customers. So Apple executives could have negotiated with retail banks, just as it did with the recording labels, to launch Apple Pay. If it had, Apple Pay would have been a substitute for credit cards, and would truly be disruptive to the credit card industry. Instead, Apple negotiated with the credit card companies, which is why you need to introduce your credit card number, instead of your bank account number, to configure the application. That merely positions Apple Pay at the end of the exisiting credit distribution value chain, as a reseller for the credit card companies.
Unsurprisingly, credit card companies are thrilled with this deal. If Apple succeeds at developing a standard for mobile payments, the credit card companies will retain all the bargaining power they currently have with banks to gain access to people’s money and can circumvent Apple at any moment. In the meantime, credit card companies are free riding on Apple’s efforts to convince us that Apple Pay’s key advantage is that it is easy to use.
Why does this matter? By launching Apple Pay as a reseller instead of as a disruptor, Apple is helping to perpetuate a credit card payment system that is obsolete, overly expensive, and absolutely unnecessary in the present day. The banks already have a money-transfer system, which they use to transfer funds from one bank’s customers to another. For historical reasons, the credit card companies have created a second, expensive, system just to process credit transactions. They fund that system through charges to merchants (as well as to a lesser extent through fees and interest payments from customers). But there are millions of small to mid-sized businesses in the world that cannot afford those credit card charges.
With iTunes and its pricing per song, a whole new population of consumers was able to buy music in a way that was more affordable. If Apple had negotiated with retail banks to get access to their money-transfer infrastructure, Apple could have introduced Apple Pay as a disruptor, instead of as a reseller. If it had offered a different pricing model to retailers (or had chosen not to charge vendors at all), it would have transformed the payments industry, extending credit dramatically. Unfortunately, launching Apple Pay as a reseller makes it just a free experiment for credit card companies, which are benefiting from Apple’s efforts with nothing to lose and everything to win.