Apple Payments and Smart Watches: Just the Beginning

on September 9, 2014

Over the past few years, Apple has been building a loyal user base. Zero sum game analysis of market share is irrelevant to the market dynamics playing out in mobile. So when it relates to Apple, my analysis centers on two fundamental buckets. One bucket is, “What is Apple doing to add compelling, useful, and convenient new features for their existing customer base?” The other bucket is, “What are they doing to expand their customer base?” Most of what Apple launched today falls into bucket number one.

Bucket number one is significant because Apple has not only some of the most loyal customers on the planet but also the most profitable. Apple customers generally spend more in the iOS ecosystem on average than those in the Android ecosystem. It is with this point in mind that Apple getting into payments is significant.

Mobile Payments

I’ve been saying for a while we are on the cusp of the era of digital identity. We will increasingly move our analog banking, payments, identification, and more into the digital realm. Apple has been laying the hardware and software foundation to help their customers transition from the analog era of payments and identity to the digital one. Apple took the first step in this direction with Touch ID last year with the launch of the iPhone 5s. They have taken another step now with Apple Pay.

In years past, the timing was simply not right for NFC. Even though the technology was there, the infrastructure was not. That is all poised to change now that Apple is including NFC in both their new iPhones. Furthermore, it seems the retail environment is poised to embrace and advance the retail experience, thanks to Amazon, and NFC along with Bluetooth LE beacons are poised to play a role.

Why is this important? First some US credit card statistics:

  1. Total number of credit card transactions in the U.S. in 2012: 26.2 billion ((2013 Federal Reserve Payments Study))
  2. Total number of credit card accounts in the U.S. as of Q3 2013: 391.24 million, vs. 457.64 million in Q3 2003 ((New York Federal Reserve, Quarterly Report on Household Debt and Credit, November, 2013))
  3. Average value of a credit card transaction in the U.S. in 2012: $94 ((2013 Federal Reserve Payments Study))
  4. Total value of credit card transactions in the U.S. in 2012: $2.48 trillion ($2.21 trillion for general purpose cards and $270 billion for private label cards) ((2013 Federal Reserve Payments Study))

On top of those statistics, Apple shared today that, in the US, there are 12 billion dollars a day in credit card transactions which adds up to over 4 trillion dollars per year. Credit card payments are an everyday experience for many consumers. It is also one which feels antiquated in the digital age. Apple is looking to change that. It will take some time but the plastic credit card is dead. With Apple Pay, Apple is looking to be positioned in the middle of this environment by adding layers of security, simplicity, and ultimately, eliminate as much friction as possible from both the in-store and e-commerce transactions. This is good for Apple, their customers, and their ecosystem.

Apple has laid a foundation,and seeing as the US market appears to be on the cusp of a transition to adopt NFC at many retailers, it will be interesting to see if and how Apple meaningfully advances this market. As I said before, Apple has the right customer base to do it.

The Apple Watch

The big surprise was the release of the Apple Watch. Apple is looking to redefine the smartwatch category and until we all get to try the product sometime early next year, we will debate whether or not they have. I’ve been continually skeptical of the smartwatch category. What the job is for the mass market for a smartwatch has been the central tension for me. I’ve noted notifications alone can not be the central value of the smartwatch. In other words, not just duplicating what is on your phone.

Without having much time with the Apple Watch, I think a few points are worth noting on the product. Firstly, and this has been said by many, this is just the 1.0 product. The Apple Watch of today will look and behave dramatically different in three years or less. Second, software is the key. Over the past few weeks, as a watch from Apple seemed to become inevitable, I have been thinking about how this product evolves. More importantly, could–through software–a smartwatch eat the smartphone? Marc Andreessen loves to talk about how software eats the world, but in many cases software allows hardware to eat other hardware. So could Apple evolve iOS and, through natural user interfaces like voice and a number of other advancements, enable the wearable to eat the smartphone? Is the watch/wearable really the evolution of the category? It is a valid question to ask at this point whether or not my 9 year old daughter will use a smartphone when she is a teenager. But again, the point all comes down to software.

Apple has created an architecture for their developers and their ecosystem where they are placing their bet on the smartwatch with the developer community. This is no different than what they did with the iPhone. Giving developers the SDK and APIs now for the smart watch is essential as they build momentum and create a robust ecosystem by the time it is available next year.

While I’m stil not sure what the mass market appeal of smartwatches is today, it is clear that, if they do appeal to everyone, assuming that is indeed the goal (maybe it isn’t), how the software, apps, and functionality advances will be the key driver of this category. This is where Apple’s third party developers come in, and if any company has the third party developers to advance this category it is Apple.

One thing Apple added to the watch that no other smartwatch has is NFC to create the ability to pay for things with just the watch. This could be a key differentiator. We addressed this value proposition specifically in this post, where we learned first hand how Disney World was deploying wearables for payments, and the level of convenience it provided. Payments and health are likely to be cornerstones of Apple’s wearable strategy.

The Brand

The intersection of liberal arts and technology includes fashion. Apple appears to be taking their brand more into this realm. Think about the names for two new products. The Apple Watch and Apple pay are not the iWatch and iPay. Where did the “i” go? Apple is clearly thinking long term and is making the Apple brand even more prominent.

Apple understands this and they began to address it with “Apple Watch”. By releasing three different collections, and a range of bands to choose from, Apple is just scratching the surface in designing a wearable for the masses. Fashion is subjective and for Apple to truly bring fashion to tech, they will need to make even more collections. But this is just the beginning.

The intersection of liberal arts and technology extends well beyond desk, lap, and pocket computers. There are so many directions it seems Apple can now go. Their future is up to them and it will be interesting to see where they go and who follows.