The Monetization of Instant Payments

Apple recently announced an integrated Buy-Now-Pay-Later (BNPL) solution called Apple Pay Later which will tentatively launch in the U.S. in spring of this year. After the payment wallet on the customer side, the acceptance solution for the merchant side, its peer-to-peer (P2P) solution and the credit card, Apple is now officially entering the original credit business – even if initially limited to the U.S. market, as with the Apple Card. 

This is made possible by Apple’s significant acquisitions, which helped the company expand its own capabilities in the financial sector (such as the takeover of Credit Kudos from the U.K.) and with the BNPL product – contrary to all expectations not with Goldman Sachs and MasterCard – but for the very first time acts itself under its own license. Apple Financing LLC does not (yet) have a full banking license, but it has all the necessary permissions to process BNPL.

The boundaries between POS and eCommerce are increasingly disappearing. "Integrated" and "invisible" payments are increasingly reaching our everyday lives. Concepts such as Amazon Go may still seem exotic or even futuristic today, but background payments have been established at Uber since 2009. FreeNow (formerly Mytaxi, a mobility “super app” based in Europe) has also switched to this model since 2021. Many retail shops are also converting, which begs the question: if customers apparently trust the taxi driver to collect the right amount, why not the supermarket cashier, bartender or hairdresser? Conventional payments will not disappear overnight, but classic POS payments could become less important in the foreseeable future. 

Is it necessary to fully monetize these payments?

Payment traffic is primarily a commodity for banks and only profitable to a limited extent. However, the customer contact and data points are essential for cross- and up-selling and serve as the data basis for promoting further products and services. Banks generally continue to regard payment transactions/payment channels as original products and are always looking to monetize payment transactions directly – or at least ratify them financially via the interaction with other financial products.

For Apple and others, on the other hand, payments are not a product but a feature of their hardware- and software-based ecosystem. The main goal of these products is not to generate revenue – though that is a welcome side effect – but it’s to help maximize customer loyalty and contact points.

For example, if when searching for the nearest pizzeria via Google Maps, customers could pay for the order directly with one click via Google Pay, Google Pay may not be a revenue stream for Google, but it reinforces the need for merchants to be present in the Google ecosystem, which ultimately brings Google advertising revenue.

Now as Apple prepares to move into the BNPL market through its subsidiary Apple Financing LLC, seamless, integrated payments will become more ubiquitous, and the move itself should be viewed as a shot across the bow of the financial industry.

So, how can retail banks push back?

Most banks will likely try to take an opportunistic approach when it comes to integrating payments solutions. This means they won’t likely have a clear strategic direction to guide their decision-making. It’s akin to saying, “If everyone else is doing it, maybe I should, too.” While this type of approach may be common, that’s not to say it doesn’t come with risk: once integrated payments have reached a critical mass in the market, the possibility to make a decision to go in any other direction simply may not exist, limiting the ability of the bank to build a competitive advantage. The decision to be opportunistic can almost be viewed as a lack of a strategic vision, and as such should not be viewed as a viable strategy, and as such should be avoided. That said, there are two options banks can take in their approach to payments:

Embrace Competition
In this approach, the bank avoids off-the-shelf products where possible and creates their own alternatives. Even today there are (still) opportunities for banks to launch products that are functionally superior to existing offerings. Examples of this could include a token management feature, which allows the end customer to choose which wallets and cards hold a digital image of the card and use it as they see fit. Or perhaps it’s the integration of virtual disposable cards and complementary card management and monitoring features. The point is the potential to positively differentiate in terms of functionality therefore exists but requires a certain agility and adaptability.

What really determines success in this approach is relevance to the end customer and relevance to the merchant, especially in terms of cost. Any solutions offered by the bank must also provide a seamless, superior user experience, without which can make convincing customers to adopt the bank’s solution over the competition’s nearly impossible.

At the same time, current market movements also represent an opportunity: numerous regulatory bodies across the globe are pushing for instant payments standardization, opening the doors to powerful alternatives to established card schemes and the classic POS business. These more traditional payment methods are increasingly being displaced in favor of remote transactions. To play in this space, banks will need to develop or acquire the necessary technological implementation capability. For those banks that have a sufficiently large customer base, the costs of developing these capabilities in-house may be legitimized.

Partnering
This option calls for banks finding ways to support payments products in partnership and to position them profitably for themselves. For organizations focused on optimization and generating returns without incurring large development costs, or controlling costs during periods of difficult market conditions, this may appear to be a viable option. However, it should be approached with caution. Since Apple at least is trying to operate in the finance context without partnerships, the question arises as to whether this is a realistic option at all – and if so, certainly only for a few well-positioned banks.

However, the market movements touched on above could also mean that Apple Pay and the like will have to be adapted over time. For example, Apple Pay today no longer triggers a card transaction via a terminal, but an instant payment via request-to-pay (R2P). There are many elements in the value chain where a bank could position itself as a processing partner. Beyond that, there are still the challenges of regional regulation and the resulting opportunity – no one provider can address this comprehensively on a global scale.

In addition, banks will also need to take into consideration the expected restrictive specifications of the payments solution in such a "partnership.” This will require a strong commitment to the provider as well as a correspondingly cost-optimized processing.

At the end of the day

To "overtake" Apple and other FinTechs and win back the customer interface is possible, but time is of the essence. Therefore, actively designing partnerships and synergistic business models could be promising, at least for some market players. However, the most common approach in the market currently – that of making opportunistic and thus inconsistent case-by-case decisions regarding payments products – only plays into the hands of the product providers in the long run and thus poses strong risks for the local financial industry. It is therefore urgently necessary for banks to reflect on their own strategic positioning and to make correspondingly consistent decisions.