Weekly reading – 22nd October 2022

What I wrote last week

Apple’s pricing strategy

Business

Kroger has to win over Wall Street and Washington on its Albertsons deal – here’s how it plans to do that. It’s entirely plausible that there are operational synergies between the two companies. For instance, instead of having two purchasing departments of 1000 people, the combined company may only need 750 after the acquisition. The combined forces can likely result in more bargaining power and lower item expenses. What I seriously doubt are 1/ whether the two companies can gel together culturally and 2/ whether they have the capability to pull off advertising. Cultural mismatch is among the biggest reasons why acquisitions or mergers fail. The bigger a transaction, the bigger this risk. Regarding advertising, yes, it is a high-margin business. But these two grocers hardly have experience in delivering the kind of advertising that can convince investors that splurging out $25 billion is the best use of their capital. We’ll see.

($) Even After $100 Billion, Self-Driving Cars Are Going Nowhere. “Our driverless future is starting to look so distant that even some of its most fervent believers have turned apostate. Chief among them is Anthony Levandowski, the engineer who more or less created the model for self-driving research and was, for more than a decade, the field’s biggest star. Now he’s running a startup that’s developing autonomous trucks for industrial sites, and he says that for the foreseeable future, that’s about as much complexity as any driverless vehicle will be able to handle. Self-driving companies have fallen back on shortcuts. In lieu of putting more cars on the road for longer, they run simulations inside giant data centers, add those “drives” to their total mile counts, and use them to make claims about safety. Simulations might help with some well-defined scenarios such as left turns, but they can’t manufacture edge cases.

World’s top chip equipment suppliers halt business with China. The measures sound draconian, but in order to stop China from growing its semiconductor industry, I believe this is what it takes. At least, it will bring the Asian country to the negotiation table

Shein and the Tech Cold War. If you heard about Shein but don’t know much about the company, read this!

NFL Sunday Ticket still up for grabs as Apple pushes for flexibility with game rights. As an Apple shareholder, I do think Apple is doing the right thing by holding its grounds. Apple TV+ is still a minor player in the streaming market and likely unprofitable at this point. Tacking on an NFL package that costs arms and legs wouldn’t make it a profit center overnight. Hence, there needs to be a strong business case for Apple to shell out the kind of money that NFL is demanding. If there is no win-win solution, I’d rather see Apple leave the negotiation.

Apple freezes plan to use China’s YMTC chips amid political pressure. One of the most valuable companies in the world put on hold a product plan which it has been working on for years because of geopolitical conflicts between the US and China.

($) Coming Soon on Netflix: A New Netflix. Content released in batches, instead of the binge model. Focus more on quality instead of quantity. Crackdown on password sharing. A new ads-supported tier. A significant change in culture. A new Netflix is starting to form. Bears will say that because Netflix is doing all the things it said it would never do, that’s a sign of a company in decline. Bulls will argue that the new changes will allow Netflix to compete in a hyper-competitive streaming market. Either way, the company is unlikely to regain its former valuation or the “darling of Wall Street” position that it once held

Is the Uber, Lyft and gig economy battle over workers nearing its end game? It is unreasonable to force companies to pay full-time compensation to workers who want the flexibility of the gig model. Regulators on the left love to enact rules to protect workers’ interest. The intention is great, but they need to find a common ground here. Right or wrong, the fact remains that many workers love the freedom that the gig model offers. Any new regulation needs to take that into account. Plus, additional expenses will eventually be passed onto consumers. Unlikely there is competition as the biggest players like DoorDash, Uber or Instacart will have the scale advantage over smaller companies.

Exclusive: Amazon’s attrition costs $8 billion annually according to leaked documents. And it gets worse. A damning report on employee attrition problem at Amazon. It paints a picture of a company that has serious control issues. Andy Jassy’s reign has been littered with challenges so far. Stock rout, slow growth, miscalculated planning in terms of hiring and warehouse capacity, departure of experienced veterans and leaders, and now this. I am a fan of Amazon and a shareholder myself, but this really gives me some food for thought on the outlook of the company

Source: Twitter

Other stuff I find interesting

New York seems to have a weed store on every corner. None of them are legal. A fascinating read on the unnecessarily complicated situation regarding the legality of marijuana selling and buying in New York.

Why high speed rail hasn’t caught on. The economics of high speed rail (HSR), the bumpiness of the Earth, the technical challenges of building and maintaining safe trains are the main factors why HSR is not yet popping up in many countries

Minerva Lithium uses absorbent material to change the way we extract lithium. The tech here looks very promising, given the importance of lithium in how we advance technologies and how harmful the extraction of lithium is environmentally

Stats

Almost 25% of the world’s sea bed has been mapped

75% of the Time We Spend With Our Kids in Our Lifetime Will Be Spent​By Age 12

As of Q3 2022, Apple Pay captures 44% of in-store mobile wallet transactions

How Americans spend their money
Source: Visual Capitalist

Apple Card will let users save rewards in a high-yield Savings – Apple is building a Super App in the US

Per Apple today:

Apple today announced a new Savings account for Apple Card that will allow users to save their Daily Cash and grow their rewards in a high-yield Savings account from Goldman Sachs. In the coming months, Apple Card users will be able to open the new high-yield Savings account and have their Daily Cash automatically deposited into it — with no fees, no minimum deposits, and no minimum balance requirements. Soon, users can spend, send, and save Daily Cash directly from Wallet.

Apple Card users will be able to easily set up and manage Savings directly in their Apple Card in Wallet. Once users set up their Savings account, all future Daily Cash received will be automatically deposited into it, or they can choose to continue to have it added to an Apple Cash card in Wallet. Users can change their Daily Cash destination at any time.

To expand Savings even further, users can also deposit additional funds into their Savings account through a linked bank account, or from their Apple Cash balance. Users can also withdraw funds at any time by transferring them to a linked bank account or to their Apple Cash card, with no fees.

Apple’s savings account marks the second time Apple and Goldman Sachs tag team to launch a financial product (with Apple Pay Later, Goldman Sachs’ role will be less prominent). Apple will take care of the customer experience while the iconic bank will handle the banking side. It makes perfect sense. Who is better than Apple in crafting a great user experience on devices that they manufacture? Apple also does not have any appetite in becoming a bank. Speaking from personal experience, I can tell you that while it’s great for consumers that banking is highly regulated, such regulatory oversight and scrutiny constitute a great deal of overhead for banks.

From Goldman Sachs’ perspective, they have ambition in growing their retail banking business. First, it’s Apple Card. Then, they got the GM portfolio and are said to be launching a T-Mobile credit card soon. Goldman Sachs has the drive and tools to handle the complex and cumbersome banking regulations. However, legendary as an investment bank as Goldman Sachs is, it will have to spend a lot of money on creating a consumer-friendly image as well as on acquiring customers.

The race to book new checking and savings accounts becomes increasingly expensive. Chase rewards new qualified customers who open a new Savings account with $300. I have seen similar offers from other financial institutions. My guess is that Goldman Sachs will have to compensate Apple for every Savings account opened through the Wallet app. The freedom that Apple mandates on the product for their customers means that it will be much more difficult for Goldman Sachs to forecast the cash flow and deposits. On the other hand, whoever opens this Savings account is less likely to close any time soon and Goldman Sachs won’t have to deal with gamers (who signs up to something just for the bonus and then leaves). If there are 10 million Apple Card users in the US, Goldman Sachs could potentially sign up thousands of Savings accounts in no time, due to this partnership.

From a consumer perspective, what are the benefits? Goldman Sachs already has a Savings product with 2.35% APY. I think this new Apple’s Savings account will have a similar yield. More importantly, it is the convenience and customer experience that will be the deciding factor. Instead of going through a bank’s complex application process, users can sign up for an Apple’s Savings account on their phone. Additionally, users can move money in and out of the account seamlessly at any time and instantly. With incumbent banks, it will take several days. We should not underestimate the impact that instant gratification has on user satisfaction.

Apple is building a Super App in the US?

Here is what Apple is currently offering:

  • Hardware: excluding very old models, AirPods and other headsets, all other Apple devices in the wild are capable of conducting transactions. And there are A LOT of them in the US. Whether it’s in stores or online, consumers can use their devices to make or receive a transaction
  • Wallet App/Apple ID: most Apple users use one Apple ID and all information is automatically updated and synchronized across devices, provided that they are connected to Internet. In other words, transactions and rewards earned from the physical Apple Card or a Macbook will show up on an iPhone without any action from a user
  • Apple Pay: arguably the most popular checkout option at counter and online on the market
  • Apple Card: an Apple-branded credit card that offers 2% cash back on everything with Apple Pay as well as 3% at Apple and a few other retailers. Users can also put their Apple purchases on installments with Apple Card. Rewards from Apple Card will be automatically turned to cash in Apple Cash that can be redeemed any time
  • Apple Pay Later: a new yet-to-launch BNPL service that will allow users to break a service into 4 installments with no interest or fees
  • Apple Cash: a service that enables Apple users to send money to and receive money from other people. Like a digital checking account
  • Apple Tap To Pay: this feature allows merchants to turn their iPhones into a payment terminal. A consumer and a merchant only need to put their iPhones close to one another and boom, the transaction is done
  • Order tracking in Wallet: starting with iOS16, Apple users can track their orders right from the Wallet app

In Super Apps, I wrote:

The term Super Apps is generally credited to Mike Lazaridi, the founder of Blackberry, who defined it as “a closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience”. In laymen’s terms, a Super App is an application that offers various services on one interface. While the mix of services offered by Super Apps varies from one to another, the common denominators of these apps are 1/ they are all two-sided networks popular with both merchants and consumers and 2/ they all began their journey by being excellent in one function before branching out to others. 

It all started with Apple Pay in 2014. After almost 10 years, Apple Pay is accepted at many merchants in the country and around the world. It’s in the hands of millions of consumers who own Apple devices. Now, other pieces are in place to make Wallet and Apple devices something that consumers will use every day in “a seamless, integrated, contextualized and efficient experience”. I don’t know if the Apple executive team already had this vision a decade ago, but if they did, kudos for patience, long-term vision and execution.

Weekly reading – 1st October 2022

What I wrote last week

The push to grow the complex Bundles by Disney

Decoupling – A great tool to analyze business strategies and disruption

Business

Instacart Offers Grocers the Future of Grocery in a Bundle. Instacart becomes a much more interesting company with these innovations. Pushing a heavy cart around and waiting in line forever just to check out is not a great customer experience. The Caper Cart sounds like a game changer for grocers, shoppers and Instacart. These products are so different economically than delivery services. This helps diversifying Instagram, adding revenue stream and reducing risks.

Why India’s small sellers still don’t trust Amazon. The relationship between Amazon and Indian sellers is so strained that I struggle to see how the company can succeed in this important market.

What Chinese media reveals about Shein’s secretive operations. “There are two main kinds of suppliers: “free on board,” those that make simple designs they haven’t devised themselves, and “original design manufacturers,” those that do both. They all feed into Shein’s sprawling manufacturing execution system (MES). The designer-suppliers will find pictures online and send a selection to Shein’s internal buyers for consideration; the buyer and their manager settle on a final pool. Once samples have been received, there might be two, or even three, rounds of changes before manufacturing can commence. (The entire time, everything needs to be recorded in the MES — materials, pricing, even chat logs — something suppliers balk at, because, if the deal falls through, all the information sits in Shein’s records, and there’s nothing to stop them from producing it elsewhere.). hein is ruthlessly efficient when it comes to evaluating its suppliers, according to analysis by Zhongtai Securities. A scoring system sorts the wheat from the chaff. Timeliness of procurement and delivery, stocking and delivery, rate of defects, and the success rate of new products make up 40% of a supplier’s score. The remaining 60% is based on order volume. They are then tiered into five levels, and the bottom 30% of the lowest tier are culled.”

The Ascendancy of Ahold Delhaize. “Ahold Delhaize USA has been strengthening its position as it looks to take its hyper-local value proposition national. After blockbuster revenue years in 2020 and 2021, Ahold Delhaize has demonstrated that it can keep growing by focusing on omnichannel innovation, prioritizing value and expanding its assortment of high-quality, low-cost private-brand products. “

($) The Unstoppable Rise of Aldi in Britain Shows No Sign of Slowing. “A recent visit to Purley, south London, found the parking lot outside Aldi boasting BMWs, Land Rovers and Porsches and shoppers choosing Aldi over nearby branches of Lidl and Sainsbury, as well as the upmarket Waitrose 10 minutes away. An extra 1.5 million customers have visited Aldi over the past three months. When sales were up by at most the low single digits at most UK supermarkets, they rose 19% at Aldi and 20.9% at Lidl. Part of the strategy is economy of scale. Aldi has about 2,000 key products in store, compared with as many as 30,000 in some large rival supermarkets. By stocking just one ketchup, for example, Aldi has a tight supply chain and can avoid pricing rows like Tesco’s recent spats with Kraft Heinz Co. and Mars Inc.

How Bryan Lourd became one of the most powerful people in the history of Hollywood. A phenomenal story. Bryan Lourd worked his way from a mail room to being one of the most powerful people in Hollywood.

How Arm conquered the chip market without making a single chip, with CEO Rene Haas. I am not a fan of Nilay or The Verge’s new website look, but this is a great interview on one of the most important players in the chip industry. Especially when Arm is not really a household consumer name

Amazon dominates the $113 billion smart home market — here’s how it uses the data it collects. Amazon has a major trust issue because no matter what the company says, I don’t think consumers trust Amazon to do the right things with their data.

Other stuff I find interesting

Why the Rush to Mine Lithium Could Dry Up the High Andes. “With the world’s car fleets transitioning to electric propulsion, Argentina, with reserves of up to 60 million metric tons, according to government estimates, is well-positioned to profit from the lithium rush. Lax regulation and low taxes make its part of the Lithium Triangle — in the northwestern provinces of Jujuy, Salta, and Catamarca — “especially attractive for foreign investors,” according to Lucas Gonzalez of the National Scientific and Technical Research Council (CONICET), a government agency in Buenos Aires. The country could soon become the world’s second-largest lithium producer, after Australia, and the largest producer from evaporative mining. But every ton of lithium carbonate extracted from underground using this cheap, low-tech method typically dissipates into the air about half a million gallons of water that is vital to the arid high Andes. The extraction lowers water tables, and because freshwater often sits on top of salty water, this has the potential to dry up the lakes, wetlands, springs, and rivers that flourish where the underground water reaches the surface.

Charging cars at home at night is not the way to go, Stanford study finds. “The move to electric vehicles will result in large costs for generating, transmitting, and storing more power. Shifting current EV charging from home to work and night to day could cut costs and help the grid

New ways to make more sustainable choices. I’d love to try out these new features, especially the updates on recipes

iPhone 14 Pro Review: No phone is an island. I like Jason’s review of iPhone 14 Pro. A few friends of mine belittled Apple for the lack of innovation. I mean, that criticism is fair when it comes to the lower lineup iPhone 14, but the Pro version is much further ahead with a lot of cool features and innovation. It’s also great financially for Apple, to sell more expensive and higher margin phones, especially when there is shortage of components.

How Apple Pay works under the hood? An example of how complex payments are under the hood and how far technology has come to enable such complexity in mere seconds

Stats

Biden’s plan to cancel student loans will cost taxpayers $400 billion, among the most expensive initiatives his administration puts forward

6000 children died on EU roads in ten years

Amazon commits to hiring 5,000 refugees by the end of 2024. A big YES to this!

Weekly reading – 14th May 2022

What I wrote last week

Uber Q1 FY2022 Results

Book Review – After Steve: How Apple Became A Trillion-Dollar Company And Lost Its Soul

Business

Newest trend in delivery apps: move from cars to e-bikes. Micromobility is great for short-distance deliveries in a busy city like San Francisco. This is how Grab Food, Shopee Food and others manage deliveries in Ho Chi Minh City. Consumers order food within 3-4 kms most of the time. Traffic jam is a feature of the city. If couriers used cars for deliveries, there wouldn’t be any food delivery business! eBikes are also environmentally friendly. I hope to see more innovation and governmental subsidies in this space

John Gruber on the European Commission’s calling Apple Pay an illegal monopoly. I like John’s takes on Apple-related things. He is experienced and more importantly nuanced and fair. “This passage, as well as much of the rest of the E.C.’s “statement of objections”, seeks to dismiss the hard work Apple has done to make Apple Pay successful. Yes, NFC is an industry standard, and Apple Pay is, in part, built on top of that. But before Apple Pay, NFC was hardly used, even though Android had supported it since 2011. When Apple Pay launched in late 2014, its support for the existing NFC infrastructure was so good, it worked with many credit card terminals that had no explicit support for “Apple Pay” specifically. Apple Pay was so easy to use people were using it at retailers who weren’t even Apple Pay partners. That’s not a credit to NFC, which had been in place for years. That’s a credit to Apple. I honestly don’t understand where the E.C. sees anticompetitive behavior with Apple Pay. What I see is market share dominance stemming from the hard work of designing better integration into iOS and iPhones and educating users about the feature. How else could the iPhone’s share of NFC payments so far exceed the iPhone’s share of mobile phone sales? I’m not saying Samsung and Google suck at this, per se, but Jennifer Bailey’s team at Apple is really good, and perhaps just as importantly, really diligent about this sort of thing.”

Congress is ‘moving too slowly’ on semiconductor supply crunch, Commerce Secretary says. The dysfunction and ineffectiveness of Congress, especially in this matter, will cost America a lot both in the short and long term.

Buy Now, Pain Later? An interesting read on BNPL and specifically Affirm

Don’t forget Microsoft. Business schools around the world should teach students about Microsoft and its revival by Satya Nadella.

Business Travel Rebounds as Execs Choose (Real) Face Time Over Zoom. I, for one, am curious about whether business travel will come back to the pre-pandemic levels and how it will come back. During the pandemic, articles were written on how business travel would never be the same. Anecdotally, my colleagues at work traveled to Omaha, Nebraska for monthly meetings and quarterly department reviews as if nothing had happened in the past two years. China remains a question mark. Because they remain persistent on the zero-Covid strategy, they are not a viable destination at the moment. And I hope that the prolonged fight with Covid does not give other variants a chance to spring up. I think we have enough of a pandemic for, let’s say, the next few decades.

Inside the Collapse of CNN+, the News Channel’s ‘Apollo Mission’. The launch of CNN+ seems rushed and more like a political move by some executives than a savvy business initiative

How Gillette Embraced the Beard to Win Over Scruffy Millennials. Gillette went from demonizing beards to embracing them. After years of fruitless resistance and declining sales, they finally realized that their bread and butter product is no longer what men want. More than half of the men in the world don beard, including two-thirds of millennial men. Sensing that the tide they were going against was too strong, Gillette launched new beard-friendly products rolled into a line named King C. Gillette. A deviation from what the company is always known for, but a good strategic shift, I think.

Other stuff I found interesting

Could solar power solve Puerto Rico’s energy nightmare? I can’t imagine living in this day and age without electricity. Especially when that happens in a U.S territory.

Moon soil used to grow plants for first time in breakthrough test. This discovery inspires a lot of questions, possibilities and dreams

Cat Litter Could Be Antidote for Climate Change. I don’t know about you, but I don’t have “cat litter could absorb methane before it goes up in the air” in my 2022 bingo card. But it’s a nice surprise and discovery.

Stats

NYC subway ridership as of March 2022 is 60% of the pre-pandemic levels

Germany has 9% of all bitcoin nodes

“In 2021, U.S. podcast advertising revenues rose to $1.4 billion”

Only 50% of the time when a PayPayer user goes to a site that has PayPal does that user use PayPal

Weekly reading – 20th November 2021

What I wrote last week

My thoughts on Apple Business Essentials

What I think about Apple Pay & Apple Card

Good reads on Business

HelloFresh: Delivering on Process Power. This episode goes deep into the operational aspect of Hello Fresh. I certainly under-estimated it and its operational complexity.

Macy’s CEO, a department store veteran, fights to fit in the Amazon future of retail. Macy is an interesting case study in which its online presence is so valuable that activist investors want it to be publicly traded alone, separate from the physical stores. “Of the company’s 5 million new customers that came in over the second quarter, more than 40% came to Macy’s digitally, Gennette said on the earnings call. In an effort to capitalize on its most valuable customers — those who shop at Macy’s both in-person and online tend to spend three times more than those who only shop at one or the other — Macy’s has invested in data analytics so it can follow when and what they shop, then tailor incentive programs and product messaging to them.”

Breaking Down the Payment for Order Flow Debate. A good read on the payment for order flow debate and why orders on trading apps like Robinhood are halted when there is too much volatility.

Apple is sticking taxpayers with part of the bill for rollout of tech giant’s digital ID card. As an Apple shareholder, it is good to see the power that Apple wields against even the states. As a tax payer, I am quite concerned that the few participating states so far seem to give that much ground to a private company.

The end of “click to subscribe, call to cancel”? One of the news industry’s favorite retention tactics is illegal, FTC says. I am really glad that the FTC intervened to protect consumers. If you want an example of how governments can help citizens, this case is exhibit A.

Airlines Are Rewriting the Rules on Frequent-Flier Programs—Again. “The airline will make it possible to earn elite status without taking a single flight starting in March. Credit-card miles will count more toward status than ever before. Those who are true frequent fliers will get some added benefits, and business travelers who aren’t taking as many trips will be able to boost their status with their spending. Small-business owners and others who use their credit cards a lot now can be a top dog at American before they ever lift the buckle on a seat belt. Delta says it will automatically roll over status that SkyMiles customers have this year to 2022. In addition, it will pool qualifying miles earned this year and next together toward 2023 status requirements. Delta is also offering bonuses to qualify for elite-status tiers faster and is counting the flying that members do on award tickets toward status levels.” Another change that was encouraged by the pandemic. What doesn’t kill you makes you stronger, I guess.

What Went Wrong With Zillow? A Real-Estate Algorithm Derailed Its Big Bet. When you are in a business of risk management and become reckless and carried away by the pandemic, the consequences can be dire.

Stuff I found interesting

Japanese Philosophies That’ll Help You Spend Money Consciously. “Chisoku talks about being content with what you already have. Wabi Sabi talks about finding beauty in imperfection. As things age and decay, they become more beautiful. Mitate teaches us that every object has more than one purpose.”

New Zealand’s 180-million-year-old forest. “While most petrified forests are far removed from the modern forests that grow near them, Curio Bay’s petrified forest, which is a representation of an ancient Gondwana forest of cycads, gingkos, conifers and ferns, still has its descendants in the present-day forests found here. About 80% of New Zealand’s trees, ferns and flowering plants are native having evolved in isolation for millions of years.”

One of the World’s Poorest Countries Found a Better Way to Do Stimulus. “In Togo, a nation of about 8 million people where the average income is below $2 a day, it took the government less than two weeks to design and launch an all-digital system for delivering monthly payments to about a quarter of the adult population. People such as Bamaze, with no tax or payroll records, were identified as in need, enrolled in the program, and paid without any in-person contact.”

Stats

The state’s venture capital share has jumped from $300 million in 2016, to almost $3.1 billion in 2020 — 866%– according to Crunchbase. That makes it the state with the fastest growing venture capital rate.”

Drug overdose deaths exceeded 100,000 in the U.S in the 12 months ending April 2021

Out of 100 children born prematurely in Vietnam every year, 17 die in the first 28 days. My country has a long way to go in terms of public health.

Image
Source: Dave Ambrose

Thoughts on Apple Pay and Apple Card

In this post, I want to discuss Apple Pay & Apple Card

Apple Pay

Natively available on almost every Apple device out there, Apple Pay is one of the most popular mobile wallets on the market. In 2020, 92% of mobile wallet transactions funded by debit cards in the U.S were through Apple Pay. This level of popularity can mean a windfall for Apple because for every Apple Pay transaction, the company is reported to earn 0.15% of the volume. In Q1 FY2020, Tim Cook revealed that the annualized Apple Pay volume was at $15 billion. At 0.15% take rate, Apple earns around $22.5 million in extra revenue for, what I would imagine, a very high margin service. Even with that advantage, I believe that Apple Pay still has plenty of potential to realize.

First, the wallet feature is still absent in many countries in Africa, Asia and South America, where a large portion of the world’s population resides. As the adoption of Apple Pay ramps up, it should increase the total transaction volume and consequently some additional revenue for the company. The second lever lies in how Apple Pay is and can be used. As of now, it is most used in online mobile transactions. In-store mobile transactions just don’t gain enough traction as there are only 6 out 100 shoppers that use the service in stores, even 7 years after launch. I don’t expect the in-store trend to change in the future. Where I do see growth opportunities for Apple Pay, though, is in online web transactions. As more customers upgrade from old Macbooks and iPads to more modern versions equipped with Touch ID and Face ID, it will make Apple Pay for web transactions an easier and more seamless experience. Finally, Buy Now Pay Later (BNPL). The whole market is red-hot and Apple is rumored to be working on its own BNPL solution. The big advantage for Apple here is that the feature comes in the Wallet app, which comes natively on every single device. Users don’t need to download any other app to apply. As the concept of BNPL becomes more common due to the popularity of apps like PayPal, Affirm, Klarna or Afterpay, Apple will just ride the coattail and won’t have to spend much money and time educating shoppers on the service.

Of course, I’d be remiss if I didn’t mention that there are also headwinds to Apple Pay. Companies such as Shopify, PayPal, Square, Affirm and Klarna all want to be the go-to app & checkout options for shopping transactions. These companies are well-known in the U.S and many international markets, as well as have enough resources to truly compete with Apple on this front. Hence, it won’t be all rosy roads for Apple Pay, but I do expect it to continue to grow in the future. If PayPal can process over $1.2 trillion in annual payment volume, it’s possible that Apple Pay could rise to $100 billion in volume, meaning $225 million in revenue and almost pure profit for the company. Since there are 1.65 billion installed devices in the wild, $100 billion in volume would translate to less than $100 per device a year. It seems doable to me.

Apple Card

Apple Card is a co-branded credit card issued by Goldman Sachs. The mega bank is about to close the GM portfolio purchase in the next quarter or two. Hence, their credit card balance is mostly, if not entirely, from Apple Card. According to the latest quarter result, Apple Card balance was $6 billion as of September 2021, up from $3 billion just a year ago. In other words, the Apple Card portfolio doubled its outstanding balance in 12 months’ time. The size of a co-brand portfolio is often a private matter, but I managed to find a few as a reference for Apple Card

A portfolio’s outstanding balance changes from day to day. Therefore, these numbers may be very different from now. Plus, these companies have a different business model, brand name and card offering than Apple. Nonetheless, I do think growing a credit card portfolio to $6 billion in loans in two years is not a small feat.

Apple Card’s loans were $6 billion as of Sep 30, 2021. Source: Goldman Sachs

According to Experian and ValuePenguin, the average credit card balance in the U.S has been a tad more than $6,000 between 2019 and 2021. If we apply that number to the Apple Card portfolio, it means that the portfolio has a bit less than 1 million accounts. However, given that Apple Card doesn’t have a big signing bonus or intro offer and it can only earn 2% cash back when used with Apple Pay, I think that the average revolving balance is lower than $6,000. In fact, I think it’s very common that people just get an Apple Card because 1/ they want a nice-looking metal card and 2/ they want to put their big Apple purchase on installments. In the latter case, an Apple purchase should range from $1,000 to $3,000 in most cases. As a result I’d think that Apple Card’s average card balance likely ranges from $2,500 to $4,000.

Average Revolving Balance Per Account# of Accounts (in millions)
$2,5002.4
$3,0002
$4,0001.5
$4,5001.3
$5,0001.2
$6,0001

The number of accounts can determine how much money Apple can get from this arrangement with Goldman Sachs. In the cobrand credit card world, the issuer has to compensate its partner for leveraging its brand. The compensation includes a finder’s fee (a certain amount for a new account opened) and a profit sharing agreement which may be based on interest income or purchase volume, for instance. I have seen smaller brands command $60 per a new account. Hence, it won’t surprise me one bit if Apple can demand a three-digit finder’s fee from Goldman Sachs, given that Apple shoulders all the marketing efforts. At $100 per a new account, 1 million accounts brings in $100 million in revenue for Apple. Even if we factor in the marketing and reward expenses that Apple might incur, it’s possible that Apple can bring in more than the $100 million figure since we know nothing about the profit sharing part between them and Goldman Sachs.

In short, even though these two services have great potential and can bring in meaningful revenue and margin to Apple, given the size of the company, they won’t move the needle much. Instead, they are great value-added services that enhance user experience on Apple devices. With Apple Pay, transactions on every website or app that enable the service are so easy to process. With Apple Card, it’s likely the only product that come with no fees and installment plans every time you make a big Apple purchase. As long as Apple users remain loyal and attached to the company’s devices, these services will have the runway to grow. Remember that Apple Card so far is only available in the U.S.

Disclaimer: I have a position on Apple.

Weekly reading – 11th September 2021

What I wrote last week

I did a quick review to show which remittance services you may want to use to transfer money to Vietnam or India

My reservation on PYMNT’s study on Apple Pay’s usage in stores

Interesting articles on Business

Why the global chip shortage is making it so hard to buy a PS5. In the silicon manufacturing process, for the most advanced tool inside a fab, typically you’ll have hundreds of different tools. Actually in a large fab, like one you might see at TSMC (Taiwan Semiconductor Manufacturing Company), you’ll have thousands of these tools. And these tools are big machines that process these wafers and do various things. And most tools cost, starting with a couple of million dollars, to the most expensive tools are in excess of 150 million euros. In Asia, they’ll build these things in a year. They’ll move in equipment in the second year, get it qualified, running, by the end of the year. In the US, or in the West, it takes a lot longer, because we don’t have the same mentality they have in Asia. We’re going to do all the permitting, all the hearings, and all that stuff. So it wouldn’t surprise me if it took 50 percent longer to twice as long. Now, let me tell you why that’s a problem. Because to your second question, a modern fab these days, one of the closer-to-leading-edge ones will cost you $10 billion-plus for the smallest efficient scale, and a really efficient scale will probably cost you closer to $20 billion. Think about how much depreciation that can generate. In Asia, the mentality is every day, every hour this thing isn’t running costs me tens of thousands, hundreds of thousands, sometimes millions of dollars. I’ve been in Asia on Christmas Day, and there are people out there with jackhammers and pouring concrete because it was like, “Man, every minute this thing gets done sooner, we can start generating cash.” We do not have that mentality in the West.”

Companies Need More Workers. Why Do They Reject Millions of Résumés? A gap on a resume should not be used to disqualify a candidate immediately. Many need to take a break, whether it was because a family member was sick or it was for their mental health. A less-than-stellar historical record shouldn’t disqualify a candidate either. We all make mistakes and we all deserve chances. Plus, if someone has the necessary skills, does it matter where they got those skills? Does it matter if they don’t have a degree? We use software to evaluate hundreds, if not thousands, of applications a year. It’s understandable. But I do believe that we can write better software to accommodate hiring needs and give people chances.

The surprisingly big business of Library E-books

PayPal To Acquire Paidy. PayPal agreed to acquire Paidy, a BNPL provider in Japan, for $2.7 billion in cash. Paidy reportedly has 700,000 merchants and more than 6 million users. As PayPal itself already has more than 400 million users, this acquisition isn’t likely about inflating the user base. The second reason is likely capabilities. Paidy, which shoppers can use without creating an account first or using a credit card, has a proprietary machine learning models to evaluate credit worthiness of consumers. In other Asian countries, it’s not uncommon for shoppers to pay cash on deliveries for online orders. Perhaps this is something that PayPal wants to replicate in other Asian markets.

Australia’s Top Court Finds Media Companies Liable for Other People’s Facebook Comments. The Court’s argument is that media companies post articles to stimulate conversations and engagement through comments. Hence, they should be liable for such comments. I don’t think that line of reasoning totally lacks solid grounds. I mean, a company’s Facebook page is essentially its property where it has the ability to curate (with Facebook’s help, of course) and it should have some responsibility for defamatory comments taking place there.

Source: CNBC

Stuff that I found interesting

This wildly reinvented wind turbine generates five times more energy than its competitors. This proposal, if materialized, can generate power for up to 100,000 households with one station while reducing the waste that is usually seen with the traditional turbines.

A great series on the study of obesity

Stats that may interest you

Mobile transactions in Vietnam are expected to increase by 300% between 2021 and 2025

Apple has around 52% to 57% of the mobile game transactions market (page 138)

Even though Apple doesn’t have a separate P&L for its line businesses, the Court found that the App Store’s operating margin is approximately 75% (page 145)

Truths about that 6% of People with iPhones in the US Use Apple Pay In-Store

A new article from PYMNTS claimed that only 6% of iPhone users use Apple Pay in stores.

As someone who works in the credit card industry and a follower of Apple, I have a few points to make with regard to this article. Per PYMNTS.com

Seven years post-launch, new PYMNTS data shows that 93.9% of consumers with Apple Pay activated on their iPhones do not use it in-store to pay for purchases. That means only 6.1% do. After seven years, Apple Pay’s adoption and usage isn’t much larger than it was 2015 (5.1%), a year after its launch, and is the same as it was in 2019, the last full year before the pandemic.

That finding is based on PYMNTS’ national study of 3,671 U.S. consumers conducted between Aug. 3-10, 2021.

First, I am naturally skeptical of surveys. To properly design and execute a representative survey whose results you can use to project trends both an art and a science. In other words, it’s difficult and tricky. Without knowing the specifics of the surveys that PYMNTS used over the years, I can’t really say for sure that their data is 100% accurate or representative. For instance, did these survey represent the U.S population demographically? We all know that older folks tend to be more reluctant towards technology than the younger crowds are. What if some of these surveys were more skewed towards Baby Boomer or late Generation X?

With that being said, let’s assume that these surveys were properly designed and conducted as there is no reason to believe that they weren’t either. Still, there are some important context points that I’d love to discuss. The U.S is traditionally slow in adopting tap-to-pay payments, compared to other developed countries in Europe. Here is what Visa had to say at the RBC Capital Markets Financial Technology Conference back in June 2021:

Canada is almost 80% of all tap to pay of all face-to-face transactions, almost 80% are tap to pay. In Europe, it’s over 80%. Australia, it’s almost 100%. Across Asia, it’s over 50%. And in the United States, it’s now over 10% from basically a dead stop a couple of years ago. So right now in the U.S., we’re a bit over 1 in 10 transactions with tap to pay, 1 in 10 of all face-to-face transactions of tap to pay. About 350 million cards, last time I looked, 268 of the top 300 merchants, 23 of the top 25 issuers are issuing contactless.

What Visa essentially said there is that mobile wallet transactions in stores basically didn’t exist two years ago. The low adoption isn’t confined to Apple alone. It’s applied to all mobile wallets on the market. Hence, it’s not a surprise that only a small number of consumers used Apple Pay in stores. Since then, the tap-to-pay transaction share has increased a lot, but from contactless cards, not from mobile wallets.

The issuer where I work only introduced contactless cards in August 2019. The roll-out was gradual as we enabled the feature only on new cards and renewal replacements. Before August 2019, we saw contactless transactions make up only a low single digit percentage of all transactions. After the change, there was an increase in contactless transaction share, but it mostly came from contactless cards (as in you tap a plastic card against a card reader). It makes sense for several reasons: 1/ Using a plastic card, whether it’s debit or credit, is a habit. It’s unreasonable to expect consumers to change their habit overnight; 2/ To some consumers, it’s just not convenient to take out a phone to pay. During the pandemic, we all had to wear a mask. That contributed to the inconvenience as most Apple Pay transactions have to be approved by using Face ID (few iPhones in circulation are too old for Face ID); 3/ Sometimes, the card readers just don’t accept mobile wallet transactions. I personally experienced it myself several times when a technical glitch forced me to pull out my wallet and use my plastic. Even when card readers are to become more reliable & friendlier with mobile wallets and the pandemic closes out soon, the current habit of flashing a plastic card in stores won’t go away any time soon. It’s a painstaking process that will take quite a while and it’s not even a guarantee that it will change significantly at all.

The low adoption of mobile wallets in general leads me to my next point: how is Apple Pay compared to other wallets? The article by PYMNTS did bring up some comparison between Apple Pay and its peers:

Today, Apple Pay remains the biggest in-store mobile wallet player, with 45.5% share of mobile wallet users. Over the last seven years, the total amount of Apple Pay transactions at U.S. retail stores has increased from an estimated $5 billion in 2015 to $90 billion in 2021.

Although that growth is commendable, it is largely the result of more people with iPhones upgrading to newer models and more merchants taking contactless payments, both leading to a general increase in retail sales – 12.9% greater in 2021 than 2019. But to be successful, innovation must solve a problem, fix a source of friction or improve an experience that is so painful that consumers or businesses are motivated to switch.

The article is so focused on Apple Pay that it missed two important points. One is that Apple Pay isn’t Apple’s main business. It may well be in the future, but it surely hasn’t been since 2014. Why is it Apple’s fault that the adoption of tap-to-pay payments in the whole U.S is low? It’s not really reasonable to expect Apple to go all out and force a new habit on consumers when there is little financial reward. The other miss is that if only 6 out of 100 people used Apple Pay, which captured 92% of all mobile wallet payments using debit card in the U.S in 2020, what does it say for others? 1% or lower? Yes, 6% adoption is low for the most valuable company in the world, but in the grand scheme of things and in comparison with its peers, that figure suddenly looks significantly different, does it?

The last point I want to make is that it is NOT comprehensive and helpful to look at the mobile wallet share of in-store transactions. What about consumers who use Apple Pay or other wallets for online transactions? How many transactions do Apple users make using Apple Pay on their phones or through the App Store? How many transactions on web pages are through Apple Pay? Said another way, is Apple Pay more suited for online transactions than for in-store payments? And PYMNTS is judging Apple Pay on something that it’s not meant to address in the first place?

In short, I believe that this article from PYMNTS is useful to some extent as we have a reference with regard to in-store mobile wallet payments. However, the entire write-up lacks important context that can lead readers to misguided conclusions. My hope is that the whole conversion is more balanced now with what I mentioned above.

Disclaimer: I own a position on Square, Apple and PayPal.

My notes from 2021 Debit Issuer Study

Every year, Pulse, a Discover company, publishes a Debit Issuer Study, which covers the debit card landscape in the U.S. This year’s version is the 16th annual edition of the study and comprises of data from 48 financial institutions of different sizes in the country. If you are interested in the payments as well as financial services world, you should have a look at this study. Below are a few things that stood out the most to me, accompanied by some of my own comments

Debit spend per active account increased as growth in ticket size more than offset the decline in transactions

Unsurprisingly, stay-at-home orders last year curtailed debit transactions as stores were closed and folks were forced to remain at home. As a result, 2020 saw a decline of 2.5% in the number of debit transactions, the first contraction of the industry ever. Most of the damage took place in Q1 and especially Q2 before the use of debit cards recovered in the back half of the year. Compared to 2019, last year saw an increase in debit spend per active account, from $12,407 to $13,550. The increase resulted from 10.5% growth in ticket size despite the drop of 1.3% in the number of monthly transactions per active card.

Annual Spend Per Active Debit Card Increased In 2020 By 9.2%
Figure 1 – Annual Spend Per Active Debit Card Increased In 2020 By 9.2%. Source: Pulse

Whether issuers are subject to the regulated interchange cap determines their unit economics

For issuers with $10 billion in assets or more, they are subject to regulations that cap debit interchange rates. Before we move forward, let’s take a step back to revisit what interchange rate is. Every time a transaction takes place, the merchant involved has to pay a small fee to the bank that issues a debit/credit card that the consumer in question uses. The fee is calculated as % of the transaction value and usually determined by networks like Visa, Mastercard, American Express or Discover. In this case, the Federal Government caps the interchange rate for big issuers that have $10 billion+ in assets. According to the 2021 Debit Issuer Study, exempt issuers earned 42.5 cents every transaction, compared to 23.7 cents for regulated issuers. Due to this difference, exempt issuers generated almost twice as big as regulated issuers in annual gross revenue per active debit account ($132 vs $71).

Exempt issuers earn much higher interchange revenue for debit transactions than regulated issuers
Figure 2 – Exempt Issuers Earn 42.5 Cents Per Every Debit Transaction. Source: Pulse

This is one of the reasons why neobanks can offer debit cards with rewards and no fees. Neobanks or challenger banks are usually technology startups working with exempt issuers to offer banking services. The startup in this partnership takes care of the marketing and the product development while the exempt issuer rents out its banking license and deals with all the banking activities such as underwriting, regulatory compliance or settlement. Because the exempt issuer earns higher interchange rates, it can afford to share part of that interchange revenue with its startup partner which, in turn, uses that revenue to fund operations and generate profit. However, I wonder if it’s really fair when a neobank or a financial service company becomes so big while still taking advantage of this “loophole”. Take Square as an example. It’s a $120 billion publicly traded company. It works with Marqeta and by extension Sutton Bank, which is exempted from the regulations over interchange rates, to offer Cash App. Is it truly fair for Square to be able to leverage this loophole when it has a much bigger valuation than many banks with more than $10 billion in assets?

The rise of Card-Not-Present transactions means the rise of fraud threats

When stay-at-home restrictions were in effect, consumers didn’t shop at the stores and instead switched to digital transactions. Consequently, Card-Present (CP) transactions per active card fell by 10% last year. On the other hand, Card-Not-Present (CNP) per active card increased by 23% and made up for one-third of all debit transactions.

Because CNP transactions are less secure than CP ones (due to lack of customer verification), the growth of CNP during the pandemic led to more fraud incidents. CNP and CP with PIN transactions both made up 34% of debit transactions in 2020. However, while the latter made up only 5% of the total fraud claims, the former were responsible for 81% of the claims. Among the CNP fraud claims, 47% were successfully recovered, meaning that consumers had their money back and merchants lost some revenue.

CNP Saw Many More Fraud Incidents Than CP
Figure 3 – CNP Saw Many More Fraud Incidents Than CP. Source: Pulse

Whenever a fraud claim happens, it brings an unpleasant experience to both the cardholder and the merchant in question. Hence, issuers may want to focus on ensuring that fraudulent transactions don’t even happen in the first place, especially with CNP.

Contactless and mobile wallet transactions are on the rise

According to the study, contactless is projected to be available on 64% of all debit cards by the end of 2021, up from 30% in 2020, and 94% by 2023. Even though contactless volume grew by 6 times in 2020, it still made up only 1.6% of total debit volume. As consumers become increasingly familiar with contactless and the feature is available on more cards, I expect the share of contactless volume to keep that impressive growth pace for at least a couple of years.

Meanwhile, mobile wallet transactions funded debit cards through three major wallets (Apple Pay, Samsung Pay & Google Pay) reached 2 billion in 2020, around 2.6% of the total debit volume, with the average ticket of $23, up 55% YoY. 57% of this mobile wallet volume were made in-app and the rest took place in stores. If we look at the competition between the aforementioned wallets, Apple Pay is the outstanding performer in every metric. In fact, Apple Pay had an overwhelming 92% share of all mobile wallet transactions using debit cards.

Starting 2022, Visa will put in place new interchange rules that are aimed to encourage more tokenized transactions such as mobile wallets. Hence, I expect that when we read the 2023 edition of this study or beyond, we’ll see a more prominent role of mobile wallet transactions in our society.

Contactless Volume Grew 6x But Still Made Up 1.6% of Debit Volume
Figure 4 – Contactless Volume Grew 6x But Still Made Up 1.6% of Debit Volume. Source: Pulse

Consumers’ Digital Wallets – Where Card Issuers Need To Be

In this post, I will touch upon digital wallets & checkouts as well as some market movements that make me believe that it will be strategically important for issuers to occupy consumers’ digital wallets.

Fast checkouts and payments are on the rise

Consumers love convenience. Instead of spending time to fill out addresses and credit card credentials, shoppers can finish the job with just a couple clicks. The same goes for in-store check-outs. It’s a far more convenient experience for consumers to hover the phone or a smart watch over a card reader than to drop whatever they are doing with their phone, reach for a wallet and pick out a card. Granted, even though they may not appeal to less tech-savvy shoppers, these fast checkouts, when absent, may be a deal breaker to the more technologically shrewd crowd. I mean, there has to be a reason why many stores accept the likes of Apple Pay or PayPal, despite losing a bit more revenue. Businesses know that by not enabling convenient payments and checkouts, they risk losing a whole lot more.

The more these payment applications are accepted at stores, the more they become useful to consumers and the more consumers they can acquire. The more consumers these wallets acquire, the more they can appeal to stores. The virtuous cycle keeps going. As they become popular, the mobile wallets become something like downtown Manhattan to card issuers. While it doesn’t guarantee success, being present in consumers’ phone and wallets suddenly becomes more critical. Furthermore, there are developments on the market that highlight the importance of this point, starting with Visa.

A new rule from Visa

Per JP Morgan:

In April 2022, Visa will introduce updates to existing domestic interchange programs with categories and rates for card not present Visa EMV token transactions. This includes both network tokenized transactions and digital wallets. With this update, a roughly 10 basis point reduction will apply for many card not present transactions that are Visa EMV tokenized in most segments.

In some cases, interchange rates for non-token transactions will go up, so while the net benefit may not reach 10 basis points, merchants that do not take advantage of the digital wallet incentive will undoubtedly be leaving money on the table. As ecommerce continues to grow, shifts like these to the overall cost of payments will have significant cost implications and influence a merchant’s product development roadmap.

The gist of this news is that Visa will allow merchants to keep more money from mobile wallet transactions but make them pay more whenever customers have to type in their information and card credentials. A few basis points may not sound much, but if your online sales is $1 million/year, the savings can be up to $10,000. Visa is the biggest network out there, accepted in virtually every store around the world. When the new rule comes into effect in 2022, its impact will be wide-ranging. I expect Mastercard to follow suit soon. The question for issuers now becomes: can they sit idly and let their rivals occupy the valuable real estate on our phones?

Apple Pay

Apple Pay is a proprietary mobile wallet by Apple that enables convenient payments by just a phone tap in stores or one click online. The feature is compatible on iPhone 6, all the models that came after and all Apple Watch. That should cover pretty much every iPhone user in the U.S, which makes up 60% of the mobile market domestically. Since its debut in 2014, Apple Pay has grown increasingly popular over the years. As of January 2021, Apple Pay is available in 90% of stores in the U.S and hundreds of websites, including those of major brands. According to the 2020 Debit Issuer report by Pulse, mobile wallet debit payments in the U.S in 2019 by Apple Pay, Samsung Pay and Google Pay totaled $1.3 billion, of which $1.1 billion came from Apple Pay. As of this writing, major cities such as Chicago, Los Angeles, New York City, Portland, San Francisco & Washington D.C already allow passengers to ride transit with Apple Pay. This kind of integration will only boost its popularity more in the future.

Figure 1 – Apply Pay facilitated most of the mobile payment transactions funded by debit in the U.S in 2019. Source: Pulse

Almost all issuers in the US enable integration of their cards into Apple Pay. American Express lets users who are instantly approved add their cards to Apple Pay immediately. In July 2021, it’s reported that Apple is working on a BNPL service for Apple Pay transactions. Historically, Apple offers a payment plan for its select products & services via Apple Card. Apple Pay Later will allow approved customers to make four interest-free payments due every two weeks or monthly payments at an undisclosed yet interest. Customers can connect their Apple Pay with any card that they want and it’s not required to own an Apple Card. This service will make this mobile wallet even more attractive to customers, though right now whether or when it goes to market remains to be seen.

PayPal

Many people know PayPal as the known P2P platform or that payment option that used to be on eBay. Over the years, PayPal has transformed itself into something much bigger. It now provides a lot of services for both consumers and merchants. No longer restricted to online purchases, consumers can now use PayPal online and in stores with services such as QR Code, mobile wallets, contactless, debit card, credit cards, PayPal Credit and PayPal in 4.

Figure 2 – Discover’s communication to ask customers to link accounts to PayPal

The brand and the scale of PayPal are not to be underestimated. In Q2 FY2021, PayPal processed $311 billion in transactions, almost twice as much as $170 billion in the same quarter two years ago. The company’s YoY growth in transaction volume topped 40% in the last two quarters despite operating at an incredible scale. If you take out eBay, the growth rate was never lower than 45% in 2021. Additionally, there were 403 million active accounts, including 76 million Venmo and 32 million merchant accounts. Venmo’s transaction volume doubled in the last 18 months from $29 billion in Q4 FY2019 to $58 billion in Q2 FY2021. The scale of PayPal is also reflected on how fast they roll out new features. PayPal in 4 was launched in August 2020. Since launch, the service generated $3.5 billion in transaction volume, of which $1.5 billion alone took place in the last three months. Meanwhile, the number of merchants that enabled payments by QR codes leaped from 500,000 in Q3 FY2020 to 1.3 million in the most recent quarter.

On the earning call, the CEO of PayPal highlighted its imminent push into the in-store space.

Clearly, on the branded side, we think we add a tremendous amount of value, things that John talked about, buyer and seller protection, Buy Now, Pay Later at no incremental cost, fraud protection, highest checkout conversion, etc. But we took down rates for basic full-stack processing. That also was reduced somewhat substantially from the 2.9%, plus $0.30 to 2.59%, plus $0.49. And that is going to enable us to aggressively compete for all of the payment processing of the merchants that do business with us.

And you’ve heard us say time and time again, David, that we were going to move into the in-store space. We’re going to move so aggressively in there. We rolled out Zettle in the U.S., is a really beautiful full package. It doesn’t just include card reader but inventory management, sales reads out and allows a merchant to seamlessly load inventory in both their online and in-store locations and then, across multiple channels as well.

And so we’re, obviously, gonna be very aggressive on moving into in-store, and it’s always been part of our strategy. And by the way, if a small merchant does all of their business with us, they can actually see their overall costs come down. And we wanna encourage them to do all of their business with us because we are a trusted platform. They do turn to us, and we price, we think, the right way.

Source: Fool.com

If PayPal successfully becomes one of the de facto checkout methods in stores, given it’s already a popular checkout option online, how would smart issuers ignore the need to get into consumers’ PayPal wallet?

Shop Pay

Shop Pay is the native checkout feature by Shopify. Shopify is an eCommerce platform from Canada. It provides businesses with the tools necessary to build a customized online presence. When merchants list their products on Amazon or Walmart, they just rent a space and have little flexibility for their own branding. Plus, these merchants have to pay numerous fees to the likes of Amazon and Walmart. With Shopify, they pay a monthly subscription and a usage-based fee for some paid services. But stores can keep their own branding and gain more control over their destiny.

Shop Pay works similarly to Apple Pay, PayPal or Visa SRC. Once a credential is stored, customers can use Shop Pay across all stores powered by Shopify. In February 2021, Shopify expanded their checkout feature for the first time to all Shopify-powered stores on Facebook and Instagram. The collaboration was successful that a few months later, they decided to roll out Shop Pay to all merchants on Facebook and Google. This move can bear significant ramifications. Facebook owns the most popular social networks in the world like Facebook, Instagram, WhatsApp and Messenger. Their access to billions of consumers is what retailers want. Google has the dominant market share in search and as a result, a unique access to consumers globally. As these tech giants make a push into eCommerce, Shop Pay will benefit from this partnership and grow even more.

Figure 3 – Shopify’s GMV in Q2 2021 was higher than that of the entire year of 2018. Source: Shopify

Between its launch in 2017 and the end of 2020, Shop Pay facilitated $20 billion in transactions. The cumulative figure increased to $24 billion as of Q1 FY2021 and $30 billion as of Q2 FY2021. As you can see, Shop Pay is growing increasingly fast. The growth of Shop Pay coincides with the growth of Shopify. In the last quarter, Shopify processed more volume than it did in the entire year of 2018. As this company continues to expand and by extension, so does Shop Pay, how long can issuers be absent from this checkout option?

In summary

Engaged customers will add their favorite card to their mobile wallets. The challenge is for issuers that don’t occupy the top-of-wallet position yet. Customers can still rotate cards and choose a certain one at the time of purchase. Hence, being in a customer’s wallet doesn’t mean a card will be used often. Card issuers still need to offer values and work hard to increase engagement. But as the saying goes, you have to be in it to win it.