09 September 2014

Why iPay May Be Apple's Most Lucrative Product Yet

iPay may prove to be Apple's most lucrative product.

Today, Apple announced the release of two new iPhones, an iWatch, and iPay, which will work like a mobile wallet. They've teamed with various credit card companies like VISA, Mastercard and AMEX to enable iPhone users to simply pay with their phones as if their favorite device was a credit card.

On the surface that might sound fairly innocuous. They are certainly not the first to offer the ability to make a digital purchase, as reported by Molly Wood here. But it's worth remembering that Apple wasn't the first company to make a digital music player. They just made it wildly popular.

First, some background. During the 20th century, a quiet revolution transformed finance. One of the reasons it might have been so quiet is that it has the oddly eye-glazing name of banking disintermediation. But disintermediation gets to the heart of how the Information Economy transformed finance, which plays right into Apple's new market.

Once upon a time, bankers were uniquely positioned upon a wall that separated the folks saving money from those who wanted to borrow it. They could take money from the savers, paying them 1% for their money, and then loan it to the borrowers at 10% (less or more). Upon their wall, they were uniquely positioned to see each party, parties who could not see each other. Savers and borrowers didn't know each other so the banker played intermediary. This is a pretty lucrative position to be in. Still. (Last year Citigroup's revenues were $76 billion.)

But information technology has made it easier for borrowers and savers to find each other without the bank playing intermediary. As the cost of information has dropped, this wall separating borrowers and savers has slowly lowered, and with it the bankers' lofty perch. This disintermediation has a long history, one I explore in my book. The most recent instance of disintermediation is peer-to-peer lending. Lending Club, a San Francisco-based company founded in 2007, has facilitated $4 billion in loans. They are to lending what eHarmony is to romance. Why pay the banks the 9% difference between what you get for saving and she has to pay to borrow when you two can split the difference? There are billions - trillions - that can be retained within households by cutting out the bank. But of course far fewer people know and trust Lending Club than Apple.

Now Apple will get millions of people comfortable with the natural extension of what Dee Hock, VISA's founding CEO, realized years ago: money is just information. As millions of Apple users become comfortable with the idea of using their phones for purchases, it won't be long before they become comfortable using their phones - and the extensive networks they represent - for loans. People hate banks and love Apple. It's perfectly plausible that Apple's foray into finance will do to banks what their popularization of the iPod did to record companies.

And there is a lot of money to be had in finance. More, even, then in music.

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