Last week at WWDC, Apple introduced Apple Pay Cash, a new peer to peer (P2P) payment system in iMessage powered by Apple Pay. Quickly compared to PayPal’s Venmo and Square Cash, the service will launch with iOS 11 and be available at the time of launch only in the US.
Apple walked me through the process for the first Apple Pay Cash money transfer and it is as easy as you would think something Apple came up with could be. Say I want to send money to my good friend Ben. I go to iMessage and hit the Apple Pay app, pick the amount I want to send, authenticate the transaction through Touch ID and I am done. If I had never used Apple Pay before, I would be asked to associate a card to my Apple Pay account. I could have also just asked Siri to send money to Ben and a message would have been created for me with the amount specified. Ben receives an iMessage that alerts him of the transaction and asks to set up an Apple Pay Cash card in his wallet and the credit gets added to it. The money on the card can be transferred to others or used to pay anywhere that accepts Apple Pay. Like other services, if users associated Apple Pay Cash to a debit card there are no fees while credit cards are subject to a 3% fee. The digital debit card is powered by Green Dot Bank a well-established name in the business of pre-paid cards.
This is how Millennials do it!
Services such as Venmo and Square Cash are predominantly used by millennials to do pretty much everything from splitting a dinner to paying rent. A recent Bank of America study showed that 62% of US consumers between the age of 18 and 34 use peer-to-peer apps regularly. This was almost double of what recorded by the general population. Intention among non-users is relatively high too, with 50% of those who do not use P2P apps saying they will likely do so in the future.
Behind the high adoption two primary drivers: convenience and a highly smartphone-centric user. Carrying cash is certainly out of fashion for younger consumers, and with smartphone penetration as high as 98 percent it should not be a surprise that for millennials apps are the go to for cash. A natural trust in technology, helps of course, as it limits concerns around security which are usually more widespread in older demographics.
Not a Profitable Business
Let’s take a look at how the established P2P payment services are doing.
Venmo’s total payment volume reached $21.2 billion between the second quarter of 2016 and the first quarter of 2017. Venmo’s growth is driven almost entirely by word-of-mouth, and almost exclusively among millennials. The average Venmo transaction size is $2, reflecting the usage patterns of the youngest millennials. Despite the incredible growth, Venmo is not profitable.
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Square Cash has also been losing money as costs are overtaking revenue and apparently have been doing so since the launch back in 2013.
Snapchat added Snapcash back in 2014 using Square Cash as its backend but it never seemed to see P2P payments as a priority
You get the picture…nobody is making any money so why is Apple bothering?
Apple’s focus is on two things: Apple Pay and iMessage.
Apple Pay Cash will help drive adoption of Apple Pay especially among users who might not yet have a credit card. While you need to be 18 to have an Apple Pay Cash card, it is likely that many young millennials will have a debit card but might not yet have a credit card, making Apple Pay Cash a convenient alternative to a secured credit card.
Apple could have integrated the Apple Pay Cash functionality solely in the wallet, but I think the integration with iMessage is really about building a full messaging platform that over time will compete for feature by feature with what is available in the market.
The Emerging Market Opportunity
While Apple Pay Cash will only be initially available in the US, I do expect Apple to go internationally. Services like this are not easy to take internationally as they involve banks, local regulators, retailers. I expect Apple to be very tactical in the countries they decide to enter with Apple Pay Cash, and I see China and, further along the line, India as two big opportunities.
Apple Pay launched in China in 2016, and so far uptake has been limited mainly because of the stiff competition by Alipay and Tenpay as well as the pervasive usage of QR codes for payments.
P2P payments in China is dominated by WeChat the messaging app that has close to 800 million active users. The success in P2P payments came straight away from the launch of Red Packets service in 2014. WeChat digitized the old practice to give Red Envelopes with money in them for special occasions and holidays. When the Red Packets debuted in 2014, over Chinese New year, the number of people using WeChat payments grew to 100 million in a month from the initial 30 million. Over the holidays more than 20 million red envelopes were sent. The following year, the number grew to 3.2 billion!
Of course, WeChat has the advantage of being cross-platform, but for Apple, it is not really about market leadership but about making sure that Apple users have no reason to look elsewhere to do something like P2P payments. Considering that P2P is more popular than mobile payments it might also mean that users would be more open to trying Apple Pay Cash than Apple Pay.
India is still a small market for Apple but one that offers tremendous opportunity for iPhone. In April, WhatsApp was reported to be looking into launching a P2P payment service using UPI, a cross-bank system backed by the government. Once again, Apple might need Apple Pay Cash to seriously position iMessage as a complete messaging platform.
From Convenience to Engagement
The convenience millennials see in P2P payments should easily transfer to Apple Pay as users start to use their Apple Pay Cash card for in-store and online payments. Apple Pay Cash lets you transfer your cash balance to a bank account, but I am not sure you want to do that as I had the impression it would not be as straight forward as using your money with Apple Pay. That, in turn, might create some muscle memory that will have consumers turn to Apple Pay more often than they would turn to a physical card. This is where Apple’s potential revenue will come from: higher transaction volumes of Apple Pay.
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