The next big thing from Apple (NASDAQ: AAPL) is peer-to-peer payments and it is coming to a smartphone near you.
The Wall Street Journal reported last week that Apple is working on a way to enable simple peer-to-peer payments, possibly through its iMessage platform. I can think of two companies in particular that stand to lose big if Apple is successful – one that is publicly traded and another that is rapidly approaching its IPO.
Charting Its Own Course
Frankly, the move isn’t altogether surprising.
Consider that Facebook (NASDAQ: FB) is also looking to add payments to its Message app, and that multi-billion dollar messaging startups like Snapchat and WeChat have already released peer-to-peer payment services.
True to its history, Apple plans to do things a little differently.
According to the Journal report, Apple does not intend to stand in the middle of the financial transactions. Instead, Apple has reportedly reached out to banks and is trying to set up a system through which the bank processes the transactions and Apple simply creates the mechanism for customer data to flow securely from one user to the bank, and then from that bank to the user receiving the payment.
If this sounds familiar, that’s because it is.
You may remember from Apple’s explanation of Apple Pay late last year that the service merely creates the mechanism for users to securely send a payment from their financial institution to the merchant they owe. Apple never actually touches the transaction data, thereby avoiding the risk associated with processing the transaction.
Here, again, Apple plans to avoid processing the actual transactions. That’s a big deal.
Unlike Snapchat, PayPal (NASDAQ: PYPL) and other existing peer-to-peer payment services, Apple will not need to file for money transmitter licenses. This will save money, avoid regulatory scrutiny and allow Apple to focus on the user’s experience – a high priority for the company in all of its endeavors.
Watch Out PayPal and Square
It’s worth noting that Apple might actually offer a peer-to-peer payment service without trying to make money off of it.
If Apple is successful in converting even a small share of its hundreds of millions of iMessage users to a peer-to-peer payment system it will greatly increase the likelihood that these users will begin also using Apple Pay, from which Apple does make money. Consider that a survey by messaging service Jott found that 60% of teens claim iMessage as their preferred messaging service.
This should strike fear in the hearts of the people running PayPal, Square Inc. and other merchant and peer-to-peer payment systems.
Consider that PayPal – which went public in July – and Square – which is currently in the “road show” phase of the IPO process and is actively pitching to potential investors – are both companies with a business model built around making small amounts of money on these peer-to-merchant and peer-to-peer payments.
If Apple walks in and offers their product for free, it could spell disaster for both companies.
The Convenience Factor
Ultimately, the flow of money from a user to a merchant or from one user to another user is the same regardless of which system you use. Except for fees, that is.
As long as the system works and the cash is green – digitally speaking, or course – on the other side, the only difference between two services might be convenience and fees.
Consider that iMessage comes standard on every iOS device sold and is used to send billions of messages per day. That is the ultimate convenience factor – at least for iPhone and iPad users.
Popular services like Venmo – owned by PayPal – also offer this feature. I’m able to instantly and relatively painlessly pay a friend anywhere from one penny to a few thousand dollars without having to pay a fee – so long as the source account is a checking or debit account. Venmo is great and I use it nearly every day.
But there’s a trade-off.
Google the terms “Venmo scam” or “Venmo risk” and you’ll see what I’m talking about. Here Apple has an opportunity to show up to the market late – as it is known to do – and offer a product that does what others do but more conveniently and with the security of the Apple brand attached to it.
If I’m an investor listening to Square pitch its IPO and business model, I am walking away from the table.
Apple can offer a peer-to-peer payment system as a free service to sell more devices and generate more Apple Pay transaction volume. Other companies either can’t do that or can’t do that as well.
The only problem is that iMessage is currently only available on iOS devices. If Apple changes this it could be game over for services like Venmo, Square Cash, Snapcash and many more.
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