Take two of the biggest disruption strains in financial services in recent years, peer-to-peer (P2P) lending and Apple Pay. Neither has exhibited the pathology which may have been expected - even just a year ago.
"Apple Pay has entered a market with well-established players looking to take market share but without something compellingly different or better."
Andrew Cornell, Managing Editor
Apple Pay has turned out to be more a niggling cold for incumbents than a rampant influenza. And P2P is now more and more looking like I2M – institution-to-marginalised, rather than peer lending to peer. It's morphing into sophisticated lenders funding borrowers outside the traditional banking markets.
Payments monitor PYMNTS has been one of several to note Apple has been strangely quiet on its electronic wallet with nary mention in the latest phone extravaganza. Apple is yet to publicise detailed usage data.
PYMNTS cited Bloomberg saying research from a variety of sources — including PYMNTS and an InfoScout report about Apple Pay adoption — estimated Apple Pay is used for just 1 per cent of retail transactions in the US.
“People don't know why it is they'd use Apple Pay,” Jared Schrieber, CEO of InfoScout, told Bloomberg. “They are satisfied with the current methods and they don't know how Apple Pay works.”
Meanwhile the global roll-out of Apple Pay is much slower than expected with it yet to make an impression in Asia and the Australian launch understood to be rather further away than original expectations of this year.
P2P meanwhile, rather than using a new platform to bring together pools of smaller savers and would-be borrowers, has shifted to be an asset class for what are called “marketplace lenders”. These lenders are less likely to be individuals with surplus savings than structured funds or professional investors who see P2P as a higher risk, higher yield asset class.
Indeed, as I mentioned in a recent column, this is how many of the more advanced P2P players now see themselves. For example, Stuart Stoyan, founder and CEO of marketplace lender MoneyPlace, speaks in terms of what is the attraction to funders. What is the yield, what is the risk, what is the volatility?
The Wall St Journal's John Carney notes that while the portfolios of US market lenders like LendingClub and On Deck Capital continue to grow, both the rhetoric and profit expectations around them are shifting. Indeed, LendingClub chief executive Renaud Laplanche speaks of his company “enabling” about $US7.6 billion in loans this year – although the good news is that's as much as in the previous eight years combined.
But for all the astronomic growth, marketplace lenders originated just 1.1 per cent of unsecured consumer loans and 2.1 per cent of small-business loans in the US last year, according to Morgan Stanley.
Carney points out growth doesn't come cheap: “LendingClub reported its interest income in the first six months of 2015 was 54 per cent higher than last year, matching its 54 per cent loan growth. Yet its sales-and-marketing expenses grew 89 per cent; total operating expenses were up 83 per cent. In the three months to June 30, interest income rose 52 per cent.”
As more competitors and new disrupters enter the field – to say nothing of incumbents defending their patch – good old fashioned scrabbling for market share and squeezing of margins is likely.
Morgan Stanley expects the biggest US banks will begin to slow the growth of marketplace lenders as early as 2017.
For Apple Pay, the challenge is not entirely different. It too has entered a market with well-established players looking to take market share but without something compellingly different or better.
Now many have argued this hasn't stopped Apple being successful with MP3 players (iPod) or smart phones (iPhones) but payments are a process with little gadget enhancement. While plenty of devices play music, make calls, invade your privacy, access the internet, Apple built its reputation on cool devices that were desirable in their own right as well as performing functions. Apple Pay lacks that extra dimension.
Nor, critically, does Apple, despite its massive popularity, have the customer base to make a payments vehicle succeed by mandate. According to analysis by one market insider who consults to telcos, people with the Near Field Communication (NFC) phones necessary are less than 5 per cent of the population. Internationally, Apple's global smart phone share is around 16 per cent (in total, ignoring whether NFC capable or not.)
The major competitor at present for mobile wallets like Apple Pay are contactless, tap'n'go payments on plastic payment cards enabled by Visa and MasterCard. These automatically arrive in the pockets of card holders as cards expire and are replaced.
The success of the contactless story is well known, particularly in Australia. For example, Visa says its payWave product now accounts for 65 per cent of all face-to-face Visa transactions in Australia with 95 million monthly transactions.
According to Visa, Australians continue to be the world's most active users of Visa payWave but in Asia, coming off a lower base, growth has also been very strong with volumes up 116 per cent across the Asia Pacific region between 2013 and 2014.
Meanwhile, although there have been unsubstantiated claims of contactless payment cards encouraging petty crime, consumers are comfortable with the technology. That's still not the case with smart phones even though superior security is potentially an attraction.
Again, in the US, mobile wallets still only represent around 6 per cent of retail transactions despite the technology having been promoted by Google, Apple, Amazon, the four major US telcos and most of the big banks.
Many of the challenges are idiosyncratic. While the challenge for Apple Pay in Asia is that it hasn't even been rolled out, the business case depends on taking a share of the wholesale “interchange” fees participants in payments networks pay one another.
That fee pool varies dramatically in different markets and is considerably smaller in Australia than the US. In the US meanwhile “smart” payments cards are a relative novelty so the “contactless” experience is not one even those who use credit or debit cards are familiar with.
For whatever reason too, the marketing of Apple Pay has been much lower profile than is typical for Apple.
PYMNTS cited a Kantar Worldpanel ComTech survey suggesting a majority (75 per cent) of iPhone 6/6 Plus users haven't tried Apple Pay as of the Northern spring.
Even among those who have used Apple Pay, their propensity to use it has been falling. PYMNTS said in March, 48 per cent of iPhone 6 consumers in a store where they could use Apple Pay did. In June, that number had dropped to 33 per cent.
Apple's response to the Bloomberg story was the service is off to a “great start” with “double-digit monthly growth in Apple Pay transactions since launch”. Apple maintains consumers and merchants “love” the service, citing security and convenience in particular.
I remember writing stories about the launch of the first electronic cash systems, by Visa and MasterCard and Mondex (later bought by MasterCard) back in the mid 90s and focus groups reported the same thing: consumers and merchants who did use them loved the convenience and security.
None of those products exists any more. However, what are tap'n'go cards if not old-fashioned electronic cash that has evolved into something consumers and merchants do find accessible and will use?
These contactless cards have now gone viral but the virus has changed. P2P seems to be evolving as well but for Apple Pay it remains to be seen.