Sunday, October 16, 2011

Impact of Apple and Microsoft on payment processing sector


Payments are an essential part in all transactions where value is exchanged. Typically, the payments are done through either cash, or check or credit/debit cards. Technology is changing how the payments are processed through each of these modes. In this post, we are focussing on the credit card payment and processing sector. Both Apple and Microsoft are already taking steps that are influencing the strategies of existing players in this sector.

When you pay through credit card, 5 or more parties are involved behind the scene to make the payment work and they share the value. These parties include the merchant, payment gateway, merchant's bank, credit card network, issuer bank and the customer. Mode of interaction between each of these parties is affected by software and technology.

A major strategy shift is happening in customers' interaction with merchant for payment through credit cards. Contactless payments has been been attempted by all major credit card networks. Visa piloted Paywave which is similar to MasterCard's PayPass and Amex's ExpressPay. But the dominance of smartphones and especially iPhone has compelled these networks to change their strategies for contactless payment adoption. Visa recently launched payWave for iPhone which is essentially a protective phone case with secure memory card that enables you to just wave your iphone at the terminal to make payment. Mastercard partnered with Google to launch Google Wallet, a digital wallet that eliminates the need for a physical wireless credit card. Like Google, Apple and Microsoft could make NFC technology part of their dominant phones/platforms and thus extract additional value away from credit card industry.

In fact the shift that is taking place towards digital wallets has the potential to give rise to a new platform for payment and can create alternate stacks in this sector. For example, Google's digital wallet has Sprint, a telecom company as another partner. Telecom companies have been working on their own innovations in mobile payment. Apple and Microsoft, through their existing strong partnerships with telecom companies can enable and speed up the creation of new layers in the payment sector at the expense of incumbent layers.

We can imagine a scenario where Apple could essentially shut out credit cards from all purchasing activities. Users could pay through their iTunes account and pay their iTunes account directly through their checking account. Going further, some day it might enable merchants to use an app on their iPhones/iPads to take payment from a customer who is also using an iPhone. The whole need of having a hardware for merchant (the payment machine) and software to integrate it, could be eliminated.

Similar strategy shifts and innovation can also occur in interaction between other players in the credit card payment processing. Microsoft can bundle payment gateway and payment processing in its business software offering,thus eliminating another existing layer in the industry. In its ERP offering called Dynamics NAV, Microsoft has partnered with a company called ChargeLogic, which offers a platform for handling payment processing directly inside of Dynamics NAV without needing any external hardware or software. This allows companies using Dynamics NAV to authorize a payment right when an order is placed, all in one integrated system.

Staying on the topic of value creation by Apple and Microsoft in the payment processing sector, we venture to think that the whole payment processing sector itself could be eliminated one day if Microsoft and Apple's current strategies succeed. Credit card networks are essentially a platform that enable transaction between customers and merchants. Credit card networks created this platform by reaching to customers and merchants to adopt this platform. Apple's dominant platform already has a terrific consumer reach and its move to consumer cloud will extend it further. Microsoft's cloud strategy for its business application software may enable it achieve similar reach on the business/merchant. Some day, perhaps Microsoft and Apple could partner to create a cloud based consumer and merchant platform that can eliminate the need for all credit card network itself.

Thus strategies and value creation in payment processing sector could be fundamentally disrupted by Microsoft and Apple.


( Post contributed by Akshaya, Burke, Joe, Manoj, Monica and Sid - The Financial Services Team )

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