I was recently watching Sean Park’s excellent talk at the Lift12 conference (definitely worth a watch here). One thing that got me thinking was his comment on trying to ‘invest in the Apple Inc’s of Finance”. The line got me thinking about ‘Re-imagining Finance’ through a series of thought pieces, based on the sole premise of building an Apple, Inc in finance.
First – we need to define Apple, Inc as a business concept that can be applied broadly to other markets. To me, Apple’s magic formula rests on the following elements:
- Simplification - Task complexity need not be displayed in the user experience; The user should feel that they can leverage the tool ‘out of the box’ with no training, as if intuitively driven.
- Pristine Environment – Apple’s hardware and software ownership allows it to own the user experience, and more narrowly define the way in which third parties can build applications to work with their system.
- Addition by Subtraction – For Apple, it’s what’s not in the box that sets it apart – no extra ports, no removable parts, no stylus – WYSIWYG literally.
- Network of Increasing Value - Apple has built several verticals out in which the vendor can directly connect with the user with Apple shepherding the process to ensure a delightful user experience. Think Music, Video, and Apps, where Apple’s brand and engagement with the content or app creators has ensured the user have a great experience, while also enabling the user and vendor to engage within that controlled environment. Each additional vendor adds to the user’s rich experience, and further proliferates the value of Apple’s ownership of the ecosystem.
Consumer Credit today has several layers of complexity that leads to a garbled user experience and a trying relationship between the user and the various counter-parties involved. Here’s a few workflows to consider within this paradigm:
Consumer Lending - Consumer goes to a financial institution and applies for a loan or credit card for a particular amount/duration/service level. The bank will take a selection of data points, primarily the consumer’s 3rd party credit scores and their history with the bank, and assuming acceptance, output the terms (timeframe, interest rate, payment schedule, etc). The consumer would then need to fill in a variety of forms, then receive the funds in their account and/or a credit card in the mail.
In the credit card example, there may be a 3rd party issuing bank that would need to create a new account for the user. The account would also need to be appropriated to the payment network, namely Visa, Mastercard, Discover, American Express, etc. who will act as the switch between the merchant and the user’s banks.
Consumer Transactions - Once the consumer gets a credit line or traditional loan, the consumer wants to leverage that cash for consumption – say to buy a laptop. The consumer then travels to a local shop (or online), browses for the product of choice, and selects one for purchase.
At the point of sale (POS), the store clerk scans the laptop (allowing his colleagues to track inventory and sales statistics for that transaction), may ask the user to swipe a loyalty card (again, managed on an internal merchant system), then asks the consumer to swipe their card. The consumer then swipes their card, enters a PIN or signs the receipt, and then is told the card is being authorized. During that time, the merchant’s payment processor is relaying the transaction via the Payment Network to the consumer’s issuing bank, to determine if there’s money there and that the transaction seems kosher. The issuing bank responds instantaneously with an answer of yes/no, sends it back through the Payment Network to the merchant’s payment processor, who relays the response at the POS. (see below).
Later on, the merchant reviews the transaction through the automated ‘settlement’ process, trying to remove any fraudulent/erroneous transactions, then requests a ‘fund capture’ through their payment processor via the Payment Network to the customer’s issuing bank, which then sends electronic funds back through the Payment Network to the payment processor who then sends it to the merchant’s bank.
More details can be found here.
The key takeaway is that there’s an open network here where there are loose relationships between financial institutions, their customers and merchants, which result in inefficiency and increased fraud risk. Clearly there’s room to improve – here’s a stab at a theoretical model that could work:
The Apple Consumer Credit / Payments Model
- Apple reaches out to merchants and provides them with a simple, easy to use POS tool. At first the tool links to existing payment networks and seems to be designed to make the POS easy to use by sales clerks, and easy to monitor for management (both local and at the corporate level). Merchants buy for the simplicity of the hardware/software combination.
- 3rd party app developers begin building applications on top of the POS, to enable merchants to track inventory, run loyalty programs, and target sales to consumers. The most critical applications that best fit with Apple’s philosophies are either acquired or deeply integrated into the core offering to further push standards from which to build 3rd party apps.
- With the merchants using the service and 3rd party vendors building niche services around the Apple POS, Apple can now go after the biggest part of the equation – the consumer banking/credit offering. Working hand in hand with a few major merchants (think Wal-Mart), Apple builds infrastructure on top of loyalty programs that enable merchants to issue credit to their customers – credit terms would be defined by the customer’s purchase behavior at the merchant and outside (via Apple merchants), their loyalty, demographics, time/place, and the purchase at that moment. Merchants like it because it allows them to increase revenues through credit services, without relying on a bank, while also removing much of the transaction cost that payment networks and issuing banks charge for their old indirect transactions. Consumer’s like it because they get the loan from the merchant they are buying from, not an indirect market participant (their bank or a 3rd party), and because they get a better rate from the merchant. Apple benefits because it now gets consumer credit data across its merchant network (and is able to build a new age version of the credit score).
- Apple then sends an e-mail to 100,000 consumers who are buying products and services through merchants on Apple’s network – it reaches out and offers them the ability to ‘bank directly’ with Apple, and get better transparency on their transactions (archive of their line item purchases), credit lines, and now their assets. In a matter of a few steps, Apple has circumvented the traditional inefficient ecosystem for both credit authorization and payment processing – and it’s enhancing the consumer’s experience and the merchant’s relationship with their consumer at the same time. Within a short period of time, Apple becomes the largest bank in terms of AUM, with a completely ‘closed loop’ of merchants and consumers with intelligence built in and around the ecosystem to add value as needed.
Who’s best positioned to be the “Apple” of Consumer Credit?
- American Express - Already a merchant acquirer (albeit a small one), a processor, a Network, and an issuing bank, Amex is best positioned to own the space. Their new Serve platform and investments in mobile payments and other services put them in a good position to lead. However, they have several difficulties, particularly the size of their merchant network (and a small emphasis on growing it internally) and a strategy to add 3rd party issuers to their network (USAA, Fidelity, Bank of America), which further muddies their place in the equation.
- Square - Square has become the POS of choice for many small businesses across the country, particularly for those traditionally under-served by the biggest merchant acquirers. They are starting to branch into mainstream retail and services, because they’ve built a phenomenal user experience and strong applications that cover both basic transaction management and loyalty. However, they’ll need to prove enough value to larger retailers/service providers to make a dent in the space, will likely need to link up with or build a smart inventory management and analytics platform for those merchants, and build a merchant acquisition network with boots on the ground (as apposed to relying on Apple Stores and the web for merchant sign ups) which seems outside their underlying DNA.
- Groupon / LivingSocial - Dark horses on some level, as they are clearly in the daily deal space at the moment. They have both built impressive merchant networks (large and small shops included) and are processing transactions on their behalf. Additionally, they are offering some form of backend analytics engine that merchants are interested in. For them to succeed, they’d need to focus more heavily on merchant services, particularly loyalty and inventory management, to get them to consider switching out their old POS for a Groupon-owned service layer, but its not outside the realm of possibility.
- No One - There are firms like CardSpring and others that are building smarter tools and features to enable merchants to build greater relationships with their customers, while also leveraging existing payment infrastructure. Not sure whether its a good play at this point, but I am curious to see how they evolve.
What do you think?