What would Apple's rumored mobile payments play mean for credit card networks? (mobilepaymentstoday.com)

The last decade was an explosive resurgence for Apple. It may have entered the 2000s firmly in the doldrums, but thanks to a frantic binge of disruption, was well on its way to becoming the most valued company in the world come the end of the decade. The question now is: Where is the next big spurt of impetus necessary for the juggernaut to keep rolling going to come from?

Even as ceaseless speculation about the company's next iPhone's or iPad's innards continue to be a staple of the mainstream media's Apple-related coverage, rumors about an Apple-branded mobile wallet are becoming just as rife.

With Apple's iPhone and iPad product lines dominating their respective device segments and with the company being privy to payment card details of hundreds of millions of iTunes users — more than PayPal and Amazon combined — a foray into mobile payments, it seems, would be the logical next step. Also let us not forget the Cupertino-based firm commands a global legion of loyal users who swear by its devices and services, have relatively high disposable incomes, and a willingness to spend.

For many, an Apple-branded mobile payments service has never been a mere possibility but a certainty. There are a number of reasons for this certitude. Everything, from the company's Bluetooth LE-based iBeacon feature to the launch of a fingerprint scanner-bearing iPhone, seems to be pointing in that direction. As for the latter, the company's CEO Tim Cook is on record as saying that a possible mobile payments play was one of the key motivations behind Touch ID.

In Passbook, iBeacon, Airdrop and iCloud Keychain, Apple already has a number of key pieces to the mobile payment puzzle strewn across the iOS ecosystem, and piecing them together shouldn't be a particularly difficult thing to do for a company with Apple's immense technological resources. But with Apple not forthcoming on the subject, there's a lot of speculation around how exactly Apple might go about solving this puzzle, though. (Granted, Apple may no longer be shrouded in the kind of impenetrable haze of secrecy that came to characterize it under Steve Jobs, but the importance of keeping secrets hasn't been lost on the company — especially when the subject of such secrets is likely to have widespread implications for tech and financial powerhouses around the world.)

Disruption or regard for the status quo?

It's just not what the company does, but as we've seen with its stubborn eschewal of NFC, even when it chooses to avoid doing something, the impact can be felt far and wide. So it's only natural that there should be widespread speculation about the possible consequences of Apple's rumored mobile payments play for various extant stakeholders like banks and credit card networks.

(Note: As has now become a pre-iPhone launch custom, the company's next iPhone is also rumored to have an NFC chip inside it. Although these latest NFC-related rumors are clearly far more compelling than previous years — even the eminent likes of Morgan Stanley and KGI Securities are convinced — they are still rumors and should be taken with a pinch of salt.)

If there is one thing Apple seems to loathe more than its rivals, it is having to share the spoils with others in the value chain. So well known is this distaste that it's been suggested, albeit facetiously, that the company should consider acquiring a bank or a credit card network like Amex or MasterCard if it's serious about invading the mobile payments market.

While the company is unlikely to do something like that, it is just as unlikely to not try and disturb the status quo. On the contrary, anyone awaiting Apple's foray into this highly competitive space should fully expect the tech behemoth to, at some stage, take a stab at disrupting the segment in a manner that guarantees it a central role in the value chain and plump margins.

Disruption!

Although there are those, like the panelists at a recent electronic payments summit hosted by Jefferies, who don't see Apple attempting to "invade the economics of payment transactions and disrupt incumbent players such as Visa and MasterCard," there is evidence to the contrary.

In a development that ought to be of particular concern to credit card networks, it was recently revealed that Apple, which already has a bevy of payments-related patents in its kitty, is now trying to patent an "integrated financing and property transfer management platform" it envisions as having the potential of replacing credit cards altogether. In the patent application (US 13/562,139), dated July 30, 2012, the company cites a number of drawbacks associated with credit card payments (including high setup and transaction costs) as necessitating a move to the proposed "Financing Systems Integration system that allows customers to shop and checkout using a Loan ID" instead of a credit card.

In layman’s terms, Apple is proposing a system that would let consumers and even businesses finance a purchase (whether online or at a POS) using a loan, lease, or line of credit granted by a financing partner (e.g. a bank) at the time of purchase itself. Under the scheme, a consumer would apply for a loan at a POS terminal or online to finance a purchase, get approved, receive an instantly generated Loan ID, and use it to conclude the transaction. The loan application and the ensuing approval communication would be routed through a FSI engine, owned and operated either by the retailer or another sales partner, using a set of standard APIs (application programming interface).

"A loan obtained through the FSI engine can resemble a personal line of credit and thus can be used as cash, thereby eliminating the need for incurring transaction costs such as authorization fees, interchange fees, settlement fees that are associated with credit card purchases," Apple states in the application. "Likewise, the cost of setting up FSI engine compatibility can be much less than the setup cost for a similarly-featured online credit card checkout tool."

All said, any disruption, or attempts thereof, may not necessarily occur at the outset but follow later, when the company has comfortably entrenched itself in the space after a fairly straightforward entry. And it would be premature to rule out any

Credit card networks, beware

Their enduring popularity notwithstanding, the manner in which credit card-based transactions are conducted is beginning to appear increasingly anachronistic in a world that's clearly languishing for a new payments paradigm. And if there is one drawback of the longstanding four-party card scheme that appears to drown out the rest, it has got to be the need for middlemen in the form of credit card networks for the four parties (cardholder, issuer, merchant and acquirer) to transact.

Even if the above payment system fails to materialize, or worse, turns out to be a dud, there's already plenty to worry about as far as credit card networks are concerned. Consensus is fast building around the need to disrupt the status quo. From upstarts like Dwolla and LevelUp to giants like the Merchant Customer Exchange (MCX) consortium, all sorts of entities are already gunning for the payment networks.