Apple and Privacy Follow-up, The Top 100 Retailers and Apple Pay, Android Pay’s Missing Bank Fee

Good morning,

I am in San Francisco for the week and will be attending the WWDC keynote this morning. For a roundup of what looks to be a relatively quiet announcement, check out Mark Gurman’s overview at 9to5Mac. That said, expect full coverage tomorrow, and potentially on Wednesday. It’s going to be an Apple-centric week, at least to start.

Unfortunately, I don’t think a meet-up is in the cards for this week, for reasons of both venue and schedule; next time, for sure.

On to the update:

Apple and Privacy Follow-up

First off, it was pretty neat to see a huge debate break out about Friday’s Daily Update on both Twitter and the Stratechery Forum. I say “neat” because, well, the update was behind a paywall, but because of all of you it really captured a lot of attention. I know that for most of my Daily Updates my need to make a living precludes a wide-ranging impact, but it feels like this one was different. Thank you.

As an aside, do feel free to take and post screenshots of articles to Twitter: it’s a great marketing tool, and it’s not like folks can count on reliably seeing screenshots of every Daily Update! To put it another way, you are all my best salespeople, and I greatly appreciate all the assistance you give me — don’t feel unfettered!

Based on all the feedback I both received and saw on Twitter, I thought it was worth clarifying/re-emphasizing three points:

  • The Definition of Privacy — My core objection to Apple CEO Tim Cook’s speech — and, on Exponent, audible irritation — was the duplicitousness of saying that the information Google and Facebook gather is “sold off for god knows what advertising purpose.” That is factually wrong; Google and Facebook do not sell your data (clearly, at least if Twitter is any indication, many people do not understand this, which makes Cook’s words even more unhelpful). And, as I noted in the Daily Update, it would be value-destructive for them to do so. Thus, your data is “private.”

    That said, I understand and appreciate that many feel the very act of storing your data and delivering advertising opportunities against that data is itself a privacy violation, even if that data is never shared with any other company. I do think this is an unreasonable expectation when it comes to using a free online service (and, as I detailed, Google and Facebook have to be free); it also completely precludes any sort of machine learning or personalization.

  • Privacy versus Security — In Friday’s update I mostly focused on the fact that Google and Facebook are incentivized to not share your data with 3rd parties; the fact the data is exclusive is a big competitive advantage. However, by extension, that also means both Google and Facebook are heavily incentivized to ensure user data is not taken by force, either: both their reputation and their differentiation are at stake.

    Apple, on the other hand, only has its reputation to protect; given how little last fall’s iCloud hack hurt them in the market (whether their fault or now) certainly suggests reputation isn’t as big an incentive as we might hope. Again, I don’t say this to denigrate Apple. It’s just that incentives matter, and at least from a security perspective, Google and Facebook’s are better.

  • Government Access to Data — Data stored by Apple is just as accessible to the government as is data stored by Google. Indeed, anything viewed in a web browser necessarily requires the web app in question have a key to your data (the key could be stored locally, but that’s not realistic for a consumer-grade service). The exception that proves the rule is Apple’s Messages: they are encrypted end-to-end (note there is no web client, only native clients). In other words, the fact that Apple does not sell advertisements against your data does not mean the data is somehow less accessible to the government.

Now, you could argue that Apple, given their non-advertising business model, is motivated to collect less data, which makes them a better choice for consumers’ worried about government snooping. And that may be true, but that right there is the paradox I closed the update with: collecting less data, in the long run, likely means inferior learning and inferior personalization. If the latter prove to be far more compelling to end users than the vagaries of business models then Apple will have some soul-searching to do.

The Top 100 Retailers and Apple Pay

Good work by Reuters:

In a January earnings call with investors, Apple Inc (AAPL.O) Chief Executive Tim Cook made a confident prediction: “2015 will be the year of Apple Pay,” he said.

Since then, the company has aggressively courted retailers – and claimed significant success. “We’ve spoken to all of the top 100 merchants in the U.S., and about half will accept Apple Pay this year, with many more the following year,” a company spokesperson recently told Reuters…

To assess Apple’s progress, Reuters worked from the National Retail Federation’s list of the top 100 U.S. retailers, surveying the 98 that had brick-and-mortar outlets (two of the top 100 sell only online). Eighty-five supplied detailed responses, and 11 others supplied information only about whether or not they accept Apple Pay. Two did not respond.

While some of the country’s top merchants said they use and like the mobile payment system, fewer than a quarter of the retailers said they currently accept Apple Pay, and nearly two-thirds of the chains said categorically they would not be accepting it this year. Only four companies said they have plans to join the program in the next year.

First off, it’s interesting to note this is another example where Cook perhaps let his rhetoric get ahead of reality. True Jobs did the same, but mostly about the products themselves; it’s always more dangerous to make confident predictions about third-parties.

Of course, you could say the same about me, given that I wrote How Apple Creates Leverage and the Future of Apple Pay that predicted long-term success. Truthfully, though, I think I got things mostly right:

  • Banks came running (more on this in a bit)
  • The chip-and-signature equipment transition would be critical (coming this October)
  • Retailers would get hung up on the lack of data

Reuters notes:

For other retailers and consumers, Apple has yet to answer the question “what is in it for us if we use Apple Pay?”…The program doesn’t offer loyalty rewards to customers, as companies such as Starbucks do with their mobile applications, nor does it provide customer information to retailers about Apple Pay users.

For 28 of the retailers surveyed by Reuters, lack of access to data about customers and their buying habits is a key reason they don’t accept Apple Pay…When a credit card is swiped through a terminal, the retailer gets the name and card number, which when combined with publicly available demographic data like address, phone and email, helps retail chains send well-targeted promotions to customers.

Clearly, from Apple’s perspective, this is a feature not a flaw: from day one Cook has stressed how Apple Pay keeps transactions private; the challenge, though, is that Apple Pay is effectively trying to roll-back today’s reality, a much tougher task than simply trying to introduce something new.

And so we’ve come full circle: perhaps the defining feature of consumer services, at least relative to hardware products, is the ongoing tradeoff between privacy and the benefits of data. For the record, I hope Apple has the leverage necessary to tilt the field in a more consumer-friendly direction; the truth, though, is that we may be too far down the opposite road.

Moreover, we don’t know if Apple has leverage anyways; their leverage comes from their high-value consumers, but it’s not clear customers care about Apple Pay. The top reason Reuters cites for Apple Pay’s slower roll-out among retailers is “insufficient customer demand” with one holdout stating “Not even a ‘small percentage’ of its customers have asked for it”. This echoes a study done by TrustEv in March:

Here at Trustev we surveyed 1000 US-based owners of modern iPhones (models 6 or 6+), the precise audience with access to the feature, and found very low adoption:

  • 79% of iPhone 6 or 6+ users have never used Apple Pay at all
  • 21% of users have tried the service once or more

Among the people who have tried it out, Apple Pay is not used very often. Within that 21% who have tried it:

  • 80% still use cards or cash for the vast majority of payments, using Apple Pay three times per week or less; the bulk of these (62% out of the 80%) use Apple Pay either not at all or once in a typical week.
  • 30% of people have stopped using it altogether: they now use it “never” in an average week
  • Only 2.1% of people are “super-users” who use it 10 times or more a week.

The reason “super-users” use Apple Pay is “convenience” and “cool-factor”; security isn’t a driver. Then again, maybe that’s because they’re super-users. Would normal users care — and demand Apple Pay support — if they knew just how terrible credit cards are for their privacy and security? Perhaps the biggest takeaway of the last week is that Cook and Apple seem determined to find out. The WWDC keynote will be a telling signal.

Android Pay’s Missing Bank Fee

From the Wall Street Journal

Google isn’t getting transaction fees from bank issuers, said people familiar with the situation. That is because Visa Inc. and MasterCard Inc., which operate the dominant payment networks, recently standardized their “tokenization” card-security service and made it free, preventing payments services from charging fees to issuers.

The article notes that Apple had to cut custom deals, and in the process extracted the 0.15% concession from banks; with new standardized rules though, there are no custom deals to cut — and thus no fees to extract.

Tough blow for Google, but not that big a deal. 0.15% simply is that much, particularly given the current low volume for contactless payments, and Apple may negotiate the fee away when it comes to going international (particularly in Europe, which caps interchange fees at 0.4%, leaving little room for an Apple kickback).

I did hope that Apple would funnel that fee to retailers to help drive adoption, but truthfully, having Android Pay as an ally will be more effective than anything. It will be interesting to see the degree to which the rivals work together to drive adoption of contactless payments. Probably less than they should.


By the way, I do have high expectations that Apple will release some sort of loyalty card program that works in conjunction with Apple Pay at WWDC. Loyalty programs, of course, are some of the worst privacy violators of all.

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