How much faster can Apple growth engine run with local payments ?

Everyone is talking about Apple's decreasing hardware revenue and increasing service revenue. Experts expect service to be the growth engine that results with 100 bps and 400 bps increase in gross and contribution margins respectively in the next five years.

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Imagine how much faster the Apple growth engine could run with proper fuel. I am no expert on revenue growth and margins, but have been around the block to know first hand how a company can grow its top line with the right set of payment methods. It can help reach market and customer segments that were not possible before.

Apple currently offers a very narrow set of payment methods for the following product lines which are part of the growth engine.

Apple Music and App store are notable drivers.

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When digital content becomes a commodity with a walled garden of subscriptions, devices, contracts and playlists. Creating a path for customers that leads to your doorsteps is a imperative for growth. If one click and auto renewals are the life blood of purchase and renewals; resulting in ever increasing MRRs, then you need to stop cart abandonment due to lack of right set of payment methods. Conversion, the first crucial step has to happen without which you can not leverage service for returns.

To drive the point home let us take the example of Apple Music and Spotify that constitute 83% of Music stream market revenues.

Here is a snapshot of global music market shift to digital with increasing share of revenue.Source : IFPI annual report for 2014, little outdated but I am sure still applies, for 2016 most likely the order is different but the set remains the same.

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For streaming in particular the breakdown looks like this :Source : https://thetrichordist.com

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Apple Music and Spotify have matching catalogs, pricing, features and offerings. Take a look.

Apple Music and Spotify have ~15 M and 40 M paid users respectively as of Feb 2016. Depends on who you ask, I have seen numbers of 17 M and 50 M respectively too.

There is a major difference in payment methods accepted in important markets. We will ignore Sweden as it is home turf for Spotify and perhaps a major contributor to its growth. We will focus on US, UK, Spain, Norway, Brazil, Japan, Germany, France and Netherlands.

The above is a small snapshot of country coverage. Spotify is available in 58 countries with a total of ~60M users (or is it 100M ? have seen that mentioned in some places). 91% of revenue is from subscriptions in top 10 markets. To be fair Apple Music subscription was launched in June 2015 with 3 months free. Earning call today will tell us how it is doing after a full quarter of income.

Take a look at another data point from https://thetrichordist.com

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Apple has low quantity share and is good at converting it into high revenues. I guess it is safe to say higher quantity with right set of payment methods will result in increased revenue (significantly no doubt).

The DPD product market is dominated by customer segment that fueled the growth of alternative payment method. Here are demo details of digital music market for US.

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Here is what it looks like for UK streaming customers in 2016.

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Source: Static

Alternative payments are a millennial must have. Source : J.WT

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On a side note payment methods become even more important in subscriptions services. LTV depends on paying customer not free user, failure to charge has long term implications.

This leaves us with a few questions:

1. Why are these payment methods important and why can't we reach customers without them ?

2. If these payment methods are so important why are large enterprises slow at adopting them?

3. If they adopt these methods how much of difference will it make ?

Here some answers (not a comprehensive list):

Payment methods are dictated by external factors - consumer choices, credit and debit trends, security concerns and marketing offerings are some of the drivers.

Let us take a look a key countries in 2 European, 1 Asian and 1 LATAM markets. Let us look at customer payment preferences in these.

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By not offering local payment methods, Apple has left out 7.7% of PayPal user in UK, 96% of France Carte Bancaire local credit card customers (perhaps co-branding and rails might mute this point, living in US I would not know :), 18% of Japanese customers preferring cash and 10% of Brazil Boleto users to say the least. We did not even get started with Int. Vs local for major CC brands, which could affect 70-90% of the population.

A counter argument could be customer has access to more than one method. Which is true to some extended but does not affect use of alternative payment, as drivers are :

1. Security

2. Wallet or gift card can by pass 2 MFA which is an annoyance in frequency.

3. Little or no access to cards

4. Convenience

5. Complete lack of other alternatives

The payment method choice is not limited to music purchase alone, it will extends to other digital products as well. Here is how music compares with others.

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Shopping cart abandonment due to lack of preferred method is estimate to be at 30%, this number rises with younger shoppers.

Local payment methods not only solves the cart abandonment problem to a large degree but it is also shown to increase AOV, frequency and volume, all of which lead to increased revenue.

So why are enterprises not offering these methods? Here are some thoughts:

1. Heavy lifting and costs. Mainly implementation cost.

2. Lack of Payment Leadership results in:

• Lack of opportunity cost understanding

• Myopic view point of payments

• Payments not viewed as strategic resource and considered back office function

• Lack of payment skill set and appreciation from decision makers

• Failure to see payment as a differentiation

• Lack of finance fluency. Payment industry norms and jargon foreign to most

• Scoping and use-cases that touch customer, merchant, processor, issuer and ERP require in-depth understanding of systems, limitations, hand-offs and design. Traditional PM and TPM skills only go so far and fail to produce a well rounded spec without domain expertise. Leadership fails to recognize and appreciate this fact.

• Lack of understanding on payment choices leads leadership to take the diminishing returns route

3. Payments is part of larger experience from on boarding, notification, account management, delivery, processing, preference setting and loyalty. Each change in payment warranties changes in any or all parts of the larger experience having to prioritize work and get alignment is easier said than done.

4. Payments is complex and misunderstood subject. To understand payments one has to understand technology, compliance, regulation , data privacy, financial impact, country landscape and instruments. Therefore payments becomes the least understood and most ignored function.

5. Currencies and countries add a whole layer to complexity which can be very daunting when we take into consideration the impact it could have on balance sheet.

Companies like Spotify, or another other start up or mid size company, addresses all of the above by being flexible, open and willing to experiment. Technology and payment partners today provide an array of options to create desired CX, right hand offs and security covers. At a startup or midsize company the legal, data privacy, compliance, infosec, treasury, finance teams are more nimble and flexible when taking decision related to payments, that luxury is not available to larger companies for good reason. Lack of payment leadership at large companies results in a lacks of skill set to work and put forth the right arguments to internal parties to move forward with local payments.

Unless leadership understands :

1. How Boletos can bring home the bacon.

2. How GC is a gift that keeps on giving.

3. How one acquiring bank contract can get you to 70% customer base in a key EU market

GMs and CMs will respectively remain at 1-4% respectively, when they could very well be much higher.

Lack of local payment methods is hurting companies and customers.

I will leave you with the following data which is relevant even today:

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P. S: Please note -

• This post is a reflection of my personal opinions and does not reflect views, strategies, and road-maps of my employers, colleagues or companies consulted.

• I have no investment in Apple Inc stock directly.

• Other articles published on my blog http://www.paymentsfintech.com

• Connect with me on Linkedin and Twitter.

• To reprint this article please contact me.

• If you are looking for folks to help you roll out alternative payment methods please reach out and I will be happy to connect you with experts in the industry.