A deep look inside Apple Pay’s matchmaker economics – Richard Schmalensee and David S. Evans

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From Harvard Business Review

Standing on stage on September 9, 2014 at Apple’s Worldwide Developer’s Conference (WWDC), Tim Cook announced, “We’ve created an entirely new payment process, and we called it Apple Pay.” Cook displayed a video of a woman who held her iPhone 6, the company’s upcoming upgrade, near a payment terminal.  She paid in the blink of any eye. “That’s it,” Cook said, exclaiming twice over “just how fast and just how easy” the new payment method was. An Apple press release claimed the new service would “transform mobile payments.”

Executives, investors, entrepreneurs, analysts, and the media had to assess whether this would be another Apple juggernaut. Would Apple Pay do to financial services what iTunes had done to music? Was the game over for the many other players—big ones like Google, and small ones like LevelUp—that had mobile payment solutions?  Should banks agree to pay Apple 15 basis points per transaction for allowing their customers to use their debit and credit cards with the new service?  And should retailers agree to take the new payment method?

The tech press called Apple Pay a revolution. So did the Financial Times.  PayPal went on deathwatch.  In an article called “Will Apple Pay Kill PayPal?” CNN reported, “Apple wants us to ditch our wallet and credit cards. Wall Street is nervous that consumers may dump online payment service PayPal too.” eBay’s shares—it owned PayPal then–fell 6 percent.

Read the full post at Harvard Business Review

Richard Schmalensee is the Howard W. Johnson Professor of Management Emeritus and Professor of Economics Emeritus.

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