Paying someone through your phone has never been easier. Recently, Apple announced an Apple Pay update in iOS 11 that will let you send someone cash straight through iMessage–much like you can with Venmo or Facebook Messenger.
And boy, does Apple make it easy. All you have to do is select an amount and authenticate it with your fingerprint. Thanks to Apple’s thoughtful design, money flows from your bank account to someone else in moments, without a second thought.
Well, kind of. It doesn’t flow directly into the recipient’s bank account. It goes onto an Apple Pay cash card. Call it Apple bucks. Cupertino’s Monopoly money. The equivalent of a gift certificate. To actually collect any of the money for rent, utilities, and all those pesky things that matter, your friend will need to manually transfer it to their bank, via an interface undisclosed in the process. It cannot be automated. In other words, Apple is making the conscious choice to sit on your money, most likely reinvesting it for millions in returns, while offering you the equivalent of a gift card for your efforts.
If Apple really cared about customer experience, why wouldn’t the company make the process of redeeming Apple Pay cash as simple as paying it? Apple would not comment on the matter, but talking to analysts and payment specialists, it seems certain that Apple Pay’s design doesn’t prioritize you. Apple Pay prioritizes itself and its partners.
It’s About UX, Not Money
So what of Apple’s competitors? Do they do the same thing? Of all the competing peer-to-peer or “P2P” payment platforms that let you send cash directly through the internet, some businesses sit on consumer funds, while others enable auto-deposit.
Neither PayPal nor Venmo enable auto deposits, either. But two of Apple’s closer peers, Facebook and Google, both enable auto deposits for cash sent through their systems. This point was called out to me by several Facebook designers on Twitter, who were clearly proud of themselves, and their company, for enabling auto-deposit by default.
After all, the average American doesn’t have very much money on hand. By one study, 53% of us can’t come up with $400 to cover an emergency expense. So, for a majority of Americans, when a friend owes us $40? That friend is holding onto more than 10% of our available funds. Which means that Apple, with $256.8 billion of cash on hand, needs that $40 a lot less than you or I do.
My knee-jerk reaction to this news was that Apple must want to hang on to users’ cash to invest for sizable returns. After all, that’s how banks traditionally make money! And while Apple is technically not classified as a bank–the transactions behind Apple Pay are handled by banking partner Green Dot through an undisclosed deal–Apple could still leverage unspent Apple Pay dollars in side hustle investments. But is that really the case? For answers, I looked at the market leader PayPal, and learned that while Apple certainly can and likely will do this, the financial incentive is less than you’d think.
As of this year, PayPal had $12.154 billion of funds sitting in customer accounts. Nailing down just how much money the company makes off of these funds is harder to quantify, as those returns are masked within larger categories on public disclosures like PayPal’s annual report.
But Eric Turner, financial technology research analyst at S&P Global, shared my curiosity. In fact, an investor had asked him the same question earlier last week. On PayPal’s 10-Q, he found the data. The company invests parked funds in a four-channel portfolio of investments, ranging from treasury investments to corporate debt securities. By estimating current returns for each, he came to the conclusion that PayPal probably pockets about $15 million per quarter (possibly up to $20 million) on $12 billion in parked funds. That’s only about half a percent of PayPal’s quarterly revenue. These overall returns match similar estimates by CNN in 2008, even though PayPal is holding billions more in cash today than they did over a decade ago, which is most likely a result of the market itself.
“We’re in a very low rate environment,” says Turner. “If you see rates creep up across categories, that return could be something more material.” But even if they do, and even if every one of the 1 billion iOS devices in the world sent $12 via Apple Pay to reach PayPal’s current cash hoard, Turner still admits that there’s not much for Apple to gain here. If Apple earned a $30 million return, it would mean even less to Apple than it does to PayPal by the nature of scale–that’d still be only 00.056% of Apple’s quarterly revenue.
In other words, there’s little to no monetary reason for Apple to withhold our funds. So why does Apple plan to do it?
A Psychological Trick To Keep You Spending
In one of the great errors we make every day as consumers, we don’t earmark all money we make the same way. A responsible person’s paycheck is expected to go to a mortgage or groceries. But give that same person a tax refund, and those dollars tend to be treated as a surprise lottery win rather than real dollars earned–and they’re spent more haphazardly as a result.
“This has been a thing with PayPal for years. It’s been referred to as ‘fuzzy money’ or ‘funny money’—you spend it more frivolously because you came into it as a windfall,” says Brendan Miller, principal analyst at Forrester. “It doesn’t get accounted for in all your other expenses as a consumer, and this money will sit in the Apple account and get used more easily. Consumers are less emotional about it.”
It’s no wonder that eBay acquired PayPal in 2002. It wasn’t just the payment system fueling the world’s largest garage sale; it was the mentality of its users, too: “I’ve just made some free money by selling old stuff on eBay, so maybe I’ll use it to buy some new stuff, too.”
Turner and Miller both believe this emotional component is the core of Apple’s strategy with Apple Pay, which transforms the $20 a friend sends you for buying lunch into fun money to be spent at Apple Pay merchants, or even better, Apple itself.
“I did find it funny that in the keynote, one of the first mentions was that you can spend the money in the iTunes store!” laughs Turner.
But the play is really much bigger than even trapping consumer dollars as an Apple gift card. It’s about keeping those consumer dollars within the entire Apple Pay merchant ecosystem. Apple claims that 50% of U.S. retailers will accept Apple Pay by the end of the year. And Apple wants to make sure that money is actually flowing through this pipeline.
“When you talk about earning and burning with an Apple Pay cash account, now there’s millions of locations that consumers can spend it,” says Miller. “It’s good for Apple Pay merchants.” So retailers who adopt Apple Pay are rewarded with a customer contingent that’s a bit less scrupulous with their spending.
Good For Business, But Bad For People
“All in all, it’s a good move by Apple,” concludes Miller. And it’s true from a pure balance sheet perspective, if getting people to spend more money, and more money on Apple Pay, is the only goal.
But when Apple designs a product, it does so with the promise that it is designed in with the interests of the consumer mind. I use an iPhone not just because it looks good and is easy to use, but because it intrinsically feels like it’s been made for me. The phenomenon is no random accident, but the result of careful, user-centered design. With every button and gesture deployed on my iPhone, Apple is solving problems for me that I may not even know exist. Or at least, it’s trying to.
That’s because Apple puts me first, and it’s a positive mentality that infects all Apple products. I see it through Apple’s industry-leading protection of my privacy, and even its attempts at improving my health with platforms like HealthKit.
Yet by sitting on my funds with Apple Pay, Apple is not a buddy who is quietly watching out for my best interests, like the nerd who knows the Wi-Fi hotspots I shouldn’t use, or the personal trainer who urges me to go on that run. Apple is a financial manager who no one should hire, silently influencing how and where we spend our money, specifically to benefit itself.
Apple, you have $250,000,000,000 dollars in the bank. Do you really need my $25, too?