PAYING WITH APPLE PAY

Any sufficiently advanced technology is indistinguishable from magic. ~ Arthur C Clarke

Apple Inc., the world's most valuable company with a market value of $668 billion, is used to making piles of money. If you were smart (or lucky) enough to own 100 shares of Apple Inc (APPL) on December 12, 1980 (which was then worth $411), and you wisely decided to hold onto them; your 5,600 shares – after 4 splits – now (as of 12/26/14) are worth $638,344. A beautiful example of an individual benefiting from capitalism. Nice going.

In October, Tim Cook presented Apple Pay to the world, in Apple's attempt to make more money. Apple Pay is Apple's ambitious version of a mobile payment or digital wallet system. Mobile payment systems that have been previously offered by Google, PayPal, Square and others have met with, at best, tepid interest on the part of retailers, financial services providers and most importantly, the paying public. But being Apple, its new mobile payment system is the talk of the tech and financial towns. The digerati are all over themselves saying that Apple Pay will soon lead to "the end of cash." Given its impressive success over the decades, it's prudent not to bet against Apple, but…

Perhaps it's a measure of my ever-lengthening separation from whatever the media and techno-cognoscenti decide is "the next best thing," but the attention given to Apple's endeavor to change how the public pays for stuff – via Apple Pay – defies reality in my mind. It's also possible that I'm a stick in the fiscal mud when it comes to salivating over yet another way to buy my Peets coffee. Oh well. Myriads of stories have been seen and heard about how Apple Pay will usher in the cashless society for everyone's benefit. The New York Times alone ran 2 dozen stories about Apple Pay since it was first presented on October 20th. The happy hype that the digerati are preaching is way ahead of what's really happening.

To begin with, last year consumers spent $1.6 billion using contactless mobile payments of the sort allowed by folks flapping their iPhone 6s with Apple Pay in stores, according to estimates from eMarketer, a market research firm. On its face, this seems like a lot of purchases (and it is), but $1.6B represents a mere 0.6% of all e-commerce spending and an infinitesimal 0.0037% of in-store retail purchases. Apple and its mobile payment system partners have a lot of ground to cover. The media buildup about Apple Pay precipitating the end of cash is impetuous. To paraphrase Monty Python, cash is not dead yet.

Any mobile payment system involves 4 vital sets of actors – the mobile software itself (here, the Apple Pay app on your iPhone 6), the participating retailers who have installed point-of-sale (POS) terminals that are compatible with the software, the financial institutions that process the transactions and the paying public. In order for Apple Pay to be successful, it has to lead a mobile minuet that each of these players want to dance to. The first 3 stakeholders need to strongly support and market the system so that the consuming public will be convinced to use the app to buy stuff. If there aren't enough retailers with compatible terminals (as is the case with Google Wallet, Square and PayPal), then there's not sufficient incentive for people to use the app and thus no real network effect to induce other stakeholders to adopt the system behind the app.

As one e-commerce payment systems analyst said regarding Apple Pay, "Apart from the cool factor, there’s really not a lot of value for the average merchant.” This is part of the reason behind Apple's initiation of a large advertising push to use Apple Pay. Together with MasterCard and Visa (the 2 biggest credit card payment processors), giant banks like Bank of America, Chase and Wells Fargo and prominent retailers including McDonald’s, Walgreens and Macy’s, Apple's advertising hopes to entice IPhone 6ers to buy stuff with their phones. But other major retailers like Best Buy and Walmart have stated they will not accept Apple Pay. These retailers, along with CVS Pharmacy, Rite-Aid, 7-Eleven and others are backing their own mobile payment system, CurrentC. If Apple et al. can't convince retailers to install Apple Pay compatible POS terminals, then it's not going to lead to success for Apple Pay.

For some perspective, let's see how we pay for stuff now, and learn what fiscal mechanisms Americans use to buy goods and services. Predictably, we purchase a whole lot of goods and services; in 2014Q3 annual consumer spending of all kinds was $10.97 trillion, which represents almost two-thirds of our GDP.   

The figure below shows the share of transactions people use for each payment type in late 2012 – cash, check, credit card, debit card, and electronic –by number of payments and value of these payments made by customers who buy everything from cappuccinos to vacuum cleaners.

 

Since 2000, the number of transactions using checks has steadily plummeted, dropping by half; so by late 2012 only 7% of all payments used checks. During this 12-year period, the number of transactions using debit cards mushroomed 9-fold. Credit cards' usage increased also and represents the 2nd most often used form of non-cash payment. After the first credit cards – BankAmericards – were issued in Fresno in 1958, they've become ubiquitous. [FYI, BankAmericards' name was changed to Visa in 1977. The first mention of the term "credit card" happened a very long time ago, by Edward Bellamy in his classic utopian treatise, Looking Backward, published in 1887.]

By 2012 the largest value of payments used either credit or debit cards, as shown in the above figure. However, cash (remember cash?) remains the single most often used payment type. Why? Because cash dominates payments for the multitude of small-value transactions; representing 40% of all transactions, but only 14% of the total value of these transactions. As seen in the figure, credit and debit cards and electronic payments ( which for the most part mean those made online, almost always using a card) account for much high-value transactions; checks also are used for higher-value transactions. Card and electronic payments account for 49% of the number of payments, but 61% of the total value share.

There are 3 "divides" present in payment preferences. First, from the above figure we can see there's an important value divide when it comes to how people pay for stuff. With small-value purchases, cash payments usually predominate; for higher-value purchases cards and electronic payments prevail. Next, there's a generational divide surrounding payment preferences. According to a recent survey, just 30% of folks under 30 said they'd use cash for smaller purchases. Forty percent of these people preferred using debit cards, but only 25% of people over 60 said they'd use a debit card.

Last, there's an income divide. Income exerts a strong influence on payment preference; folks with lower incomes use cash more frequently. From the San Francisco Federal Reserve Diary of Consumer Payment Choice study, 55% of consumers with household annual incomes less than $25,000 prefer cash over non-cash payment types, while those households making more than $200,000 exhibit a very strong preference for credit cards. The preference for cash declines sharply once household income exceeds $25,000 per year, with debit cards cited as the preferred payment instrument for all those in household income groups between the two extremes.

Consistent with these payment preferences, the highest-income earners use credit cards for more than 40% of their monthly transactions – much more frequently than any other payment option. This is likely because more affluent consumers tend to have better access to credit and financial services and can take advantage of the incentives card issuers offer for using credit cards. It's this group, together with younger people, that mobile payment systems' operators like Apple Pay are targeting.

Moreover, Apple's entry into retail payment systems may be banking on up-coming changes facing credit and debit cards. In October 2015 the fiscal responsibility for liabilities resulting from fraudulently-used credit and debit cards will shift from the card companies to the retailers themselves. This is no small matter, and why Apple and other suppliers of POS payment systems are loudly proclaiming their new systems' "enhanced security." This legal change will create significant incentives for retailers to replace their existing POS terminals – the "card-swipe" devices that retailers employ to authorize a customer's purchase. This change is why many newly-issued credit and debit cards have so-called smart chips in them, which creates an added level of security. New terminals will use the card's chip, not the strip, for authentication. As long as the retailers are changing out their terminals, Apple obligingly suggests, why not go whole hog as it were and use Apple Pay, with no card required at all. Nice timing.

There's also the issue that Apple Pay only works with iPhone 6s, Apple Watches and certain iPads. [The Apple Watch will be introduced in early 2015. And waving an iPad to buy a CFL at your local hardware store seems improbable, at best.] IPhones certainly occupy an important part of the smartphone market, but only a part. And that portion has been slipping as Android-based phones have captured a larger share of the market. According to Pew Internet, 56% of adult cellphone users have a smartphone. Apple expects to sell over 40 million iPhone 6s this quarter worldwide, so the share of this 40M who are American iPhone 6 purchasers is the underpinning of Apple Pay possibilities.

Finally, there's the issue of personal transactions data. If Apple Pay eventually comes into widespread use, then Apple will be privy to highly personal information about every Apple Payer's purchases that now only the financial institutions and credit card companies receive. These data are highly coveted and valuable. Apple already has access to multitudes of retail purchase information about their customers, through iTunes and their device sales, but Apple rightly expects Apple Pay transactions will be far, far broader should it become popular. Whether or not this further dispersion of retail  purchase data is appropriate or not is impossible to assess now. But I hope Apple's data security systems are being strengthened in anticipation of this possibility. Jennifer Lawrence, among others, would certainly suggest such strengthening is warranted after the September iCloud security breach.

Will most of us pay with Apple Pay in the near future? My bet for the future is that although cash may no longer be the high sovereign of the retail store counters, it will continue to be widely used for certain types of purchases, despite Apple's and the digerati's entreaties, as will debit and credit cards. If Apple can convince us that their app is both more secure and less troublesome than using a smart-chip card, then Apple Pay may become a prince of purchasing.

But the central challenge that Apple and its Apple Pay partners confront is that buying things with a credit or debit card is not nearly as arduous and burdensome a process as they make it out to be. It's actually quite straightforward and almost unconsciously used by millions and millions of people each day. And the prime mission of 2 key Apple Pay partners – Visa and MasterCard – is to promote the buying public's continued use of cards, not waving iPhones.

It's game on for the magic of paying with Apple Pay.

MY HOLIDAY WISH LIST

The excellence of a gift lies in its appropriateness, not its value. ~ Charles Dudley Warner

Merry Christmas, Hanukkah, Kwanzaa, Saturnalia and Brumalia. And, in that spirit, here's my wish list to Santa for this holiday season.

1)  A large box of judicial equity. During the past several weeks I've been affected, like many, by the horrible killings of Michael Brown and Eric Garner at the hands of local police. The lives of these 2 men are the latest in an all too long line of black men slain by men in blue under highly-questionable circumstances. Two grand juries now have independently decided not to indict the policemen who directly caused these men's deaths. Indignation about these jurisprudential decisions, let alone the killings themselves, has been widespread. Always willing to jump on the opportunity to showcase turmoil-the-making, the media has publicized demonstrations, thankfully after Ferguson, mostly peaceably mobilizing in cities across America. Outrageously, the Wall Street Journal ran an AP story which implied that a cause in Mr Garner's death was New York's high taxes on cigarettes. [Mr Garner was allegedly selling non-taxed cigarettes before being confronted and slain by cops.] OMG.

Politicians have echoed their anodyne, incomplete statements that these men's deaths are tragic and that law-enforcement tactics need to be modified via "retraining" police officers. At best, such "retraining" is a necessary but hardly sufficient remedy for these crimes. It's hard, very hard, to "retrain" culture with an immediate effect, which is what's needed. De-militarizing police departments and tactics is an unstated, but needed initial step.

Why hasn't any public authority demanded that the process and rules governing our grand jury system needs to change? Like all grand juries, these juries' deliberations and proceedings were held behind tightly-closed doors. Among other fundamental issues surrounding this system, so-called experts have cited the inherent conflict of interest that envelops local prosecutors and police interactions with police violence cases. Of the 2,700 cases heard by grand juries between 2004 and 2011 where police officers' actions resulted in the death of a civilian, only 41 (1.5%) resulted in charges of manslaughter or murder being brought against the cop. Talk about bias. Grand juries are mandated by the 5th Amendment to our Constitution. The Magna Carta – soon to celebrate its 800th anniversary – formally created and authorized grand juries at the strong behest of King John's nobility. Eight-hundred years is enough. In 2015, we need crucial changes made so real justice can be ultimately served in such appalling cases as Mr Brown's and Mr Garner's.

2)  A big package of economic growth. The US economy needs to grow faster. It has been limping through our "recovery" since June 2009 from the Great Recession at a paltry annual growth of 2.3%. Thus, the usual elixir of higher macroeconomic growth has been missing, much to the detriment of the vast majority of people. Our economy needs to marinate in expansionary fiscal and monetary policy for quite a while. As I've mentioned in previous blogs, this resuscitative package can take many forms but ultimately first needs to be put under the trees of middle- and working-class Americans.

3)  A present of broader economic equity. The inequitable distribution of income and wealth in the US needs to change in favor of the lower 80% of income- and wealth-holders. Such a present will not only promote more economic equity, but more growth and a greater sense of fairness for all. This gift of equity will provide priceless benefits.

4)  A wet present followed by wisdom. In these vanishing days of 2014, I offer thanks to Chaac, Tloloc and Zeus for the recent rains we've received here in California. I hope this wetness continues often enough so our drought finally subsides. But us water users (meaning everyone) and politicians (all of them) must become wise and brave enough to enact new water-use policies that recognize fresh water is always a limited, vital resource. These policies must raise the price of and mandate the recycling of this necessity. Building more dams and aqueducts isn't the answer. Water policy must require efficient and appropriate usage at all times. 

5)  Large lumps of coal to Congressional Republicans. Finally, virtually all Congressional Republicans have been naughty this past year. These stalwarts of mis-placed austerity and disdain for regular folks' continuing plight have thwarted all efforts to enact any real expansionary fiscal policy to improve growth and equity. For this, Santa should place a large lump of Kentucky coal under the trees of each Republican Congressperson, and at least 2 big lumps for Rep. John Boehner, Rep. Kevin McCarthy, Sen. Mitch McConnell and Sen. John Cornyn. Hopefully, they'll get the message from Santa and change their ways to qualify for actual presents next year. We all hope so.  

Happy New Year!

MORE YOUTH-FULL THAN EVER

The foundation of every state is the education of its youth. ~ Diogenes   

Humanity remains young, despite all the talk and time devoted to how old we're getting. There have never been so many young people alive as are now. The earth's 1.8 billion young people, between the ages of 10 and 24, according to a recently-issued UN report, represent 25% of humanity. Most of the people living on this planet today have yet to reach age 30 and are transforming the present, let alone the future. But adult policy-makers around the globe are not supporting youth's fundamental needs and thus aren't doing much to take advantage of the economic and social potential of this sizeable portion of humanity.

Our youth population isn't equally dispersed across the world's 196 nations, as 9 out of 10 young people live in less-developed countries. Six nations' populations ,including Israel, are "youthening" rather than ageing, meaning their median age is actually declining. In Afghanistan and 15 countries in sub-Saharan Africa, half the population is under 18. Other nations – most of them richer and developed – like Japan and Germany are fast growing older and will soon experience the travails of insufficient working-age/younger people.

China is an interesting example of a rapidly aging country. Principally due to its one-child policy, within 5 to 6 years the world's most populous nation will become older than the US. Because of China's highly sex-selective abortion rates, it will have 96.5 million men in their 20s in 2025 but only 80.3 million young women. This imbalance in its near-term demography will present many challenges for the Communist Party elders.

Each nation has unique population characteristics that can differ markedly from other countries. Figure 1 illustrates 3 demographic attributes of the 20 most populous nations on Earth, which together account for slightly more than 5 billion people and 70% of world population. These attributes are the nation's median age, youth (ages 15-24 years) population proportion and youth unemployment rate.

 

 Based on this information, Germany and Japan are the most "mature" of these countries. In contrast, the most "youthful" are Ethiopia and the Democratic Republic of Congo, followed closely by Nigeria. Half of these 20 nations have youth unemployment rates greater than 13%. Unsettlingly, in 4 of them – Indonesia, Egypt, Iran and France – youth unemployment now exceeds 20%; Egypt has the highest, a dreadful 35.7%. The unemployment rate for US teenagers (16-19yrs) in October is a distressing 18.6%.

Another measure that represents the youth or maturity of a nation's demography is the Potential Support Ratio, which indicates how many working-age (15-64 years old) people there are for each post-65 year old person. The higher this ratio, the greater the economic potential for the nation, and the more likely the nation can afford the higher retirement and health costs of its oldest people. Thus a lower ratio is detrimental with respect to future growth or fiscal sustainability. More economists now believe that "secular stagnation" is caused in part by fast-aging populations where the working-age population is shrinking, like in Japan, Germany and other nations.

Figure 2 shows the Potential Support Ratio for these same 20 nations. As illustrated, the more mature nations' Potential Support Ratios are much lower than the youthful nations. Japan's ratio is a mere 2.4 – meaning there are 2.4 working-age people in Japan to support each 65+ year-old person. The US ratio is now 4.6; by 2050 it is forecast to be 2.8 when all the baby boomers will have blown at (perhaps even blown out all) 65 candles on their birthday cakes. By contrast, the Congo and Nigeria now have more than 18 working-age people to support each post-65 person. The 8-fold difference between Nigeria's and Japan's Potential Support Ratios illustrates just how dramatically dissimilar population characteristics can be between nations.

 

These 2 figures illustrate why Africa is the most youthful continent and Europe (especially Southern Europe) is the most mature.

It's not mysterious what types of support young people need from their governments in order to thrive. Spurred by youth, the working-age population is expected to more than double in the least-developed nations, especially in Sub-Saharan Africa. All nations, but especially those with significant youth population, must invest in youth-oriented health care, education and labor (HCEL) policies to support their continued development and growth. Such policies can increase the likelihood that these youthful nations can benefit from their up-coming Demographic Dividend.

The demographic dividend is the accelerated economic growth that may result from a decline in a country's mortality and fertility rates and the subsequent change in the age structure of the population. With fewer births each year, a country's young dependent population grows smaller in relation to the working-age population. With fewer people to support, a country has a window of opportunity for rapid economic growth if the right social and economic policies are offered and public and private investments made.

In the past, this dividend has been realized by many nations, including the US (with us Boomers in the 1960s and 1970s), and later the Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan). Realizing this demographic dividend, however, is never a certainty for any nation. The 5 most youthful nations shown in Figures 1 and 2 (based on their median age and youth population percentage) – Congo, Ethiopia, Nigeria, Pakistan and Philippines – have expended less than two-thirds as much on education and on health care as the other 15 most populous nations. This lack of spending on key HCEL policies means realizing the dividend is more unlikely for these countries. These 5 most-youthful nations have over 123 million young people.

Americans don't need to travel to Ethiopia or Pakistan to see the effects of such lack of spending in youth education and health care. You can visit South Dakota's Pine Ridge Indian Reservation or any of the mostly-forgotten, poor under-invested inner-cities of America to witness a glaring lack of HCEL infrastructure that doesn't require a passport to behold.

Young people in Congo, Ethiopia, Nigeria, Pakistan, Philippines and other nations, as well as in places closer to home like Pine Ridge, require substantial health care and education funding to thrive and to capture the benefits that accrue from realizing their countries' demographic dividend. Unfortunately for the world's 1.8 billion young people, where this needed funding will come from remains a mystery.