The Story of Apple Pay with Jennifer Bailey

0:01If you look down at your phone, there are so many objects that exist in the physical world that have been absorbed into it. Maps, calculators, mail, clocks, and of course for many, your wallet. In today's episode, you'll get to hear from one of the people who helped build Apple Pay and Apple Wallet into these crazy little pocket computers, passing over the mic to A16C General Partner, Alex Rampel, to properly introduce our guest.

0:37Hi, I'm Alex Rampel, a general partner at A16C. In this conversation, I talked to Jennifer Bailey, the legendary Vice President of Apple Pay and Apple Wallet, whose work has revolutionized everything from digital payment to transit cards, contact those tickets, hotel and car keys and more. Since overseeing the launch of Apple pay a decade ago, Jennifer has led its expansion in the 75 markets worldwide, now encompassing over 11 ,000 bank and network partners. In this conversation, we cover her unconventional path rising through the reins at Apple. The challenges she confronted pushing Apple Pay into the mainstream, new Apple verticals on the horizon, and her hard earned advice for early entrepreneurs.

1:18Let's dive in. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details including a link to our investments, please see A16Z .com slash Disclosures. Jennifer, thank you for being here. You started off as a software engineer. Now everybody becomes a software engineer.

1:54I think it's the most popular major in college. But in 1980, that was not a thing. But maybe walk through how you started. It really goes back to my childhood because I moved to Silicon Valley when I was six and my dad was in the semiconductor industry. So everyone we knew were pretty much in that phase of technology in Silicon Valley. And so when I went off to college, I started with math, computer science, and my first job out of college was, as you noted, a software engineer. It was a fantastic grounding and really exciting time to be in the industry back then. Any particular memory stand out?

2:29One of the things I loved about what I did in my early careers, I was in a lot of early stage companies. Some of them were successful and some of them were not. And I would say you learn from both, both the success as well as the failure. And even when I look for hiring people today, I love to see them having come from early stage companies because they sort of understand what it takes. Yeah, success can be a dangerous teacher, but it's a good failure. If you only work at places that never get to product market fit, it's hard to learn anything except you never got to product market fit. Exactly.

2:58I agree. Our firm is highly intertwined with the Netscape story. Netscape for those that don't know, it was really synonymous with the explosion of this new thing called the internet. How did you get involved with Netscape? What was it like working there? It truly was, I think, the beginning of the commercial internet, certainly not the technical internet, but the commercial internet. And a lot of things were emerging at that time, the search business, Yahoo, formed in those early years. InfoSeek was another one of the search companies. And then certainly a few years after that came Google. And so it was an incredible time where so much formulation was happening around this crazy thing called the internet.

3:38The company, if you ask what it was like to work there, it was a bit chaotic, like most startups, but it was a challenge in terms of finding to your product market fit with a revenue model. Because as you know, the internet emerged, and browsers emerged to be something that needed to be free. And that was our primary business model at the time. We transitioned to do both server technology as well as what we would have called a portal, which is what you would consider Yahoo was and these were where we're aggregating content and information and search technology and trying to monetize that through advertising.

4:13Was there anything that you brought with you from Netscape? I just remember when Netscape was taking off and people here talk about tech bubbles, but there was one real tech bubble, which was really the late 90s, where there were companies that would get formed, they'd go public like four months later, and it was all on the back of the internet becoming a thing. If you were to think through biggest learnings that you had from that experience, anything that really stands out? I'd say it was two things. One is having a strong, resilient smart team that could really change with the times and move quickly to new forms of business was really, really important in having that flexibility, not being stuck at a single model, especially back then when sort of unclear exactly what the internet was and how it was going to monetize.

5:01I think the second thing that you learn in startups and I actually see this in Apple is a lot of success is based on great timing. And some of that's predictable and some of that's not predictable. But I think the timing of when these companies come to market, how they come to market and how quickly they invest can make a huge determinant in the success of a business. Yes. Yeah, it's probably a good segway to Apple because I think the most amazing companies exist at the beginning of a product cycle. In fact, even better, they create the product cycle. So Microsoft and Apple in the early 80s with the operating system for the personal computer.

5:41And then the internet, and the problem is, as you mentioned, Netscape didn't really hold on to that platform. They were the access point and then it became free and then Microsoft got in trouble in the 90s for making it free in a very punitive way to Netscape's peril. But the smartphone was that next platform. Everything that we think of today was really to get to the smartphone and maybe walk me through how did you rejoin Apple and that must have just been an incredible experience. Yeah, I was super fasting so I came back to work for Tim running the online stores. I was where the e -commerce was really emerging on the internet which made my nutscape background pretty relevant.

6:18But when I came back, actually the first new platform was really iTunes and the iPod. So the iPod was introduced, I think, in 2001. I came back in 2003, and that's when we really launched iTunes for Windows, which is where the growth really started to take off for the company. When I came back in 2003, it'd been pretty flat. And why we weren't running out of cash, we weren't growing the business that great. But once we released iTunes for Windows, that trajectory really started to change. And then that became the platform, if you will for the iPhone and iOS. And so the company reinvented itself many times.

6:56You know, we used to be a computer company and then we were sort of this music player company and then of course the phone company. And that continued to provide great growth opportunities and challenging roles within the company to do new things and continued to really grow the footprint that Apple had and the consumer base that we had. So how did I assume that there's a magic link in a very, very narrow one between running online store where you accept lots of payments and the beginning of Apple Pay. Am I correct on that or am I incorrect? Well, I mean, my story to come over to Apple Pay is sort of an interesting one.

7:31I had been running the online store for 10 years and I was ready for a new growth opportunity and I went to Tim and I said, you know, I'm ready to do something else and he said, well, do you want a big operational job or do you want to do something that's more like a startup? And I said, well, I think I'd rather do a startup, You know, because that's what my background had been in. And I love that part of the creation phase and the risk -taking phase and all of that. And so there were a few things that he had me go look at. And there were some engineers working on the core technologies associated with Apple Pay, like the NFC and wireless capabilities and the secure elements and the technologies that we were using.

8:09And so really was in the formation stage from a technology standpoint and then we decided, Yeah, we really want to do this mobile payments thing. And it turned out, I knew a little bit about payments from the online store, not a ton, but knew enough, I think, to come in and help start the business and get it formulated and bring the resources together into a cohesive team. What was the inspiration? Because if you're the platform, which Apple was becoming, there are so many different directions that you can go. I remember talking to this guy at Facebook, and we were talking about a couple ideas, and he said something to me that I'll never forget.

8:43He's like, Alex, that's a good idea. But there are so many gold bricks lying around that are closer. We just like, every day, we could just pick up gold bricks because we're the platform. We have all these things. And, you know, which gold bricks do you pick up in which order? Controlling payments is very useful. But there are so many other things that I imagine Apple could and thought about doing. Why do payments? We just felt like payments was an area that had a couple of friction points and things that we could really solve for customers that we thought were really important. And the first was obviously making payments much more secure.

9:19You know, these plastic cards have been around for a long time. We looked at that and said, do you have any better technology than using plastic cards to do this kind of thing? We thought we could make it easier, we thought we could make it more private for customers. And with the technologies that we developed as we looked at the user experience back then even, I think there was a view that in some number of years, everyone should be paying this way. And I remember 10 years ago, this idea of contactless payments, had the EMV switch over the liability shift been formalized at that point or no?

9:52No, one of the things you find out about payments when you get into the details is very different on a global basis. So in the US, contactless was not a thing, right? When we launched Apple Pay, I believe contactless acceptance was at 3%. But we saw outside the US, in places like the UK and Australia, high adoption of contactless cards. We're regulators there had mandated the move much faster and much earlier than in the US. So as we launched in these countries, we could really see the benefit and the uptake of Apple Pay where acceptance was high. And so we knew that the experience was fantastic.

10:29People were going to love it. But we had to work through this acceptance program. And what helped us was as we were launching Apple Pay, they were mandating chip acceptance, which really required merchants in some ways to upgrade their hardware. So if they were upgrading their hardware to do chip, they might as well upgrade it to do contactless as well. So that helped us as well. But still took time in the US, as you probably know, has taken time in the US to get to the acceptance levels that some of these other countries have. So Apple pays 10 years old now. What were the biggest challenges that you had getting that kicked off?

11:02Because it was banks, it was merchants, it was issuers. there were lots of different parties involved and everybody kind of probably saw you as a threat and an opportunity to some degree. As you point out, it's really a multi -sided network. And so those are hard. You have the chicken and egg problem. I think the good news here is that the banks, particularly the early banks that we worked with, both in the US on a global basis, really did see the benefits of the privacy and the security and could understand that customers would really want to do this over the longer term. So there were technical requirements that the banks had to do.

11:38And so that took time, but I think the value proposition that they saw, they liked. And they were also in the phase of trying to drive more mobile engagement with their customers, more mobile downloads of their apps. And so having Apple Pay helped achieve not only better security and payments, but also more mobile engagement and download of their banking apps. And so that was really positive. The biggest challenge was really acceptance and trying to get acceptance really as ubiquitous as possible. Well, and also there is Apple Pay Online and Apple Pay Offline. Yes. And what I thought was interesting is that you picked the harder problem first to a certain degree, which was offline.

12:20How did you decide to do the offline before the online? How did you think about that? Well, first of all, at the time and still today, obviously the vast majority of payments, If you look at the aggregate, I think 80%, something like that of the transaction volume is still really coming offline. And so, I think that and the combination of the hardware technology and the capabilities that we had, we felt like it was a fantastic use of NFC and the secure element chip. And just the whole technical architecture was really made for offline in many respects. And so I think because the scale was there, we obviously saw these markets outside the US that had fantastic content, it's the substance.

13:03So going after the offline market seemed to be where the most consumer impact would be. Got it. There's a famous line from the book The Sun Also Arises. It's actually about bankruptcy. It's like one character asked another one like, how did you go bankrupt? And he said two ways slowly than all at once. And if I kind of sink through Apple Pay, I remember like, I heard about it. And now it's all at once. I mean, there's not a single place that I can't pay with my watch. It's incredible. I go around the world. How did it really take off? Or when did you feel like it was really taking off? When we launched in the US, we knew it would be slow going given the acceptance infrastructure here.

13:43As we looked outside the US, though, we could really see, as we launched in more of these countries that had contactless acceptance. we could really see it take off in the consumer base. So we knew that the, I like to call it the formula, you know, the formula of the value proposition for the consumer was really there because we could see the growth happening in these other markets. So when you look at it in global terms, I would say maybe three, four years into Apple Pay, we felt like, okay, this is really gonna scale given what we were seeing primarily in the international markets. And then at that time, we started adding functionality Now I like online, we started adding transit and some of the other wallet capabilities that also take advantage of some of these technologies that we have built into the phone.

14:26And so with those additional capabilities, we knew that we could get this to a global scale. What was the order of operations for global? There's a lot of companies that want to go global. There's the dominant version, which is you start off in one country, then you go to the adjacent to you. You're in Canada, then you go to the US, and then you go to Mexico or something. How did you think through global expansion? What were the biggest surprises or challenges in scaling it up globally? Yeah, it's a great question, because as you know, payments can be a very local thing in countries. Most financial services are very local, country -specific.

15:01When we looked at expansion priorities, we really were looking at a couple of things. First of all, obviously, how large was the active iPhone base because you can't do Apple Pay unless you have an iPhone? The second thing was contactless infrastructure. wasn't an early or a late market. And then the third was really, was the ecosystem available and ready to do the work in integration and sort of willing to do the integration. And where that's important is when you look at countries that have a large domestic or dominant domestic, typically debit networks. So you might think of Cartball Care or Giro card in Germany, F -Post in Australia.

15:38Those were the factors that we would look at. we really started in the biggest iPhone markets first, where we could get the right level of payment infrastructure support and looked at contactless. And then from there, we just kept going down. So, you know, some of the markets were truly fascinating. Like Saudi Arabia was a country that we worked with a domestic network, it's called Mata. And from a regulatory standpoint, they basically mandated everyone to go contactless, all merchants at once. And so Saudi Arabia skipped the whole contactless card evolution. They just went straight to mobile.

16:15And so there were countries like that where from a regulatory standpoint, they're much more coordinated than in a country like the US. And then we would see countries like France and Germany, which have been on the slower adoption curve contactless, but are now really taking off from a contactless perspective. Those are big markets for iPhones though. So we went pretty early and then just started to do the business development work and market development work to get the acceptance that we needed and the footprint that we needed. You mentioned privacy and security as a key impetus for developing Apple Pay to begin with.

16:48I mean, particularly when I pay online, if I'm entering my CBV in all of these account details, I don't know what happens to them when the merchant receives them and they might just store them. And again, if I'm paying with Apple Pay, I don't have to worry about that. Apple is very privacy and security concerned. Yeah. How did you try to reinvent things? and I'm sure there's some back and forth with kind of old fashioned infrastructure along the way. Yeah, definitely. In the early days and the early design of Apple Pay, we were collaborating with obviously internally on the engineering side, but also with the networks.

17:22You know, the tokenization schemes that we use are network -based. So these are mastercard AMX, and then now we work with these domestic networks as well. And so it took collaboration and design really across these parties to agree on what was the best technical architecture and the most secure architecture. And so there were pieces obviously on the phone side, the things like taking a token, encrypting it, storing that in the secure element, and it can only be released with a biometric, and then on the network and bank side being able to take those tokens, validate the to grant validity and translate the token in a way that the banks could have processed the transactions.

18:04So it was collaborative and we really focused on security first, as you mentioned, with a lot of these technologies that were just in the early stages of coming to life. The second thing that we did on the privacy side, I remember really some very specific design meetings where we would talk through different architectures about how the transactions could flow and how they would be detoxinized or how the cryptogram would be read. And we were very clear and specific in our design goals that we did not want to have that data. We didn't want to be able to see it, we didn't want to be able to aggregate it.

18:39It was very clear in our design that when you pay in store today using Apple Pay, we don't see that transaction. It goes up the traditional payment, infrastructure into the network and into the issuers, through the acquires, et cetera. And so that was a very specific design goal of ours, which was to make sure that we weren't, if you will, a honey pot for all of its very sensitive transaction data. So it was really designed from the beginning to be architected that way from a privacy perspective. So maybe we could leap from Apple Pay to Apple Wallet. I'm a big fan of this because last night I took my 15 year old to a San Francisco Symphony Orchestra concert.

19:16or my parking pass was in my Apple Wallet. Our tickets were in my Apple Wallet, and now that we've already seen that show, they've disappeared from my Apple Wallet, so we don't have to worry about them cluttering it up. But I have all sorts of things in my Apple Wallet. How did Apple Wallet become a thing? Maybe kind of talk about the origin story of that. Well, the precursor to Wallet was really when we started airline boarding passes a long time ago. And ever since then, I think we've had a goal, I would say that in a long arc of time, we would like to replace your physical wallet. And so as the years have gone by, we have focused on different things that are in your wallet.

19:52Tickets is one. Transit passes is another. You can now tap to ride in over 250 cities globally, just with your phone or Apple Watch. Some of those use proprietary transit cards, some of those use what we call open loop, which would be standard debit and credit cards. We've done work around loyalty. as you know now, we also do student IDs. So many campuses on the United States now, you can add your student ID to wallet, you can tap to get food, tap to get into your dorm, tap to check out library books, if anybody does that anymore. Car keys, we have launched with about 10 brands now. I have one, I'm sorry.

20:31I don't even have a car key. It's my watch. My watch opens by BMW, it's amazing. I love that feature as well. So we have car keys, we've worked with Disneyland on access passes to Disney World. We just launched scooter keys in Taiwan, and we'll be expanding that into other Asian countries, as well as hotel keys. So I think all those things that you think about that you carry in your wallet or your keys, we're really on a path to try to replace those with more secure and private versions of all of those. And so we know that in the future, you will be able to leave your wallet at home. The last area I forgot to mention, We are starting to work on IDs.

21:10We work with a number of states in the US to provision state driver's licenses into your Apple wallet. First acceptance is at TSA locations, typically in those states. And then we've just enabled this last year the iPhone actually to be an acceptance reader. So if you were a bar as an example and you wanted to check IDs using your iPhone, you could do that with an app to check IDs that way. So I hope soon that you and I will be able to leave our California driver's licenses at home. I have a DMV appointment in two weeks, which was the first one available to get my real ID. So I'm very, very excited to not do that in the future and just go through Apple.

21:49That might be a good question, which is, are most of these things inbound to you or do you go out to states or, you know, IDs or just like, you know, ski ticket passes? I imagine everybody knows what the iPhone is. Everybody knows what Apple wallet is. Are people coming to you? Do you go to them. And then I guess the kind of natural follow -on question is, will there be an app store? If I want to apply from my next credit card, why can't I do that within the Apple wallet? Like, ooh, I don't like my current credit card. I want to add a new one, push plus, and then the application is right there.

22:20Yeah. So let's start with the first part of that, which is whether it's about our app bound from our perspective. And I would say usually in the very early stages of a vertical. So we would call keys a vertical and transit as a vertical, I would say that it's largely us outbounding to a couple of the key infrastructure partners to collaborate, you know, under NDA on the kinds of experiences we think we can enable. So just like payments, we have to work really closely with these integrators because we don't own the whole tech stack. You know, we own the tech stack that sits on the iPhone and some servers here that make the connections.

23:05But we have a lot of infrastructure partners, whether it's access partners who do corporate access or it's ticketing vendors who do access into stadiums, we have to work with them very collaboratively. So it's outbound initially, usually in a vertical, and then it's very much inbound. So when people understand that as an example that we're working on IDs, we have a lot of governments reaching out to us like, hey, how can we work together on IDs as an example? because they understand that what our technology platform is, what capabilities we can bring to bear. And one of the things we really work on in terms of trying to get these to more countries more quickly is the scalability of our ability to do these integrations with partners.

23:45I think your second question, remind me your second question. That was kind of like an app store for my wallet. What do I add to my wallet? So we have debated this internally. It's a really good question. If you think about the marketplaces today that exist, Just pick one for financial services, somebody like Credit Karma as an example. Credit Karma uses a lot of personal data to be able to best match you and the hundred things they have in their marketplace that might be related to what you're looking for. And so I think, given that we don't have the data, at least sitting in our servers, which is the way Credit Karma does it, and most marketplaces are server -based, we have not gone down a path to do things that are more marketplace oriented.

24:31I think you could imagine a world where more of that data resides on the device and the consumer has control of that and can say yes I want to provide this data for the purposes of you giving me the best recommendation in credit cards or giving me the best recommendation and whatever financial service you want. But that does not exist today in any sort of real form. You can imagine things like you know we do open banking in the UK, which is a regulatory enablement to allow people to connect their Apple Pay cards to their bank account. And then that allows us to show the consumer things like their account balance for their debit.