In the Vault: The Story of Apple Pay with Jennifer Bailey

Episode Transcript

This transcript has been condensed and edited for readability and clarity.

Alex Rampell: Jennifer, thank you for being here. You know, you started off as a software engineer. Now everybody becomes a software engineer; like, I think it’s the most popular major in college. But in 1980, that was not a thing. Maybe kind of walk through how you started.

Jennifer Bailey: So it really goes back to my childhood, because I moved to Silicon Valley when I was 6 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, you know, 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.

Alex: Any particular memory stand out?

Jennifer: You know, one of the things I loved about what I did in my early career is I was at 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.

Alex: Yeah, success can be a dangerous teacher, but so can failure. Like, 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 — but I agree.

You know, our firm is highly intertwined with the Netscape story. Netscape, for those that don’t know, 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?

Jennifer: 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, you know, Yahoo!, formed in those early years. InfoSeek was another one of the search companies. And then certainly, you know, 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.

The company, if you ask what it was like to work there, it was a bit chaotic, like most startups. But, to your point, it was a challenge in terms of finding 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 in the days where we were aggregating content and information and search technology and trying to monetize that through advertising.

Alex: And was there anything that you brought with you from Netscape? I mean, I just remember when Netscape was taking off. You know, 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 the biggest learnings that you had from that experience, anything that really stands out?

Jennifer: I’d say it was probably around 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. And having that flexibility, not being stuck in a single model, especially back then, when [it was] sort of unclear exactly what the internet was and how it was going to monetize.

I think the second thing that you learn in startups — and I actually see this in Apple — is that 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.

Alex: Yeah. That’s probably a good segue way to Apple, because I think the most amazing companies exist at the beginning of a product cycle. Or 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 and 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 kind of 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 because of the smartphone. And maybe walk me through: How did you rejoin Apple? That must’ve just been an incredible experience.

Jennifer: Yeah, it was super fascinating. So I came back to work for Tim [Cook] running the online stores. It was when the ecommerce was really emerging on the internet, which made my Netscape background pretty relevant.

But 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 had been  pretty flat — and while 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. You 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 continue to really grow the footprint that Apple had, and the consumer base that we had.

Alex: So I assume that there’s a magic link, albeit a very narrow one, between running an online store where you accept lots of payments and the beginning of Apple Pay. Am I correct on that, or am I incorrect?

Jennifer: Well, I mean, my story to come over to Apple Pay is sort of an interesting one. I had been running the online store for 10 years and I was ready for a new growth opportunity. And I went to Tim [Cook], 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. 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: there were some engineers working on the core technologies associated with Apple Pay, like the NFC [Near Field Communication technology] and wireless capabilities and the secure elements and the technologies that we were using. And so, really was in the formation stage from a technology standpoint. And then we decided like, 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 new enough, I think, to come in and help start the business and get it formulated and bring the resources together into a cohesive team.

Alex: And 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 of ideas, and he said something to me that I’ll never forget. He’s like, “Alex, that’s a good idea, but there are so many gold bricks lying around that are closer. 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 were so many other things that I imagine Apple could and thought about doing. Why do payments?

Jennifer: 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. You know, these plastic cards have been around for a long time. And we looked at that and said, “Hmm, gee, I think there’s some 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 had 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.

Alex: And, I mean, I remember 10 years ago this idea of contactless payments. Had the EMV switched over, the liability shift been formalized, at that point, or no?

Jennifer: No. One of the things you find out about payments when you get into details is [it’s] very different on a global basis. So in the U.S., contactless was not a thing, right? When we launched Apple Pay, I believe contactless acceptance was at 3%. But we saw outside the U.S. and places like the U.K. and Australia high adoption of contactless cards, where regulators there had mandated the move much faster and much earlier than in the U.S.

So as we launched in these countries, we could really see the benefit in the uptake of Apple Pay where acceptance was high. And so we knew that the experience was fantastic. People are 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 it still took time in the U.S., as you probably know, has taken time in the U.S. to get to the acceptance levels that some of these other countries have.

Alex: So, Apple Pay is 10 years old now. What were the biggest challenges that you had getting that kicked off? Because it was banks, it was merchants, it was issuers — there were lots of different parties involved, and everybody probably saw you as a threat and an opportunity to some degree.

Jennifer: As you point out, it’s really a multi-sided network, and so those are hard. You know, 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 U.S. 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, and that took time, but I think [they saw] the value proposition. 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.

Alex: Well, and also there’s Apple Pay online and Apple Pay offline. And what I thought was interesting is that you picked the harder problem first, to a certain degree, which was offline. How did you decide to do the offline before the online? How did you think about that?

Jennifer: 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 U.S. that had fantastic contactless acceptance. So going after the offline market seemed to be where the most consumer impact would be.

Alex: Got it. There’s a famous line from the book, The Sun Also Rises — it’s actually about bankruptcy — but it’s like: one character asked another one, “How did you go bankrupt?” And he said, “Two ways: slowly, then all at once.” And if I kind of think through Apple Pay, I remember I heard about it and now it’s all at once.

I mean, there’s not a single place where 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?

Jennifer: Yeah. When we launched in the U.S., we knew it would be slow going, given the acceptance infrastructure here. As we looked outside the U.S. though, we could really see — and as we launched in more of these countries that had contactless acceptance — we could see it. 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 3, 4 years into Apple Pay we felt like, okay, this is really going to scale, given what we were seeing primarily in the international markets. And then at that time, we started adding functionality 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. And so with those additional capabilities, we knew that we could get this to global scale.

Alex: What was the order of operations for global? Because a lot of companies that want to go global, there’s the domino version, which is: you start off in one country, then you go to the adjacent ones. So, you’re in Canada, then you go to the U.S., and then you go to Mexico or something. But how did you think through global expansion and what were the biggest surprises or challenges in scaling it up globally?

Jennifer: 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. When 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: was it an early or a late market? And then the third was: was the ecosystem available and ready to do the work and integration, and 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 Cartes Bancaires or Girocard in Germany or eftPOS in Australia.

Those were the factors that we would look at. So 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 the domestic network, it’s called mada. 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. And so there were countries like that, where from a regulatory standpoint they’re much more coordinated than in a country like the U.S. And then we would see countries like France and Germany, which have been on the slower adoption curve [for introducing] 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 in the footprint that we needed.

Alex: You mentioned privacy and security as a key impetus for developing Apple Pay to begin with.

I mean — particularly when I pay online — if I’m entering my CVV and all of these account details, I don’t know what happens to them when the merchant receives them; 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. How did you try to reinvent things? And I’m sure there was some back-and-forth with kind of old-fashioned infrastructure along the way.

Jennifer: 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 — you know, the tokenization schemes that we use on our network base, so Visa, MasterCard, Amex. 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. There are pieces, obviously, on the phone side, 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 cryptogram, validate and translate the token in a way that the banks could then process the transactions. So 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 de-tokenized 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. It 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 acquirers, etc.

And so that was a very specific design goal of ours, which was to make sure that we weren’t, if you will, a honeypot for all of this very sensitive transaction data. So it was really designed from the beginning to be architected that way from a privacy perspective.

Alex: Yeah. 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, right? 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 I 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? Talk about the origin story of that.

Jennifer: You know, 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 the 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. You know, tickets 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 [at] many campuses in the United States now, you can add your student ID to Wallet and 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.

Alex: I have one. I don’t even have a car key, it’s my Watch. My Watch opens my BMW. It’s amazing.

Jennifer: 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, you know, 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 know, you will be able to leave your wallet at home. The last area I forgot to mention, we are starting to work on IDs. We work with a number of states in the U.S. to provision state driver’s licenses into your Apple Wallet.

First acceptance is at TSA locations, typically in those states. And then this last year we’ve just enabled the iPhone 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.

Alex: 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.

Well, actually that might be a good question, which is: are most of these things inbound to you or do you go out to states [for things like]  IDs or, 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 natural follow-on question is: will there be an App store? If I want to apply for 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 “+” and then the application is right there.

Jennifer: Yeah. So let’s start with the first part of that, which is whether it’s inbound or outbound 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 is a vertical — I would say that it’s largely us outbounding to a couple of the key infrastructure partners to collaborate, 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, but 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. 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? because they understand then 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.

I think your second question — remind me your second question.

Alex: Well, like an App store for my Wallet. Like, what do I add to my Wallet?

Jennifer: So, we have debated this internally; it’s a really good question. And if you think about the marketplaces today that exist — 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, 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. I 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, and credit cards giving 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 U.K., 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.

So when they’re making a purchase they can see, I do have the funds in my debit account to actually make this purchase. And so in the future, you could see if open banking becomes a reality in the long term, you could see that data being on the device as we do in the U.K. and giving users control over it that way, being able to provide more of this filtered matching service. But today, it’s very hard to do without a lot of data that sits in servers, and that’s not a model that we would pursue.

Alex: Okay. So maybe on that topic, talk about the Apple Card. Why decide to both host the Wallet and have your own proprietary product for it?

Jennifer: I would say for years and years — and again, I’ve been at Apple, as you said, a long time — there was always a discussion about whether Apple should have a co-brand card. Very common thing for large companies that are merchants, in particular, whether you’re thinking Best Buy or Macy’s or whatever.

And obviously, we’re a large merchant through the App store, as well as our Apple Store. And I think until we got through, you know, our first several years of Apple Pay and had a lot of experience working with the banks and spent a lot of time in financial services generally, did we get comfortable, I think, with the idea that we could actually create something that was very differentiated and really highlighted and showcased our values around this. You know, there are a lot of really bad things that credit cards can do to consumers. And so as we looked at it, we really wanted to create a credit card that people would use to be more financially healthy.

Credit is a thing people need to have, particularly when you live in a place like the U.S. where you can’t rent an apartment, you can’t buy a car, typically, you can’t, obviously, own a home unless you have an established credit record. So it’s actually very important for people to have credit and to be able to use credit responsibly.

So as we created Apple Card, we really wanted to do a couple of things. One was: make it mobile-first, of course, all the way to the way we handle chat and customer service. It’s all mobile-first. But the other things that we really wanted to do was to make it, as I said, financially healthy.

And so we have this thing called the “interest wheel” where you can put in your payment and it’s going to calculate how much interest you’re going to pay. We have no fees associated with late fees or foreign exchange fees and all these little “gotchas” that can be not very transparent to consumers. And we have ways to help people see how much they’re spending in an easy, visual way and where they’re spending it and to be able to really track their purchases quite easily.

And then, Daily Cash. You know, we thought long and hard about the rewards program for Apple Card. And you know, many of our executives, many of our designers, had been using points cards, points programs; they’re quite popular, as you know, in the U.S. And I think the lack of transparency in terms of what I’m actually really getting in terms of value for my points and the fact that card companies can value and devalue those points really without, sort of, any notice, if you will, to consumers, we felt was not a great value proposition in terms of the lack of transparency.

So we did something called Daily Cash. And so you get cash back every night that you can spend using your Apple Cash card to tap-to-pay anywhere or to send to friends and family. So those were some of the things that we wanted to do with the credit card when we started out to design it.

Alex: Yeah, I love it because my kids’ allowance for whatever they spend money on comes from my Daily Cash. So how about Apple savings? I mean, it’s kind of adding more proprietary products. What was the impetus for that?

Jennifer: Well, back to Daily Cash. So we thought, you know, most points programs over time feel like they’re devaluing. So how can you take a points program or rewards program, in other words, and help it grow? And so that was really the idea behind savings. It turns out — again, when we’re talking about timing — the timing of our launch of savings was fantastic because it was when interest rates were going up. And so Goldman, our partner, was able to offer a high savings rate, which actually drove not only people to put their Daily cash into their savings account, but also other deposits, as well.

Alex: Maybe I can ask two final questions. Looking back at your time leading Apple Pay and Apple Wallet, what are two or three of the moments that you’re most proud of?

Jennifer: I have to say a couple of them, which wouldn’t maybe seem obvious to people. I would say maybe the first time I stood in Tokyo, in one of the stations, and used Apple Pay for transit there. The throughput requirements to get people through those turnstiles, as you know, is sub-second timeframe, from a performance perspective, and seeing people just be able to tap their phone or their Apple Watch and go through those turnstiles — it is a phenomenal use of the technology. So I’d say that was a really big one.

And I think another one that we were just really happy with has been really changing Apple Card and sort of setting a standard for some even offering and business practice associated with cards that hadn’t been in the market before. And so that was also a great moment. But there are many. As you point out, we’ve done a lot of cool things.

Alex: I think of you legitimately as a founder. You’re an intrapreneur, you built this thing within this enormous company. Any advice that you have for other entrepreneurs or intrapreneurs?

Jennifer: I’ll say this, even though it sounds a little bit overdone and trite, which is: truly staying focused on the customer experience. And I always remember, I’ve had new people start from outside the company and they come in and they don’t really realize how customer-focused we are until they see an executive make a decision that costs us more, delays the timeline, in order to do the right thing for the customer. So I think a lot of companies say this, but I don’t think they actually put their money where their mouth is.

Second thing I would say is: patience and tenacity are everything. So I’m sure many of your entrepreneurs know that, but if you believe what you have is truly valuable from a consumer perspective, you need to stay patient and tenacious in making it happen. And that’s even true at a large company, at Apple. These things are not easy. And so those characteristics come to be very important.

Alex: All right, great. Well, thank you so much for your time. Really appreciate this amazing story.

Jennifer: Thank you, Alex. It’s great to talk to you.