After leaving his office in Manhattan, Tag stopped at a nearby Panera to grab a Frontega Chicken Panini and Green Passion Power Smoothie as a quick dinner on his way to see some friends in Soho. Upon ordering, he held his Apple Watch to the contactless reader near the register, gently pressed his finger to the TouchID fingerprint sensor on the small screen, and let Apple Pay do the rest.
Wanting to get across town as soon as possible, Tag used his Uber app to summon an UberX car. During the car ride, he remembered that he needed a couple of new dress shirts. With a few quick clicks on his watch, he selected the shirts through his Macy’s app. With a simple tap, he used Apple Pay to seamlessly complete the transaction. As he neared his destination, Tag added a tip to the bill for the ride through the Uber app, which he’d already configured to use Apple Pay as the default. With one simple press of his finger to TouchID on his watch, he exited the cab.
Three purchases—offline, online, and, well, sort of in between—no wallet required. No traditional wallet, that is. This new reality—one that many early adopters are already living—is rapidly expanding toward what some experts predict will become the future for everyone. Folks like Tag don’t even carry traditional wallets anymore, only their mobile devices and perhaps an ID and a backup credit card for retailers that don’t accept mobile payments—yet. After years of predictions that mobile payments would replace cash and credit cards, there are finally signs that it might actually be happening. And Apple is leading the way.
The ability to pay for transactions with a mobile device is hardly new. In fact, the first technology for mobile payments was invented by Sony way back in 1989. It was first put into use in Hong Kong’s subway system in 1997 and began taking root in Japan in 2001. The tech-savvy Japanese warmed to the idea quickly, and mobile wallet apps were being used on mobile phones throughout Japan by 2004. Ever since, more than 245 million Japanese mobile phones have been equipped with the capability to make mobile payments, and Japanese consumers use mobile payments for everything from transportation to food and household purchases.
So it seems odd that a similar system has not taken root in the United States, although it hasn’t been for lack of trying. Companies have been experimenting with different approaches for years. PayPal was the first to take advantage of the smart- phone revolution by creating a payment app that gave just about every smartphone the potential for mobile payments. About a year later, Google entered the mobile payment game with the launch of Google Wallet. In the past five years, numerous other companies, from small start-ups to electronics and retailing giants, have tried to gain market acceptance in mobile payments. They include the likes of Samsung, Square, and CurrentC, a mobile wallet app backed by a consortium of U.S. retailers (with Walmart leading the way) that hope to cut credit card companies and their fees out of the buying loop.
But none of these players—individually or together—have made much of a dent in replacing traditional credit cards and cash as a form of payment in the multi-trillion-dollar U.S. retail market. Although the mobile payments concept may seem like a no-brainer for convenience-loving American consumers, numerous barriers on both the buyer and seller sides have kept the concept from gaining momentum. With its recent launch of Apple Pay, Apple is clearly a market follower. But it’s a feat that the innovative company has performed to perfection time and again—take a new technology, make it better than any of the initial offerings, then watch the market explode as the Apple version becomes the runaway market leader.
Overcoming Negative Consumer Perceptions
As with every new technology that involves paying for things, consumers have concerns about the security of mobile payments. Paypal, Google, and the others took significant measures to design secure systems. However, most consumers just weren’t comfortable with the idea that their phone might be used as a portal to their credit cards and bank accounts if it fell into the wrong hands. Never mind that the same could be said of a wallet or handbag, far less secure devices.
Recognizing consumer reluctance to place digital versions of their financial devices in one app, Apple took security to a higher level. Requiring a fingerprint makes the process much more secure than the more common safeguard of entering a passcode. And if a mobile device is ever lost or stolen, the owner can use its Find My iPhone feature to immediately lock down Apple Pay or even wipe the device completely clean.
Additionally, every compatible Apple device is assigned a unique Device Account Number. This is encrypted and securely stored in a dedicated security chip on the device. That and a transaction-specific security code are the only numbers that Apple transmits to merchants. In fact, the merchant doesn’t even need to know the customer’s name. Credit and debit card numbers are stored only on the local device, not on Apple servers. This makes Apple Pay even more secure and more private than paying by credit card.
Beyond consumer security concerns, previous adoption of mobile payment apps has been slowed by perceptions of a clunky user experience. If convenience is the biggest draw for consumers, then anything more arduous than the already convenient swipe of a credit card simply won’t cut it. Setting up any of the existing mobile payment apps takes time and effort. Using such apps at the point of purchase is far from seamless, especially if the technology isn’t working quite right. “I don’t want to be that guy holding up the line while we fumble around to get it all to work,” says one business columnist, “just like I don’t want to be the guy who holds up the line boarding an air- plane because his mobile boarding pass can’t be read.” Mobile apps that hit the market prior to Apple Pay required entering a passcode and—in some cases—hitting multiple buttons. That took longer than the traditional swipe of the card, even if everything worked as intended.
With Apple Pay, users still need to configure the app. But Apple already has 800 million credit cards on file with its existing iTunes store. Not only can this facilitate a set up that is already streamlined compared with existing apps, it’s a sign that iTunes users may be more comfortable with using the app given that they have already given their credit card information to Apple. And with the TouchID sensor, Apple has the transaction down to a one-touch process. That’s quicker than swiping a card and going through the typical menu, not to mention quicker than inputting a passcode.
Establishing Points of Acceptance
For mobile payments to penetrate the market, consumer acceptance is necessary. But companies face a twofold challenge in making such a technology successful. Consumers won’t adopt it if retailers don’t accept it, and retailers won’t invest the resources necessary to accept it unless there is sufficient consumer demand. And the lack of consumer demand is the biggest factor that has kept retailers from jumping onto the mobile payments bandwagon. As a result, there are currently too few retailers that accept mobile payments to convince people that they can leave their credit cards at home.
But thanks to Apple, that situation is changing rapidly. It may be because of Apple’s clout or because of the company’s massive and loyal user base. But in less than a year, Apple has signed up far more retailers than all the previous mobile payment providers combined. “You need so many points of acceptance to make mobile payments work,” says a mobile payments analyst for Forrester Research. “Apple has made that happen, striking partnerships with top national brands across a variety of categories that will give consumers plenty of opportunity to use the service.” Apple has also signed up enough credit card issuing banks and credit unions to cover 83 percent of charge volume. In fact, Apple Pay has gained enough steam that Best Buy and Meijer will soon be accepting the payment app, despite having signed exclusivity agreements as part of the CurrentC consortium.
But Apple still faces many challenges. For example, even though Apple Pay is now technically accepted at more than 700,000 U.S. retail outlets, many of those outlets don’t yet have the hardware installed that will recognize Apple’s app. That fact can be discouraging to early adopters, hurting repeat usage. One recent survey showed that 66 percent of iPhone 6 owners had signed up for Apple Pay, but nearly half of them had visited a store listed as an Apple Pay merchant only to find that the location wasn’t set up yet to process mobile payments through the app. Additionally, although Apple’s penetration of the market far exceeds that of the competition and continues to grow each month, the mobile payments leader has a long way to go before reaching critical mass with 8 million retail outlets. And this doesn’t even take into account online and in- app payments.
Still, Apple remains confident. “We are more convinced than ever that 2015 will be the year of Apple Pay,” says Tim Cook, Apple’s CEO. While there are still plenty of doubters that mobile payments will replace plastic as the go-to method for purchasing goods and services, there are also plenty of believers. And while Apple is clearly ahead in this game, its success also bodes well for the competition. As the concept catches on and technologies become more compatible, demand among non-Apple users will increase as well.
There is no shortage of options in the mobile payments field. And improvements designed to make the apps more convenient are being made continually, including the integration of loyalty cards and other promotional mechanisms. But even as other companies’ offerings get better, expect Apple to be more competitive than ever. After all, nothing is stopping it from creating Apple Pay for Android devices.
Questions for Discussion
- As completely as possible, sketch the value delivery network for Apple Pay.
- With respect to Apple Pay, is Apple a producer, a consumer, or an intermediary? Explain.
- Identify all the reasons why Apple’s partnerships are essential to the success of Apple Pay.
- With respect to marketing channels, what are some threats to Apple Pay’s future?