Much of this week’s tech excitement has been around the size, shape, and display of the new iPhone 6. Perhaps the most important long-term implications, however, will come from Apple Pay, Apple’s new play in mobile payments.
Apple Pay — enabled by Near Field Communication (NFC) — is hardly a noteworthy technology innovation. Despite limitations in point-of-sale (POS) infrastructure and relatively slow roll-out in the corresponding phone technology, Google Wallet and others long ago made mobile proximity payments a mass possibility. NFC has been around for roughly a decade. At the same time, companies such as Square have been steadily popularizing mobile payment solutions for both consumers and smaller merchants.
So, why is Apple Pay significant? Much like with Apple’s past successes, the relevant technology is now being integrated into a larger business model innovation. Somewhat serendipitously, this business innovation nicely coincides with shifting consumer behaviors and demands for retailers to upgrade POS terminals. In particular, Apple Pay benefits from five key advantages that might allow Apple to be the driving force in fueling the growth of the US mobile payments market.
Devoted and powerful customer base. Apple’s critics will be quick to point out that Android has captured roughly 80% of global market share (and roughly 60% of US market share) while Apple clocks in under 15% worldwide. The diffusion of new technology does not occur instantly, however, nor does it begin on a global scale. Rather, new technologies gain strength through foothold markets, an area where Apple is king. iPhone users are known for their extreme (and vocal) devotion to Apple products, and Apple Pay will first be available to Apple’s power users — early adopters of the iPhone 6, iPhone 6 Plus, and Apple Watch. Even beyond these power users, iPhone users as a whole appear quite attractive from a mobile payments perspective. Research from Experian suggests that iPhone users spend significantly more time using their phones each day (75 minutes, compared to 49 minutes for the average Android user). According to Swrve, a mobile marketing company, iOS users are 32% more likely to make a mobile purchase, and they spend 10% more than Android users. Early Apple Pay users will likely provide attractive revenues that will encourage retailers to scale up acceptance of the technology.
Motivated partners. Unlike with some early players in mobile payments, the Apple Pay business model does not position Apple as a disruptor of major payment networks. Instead, Apple has established partnerships with major credit card companies and banks, meaning that Apple Pay will be able to support over 80% of credit card purchase volume from the outset. At the same time, Apple has already announced that several leading US retailers — including Macy’s, McDonald’s, Staples, Subway, Walgreens, and Whole Foods — will support Apple Pay. With both credit card companies and merchants alike having the potential to boost transaction volume as consumers avoid the constraints of cash-based systems, the entire network has motivation to support the success of Apple Pay.
Advanced infrastructure. One of the biggest reasons for the slow growth of mobile payments in the US has been the lack of the required POS infrastructure. In recent years, however, major retailers have steadily been investing in the required terminals, and smaller merchants have increasingly been looking for cost-effective alternatives to cash systems. According to MasterCard’s Mobile Payments Readiness Index, the US is well on its way to reaching the mobile payments inflection point — the stage at which mobile devices account for an appreciable share of the payments mix — with infrastructure readiness far outpacing consumer readiness. Notably, recent retail data breaches and a 2015 upgrade deadline imposed by credit card networks are already forcing merchants to invest in new POS equipment that is more secure and NFC-ready. With consumer comfort also continuing to rise (eMarketer estimates the growth of mobile proximity payment users at 161%, 54%, and 57% for 2012, 2013, and 2014 respectively), the US retail market is well primed for mobile payments.
Complementary product suite. Another major advantage for Apple Pay is that it will be able to draw value from existing Apple assets, including iTunes and the Apple App Store. To start, many Apple users are already comfortable giving Apple their credit card data (and inputting it into their iPhones), as they have already done so to make app and music purchases. Furthermore, those looking to ease into the Apple Pay experience will be able to use the function to effect single-touch payments within apps, such as in the Starbucks, Target, and Uber apps.
Under-satisfied job to be done. Those who have struggled in mobile payments have generally failed to articulate a use case for their offering. Often, they have tried to suggest that mobile payment options may be faster, but credit card transactions are already sufficiently speedy for most users. In fact, several of the predecessors to Apple Pay required a number of steps to be taken by smartphone users, ultimately making the process longer. In light of recent data breaches and compromised credit card numbers, however, Apple Pay can satisfy an emotional job that is top of mind for consumers — security. With Apple Pay, credit card numbers are turned into encrypted identifying numbers that are securely stored on a chip in the iPhone or Apple Watch. This means that actual credit card numbers are never stored on Apple’s servers, nor are they shared with merchants.
Pundits have long been announcing that the US mobile payments market will grow to astronomical heights in very little time. To be clear, there is still a fair distance to go until mobile proximity payments are a significant portion of payment volume in the US. Nevertheless, mobile payments will see meaningful growth in the US over the next few years, and Apple Pay will likely play a big role in making that happen. Furthermore, the security and virtualization technology underlying Apple Pay may ultimately act as a foundation for new technologies that are currently unforeseen.Remember — the iPhone was far from the first smartphone, and the iPod was not the first MP3 player. They became the first mass market successes by making the technology easily acceptable, wrapping it in an appropriate business model, and marketing it aggressively. The company is applying the same formula to Apple Pay. The results should be exciting.
Story by Dave Farber.