This summer I wrote an article about the emergence of mobile payments. The article both explored the potential and the promise of mobile payments, as well as covered several emerging mobile payment platforms. As it is often the case, a lot can happen in short few months. Since then, Apple, in its typical fashion released a product called Apple Pay that seems to be taking the world of mobile payments by the storm. If nothing else, there is a lot of buzz surrounding Apple’s new innovation, so some exploration into what it is and how it works seems warranted. Specifically, this article will dive into what Apple Pay is, what are some of its end-user benefits, as well as what’s in it for merchants, banks and Apple itself. Lastly, the article also touches on Apple Pay’s adoption thus far, and discusses some of its weaknesses.
Basics of ApplePay
The basic premise of Apple Pay is allowing consumers to purchase products and services using their iPhone. The process typically starts at the payment terminal itself. As shown here, instead of swiping a card, consumers would place their phone near the terminal while placing a finger on the phone’s fingerprint reader. The rest of the process follows a familiar path often even bypassing the need to sign for the transaction. While on the surface the technology is just as simple as the traditional magnetic credit card system, behind the scenes it is much more complex and secure. To start with, the process itself does not work without the user’s fingerprint. Unlike with credit cards that can be stolen, lifting someone’s fingerprint is a bit more complex. Likewise, while behind the scenes Apple Pay uses credit card networks and leverages consumer’s actual credit card, the card number itself is never transmitted. This additional layer of security also prevents hackers from stealing credit card numbers directly form merchants’ Point of Sales systems as it was in the case of last year’s Target breach.
As a result, the chief consumer benefit of Apple Pay is security. Similarly, the technology also offers more privacy when compared to swiping a traditional credit/debit card simply because no private information including the consumer’s name is ever shown or transmitted. Likewise, Apple does not share the purchase history with the merchant, thereby making the transaction completely private (1). Apart from security and privacy, the new payment system also has a potential to redefine the end-user experience at the store itself. For instance, with the advent of new wearables technologies like the Apple Watch, users will be able to pay with the watch making the entire process even more frictionless. In addition, as shown in this video, consumers now have the ability to purchase a product online and pick it up at the store when ready, thus potentially bypassing long lines at the register.
Benefits for Merchants (sort of)
Although a little bit more muted, merchants can see some benefits as well. Outside of providing a better and safer shopping experience for their customers, merchants can benefit from what the behavioral economists call decoupling. Specifically, studies have shown that the more shoppers are distanced from the actual currency, the more they tend to spend. This is because decoupling mentally separates consumers from their money, making it easier for them to spend it (2). This is partly why credit and debit cards have been so successful and why companies like Starbucks already use their own forms of mobile payments. In theory, the same should extend to Apple Pay, and therefore providing merchants with more sales opportunities.
Banks Love it
Banks will likely see some positives as well. Because of increased security that Apple Pay provides, banks can potentially curb fraud committed using traditional magnetic stripe credit cards, thus eliminating costs. This is why Apple was able to persuade them to share a fraction of the interchange fees. Specifically, according to some sources, Apple receives 0.15% of each transaction value (3).
Even though there is no doubt that Apple Pay has an enormous potential, there are those who are vocal about its shortcomings. As Mr. Lyle Beckwith, a senior vice president of government relations for the National Association of Convenience Stores (NACS) astutely pointed out in his Wall Street Journal article, Apple Pay fell short of revolutionizing the entire end-to-end system of payment processing. Because the technology still relies on the established credit card processing system, it does not eliminate the interchange fees. On average, the fee in the US is 2% of each transaction amounting to approximately $50 billion every year (4). According to NACS, convenience stores alone paid $11 billion in fees last year, and the fees often exceeded the profits these merchants made on some products. Moreover, according to Mr. Beckwith the fees have tripled over the past decade and already represent the “second-highest operating expense for merchants” up from fourth largest cost in 2004 as reported by Mr. Peter Lucas (6).
Another Apple Pay criticism stems from its inability to integrate with merchants’ loyalty programs. Specifically, because purchase transactions do not reveal user identifiable information to merchants, there is no automatic way to tie a transaction to customer’s loyalty account. For now, that can only occur outside of Apple Pay for instance in a form of entering a loyalty number at the payment terminal prior to completing the purchase. However, it is rumored that Apple will add a loyalty component at some point in order to provide additional incentive for iPhone users to leverage Apple Pay8. What is unclear is whether the same mechanism will also allow merchants themselves to leverage the loyalty program or whether this is merely an Apple-only mechanism. Even Apple partners are not all too thrilled with this status quo. When asked about the inability of Apple Pay to integrate with merchant loyalty programs, Mr. Blaine Hurst, Panera’s executive vice president for technology and transformation said — “Obviously, that’s not where we want to be.” (7)
Unsurprisingly, any new technology will likely have both its fans, as well as critics. It will also likely have both benefits and downsides for its various stakeholders. However, one true success measure of any new technology is its level of adoption and growth. In terms of Apple Pay, Apple is partnering with three out of four major US credit card networks including Visa, MasterCard, and American Express (9). (Discover is not part of Apple Pay.) Further, 19 card issuers (banks) including top five largest US banks — Chase, Bank of America, Citi, Wells Fargo, and US Bank, have signed deals with Apple (10). In terms of merchants, Apple Pay is accepted in approximately 220,000 retail stores in the US including merchants like Walgreens, Subway, Staples, Macy’s, McDonald’s, Cumberland Farms, Chevron and Texaco and others. That number represents roughly 6% of all retail locations in the US (12).
In all likelihood, the adoption rates are likely to climb further. A contributing factor may be that merchants themselves actually do not need to officially partner with Apple to enable Apple Pay. They simply need to have and enable NFC (Near Field Communication) on their payment terminals. That adoption is likely to accelerate quickly as all major US credit card networks set some requirements around the new types of terminals. Specifically, after October 2015 any merchant that is not compliant with the new EMV standard will assume responsibility for fraudulent transactions where card was present. While that’s not directly tied to Apple Pay and NFC, many of the new terminals already include NFC12. For instance, when Cumberland Farms upgraded their 600 Florida in-store terminals recently, Apple Pay worked out of the box (13).
All in all, the fundamental takeaway this — while it is doubtful that Apple Pay will become a dominant method of overall payments anytime soon, it’s plausible that it may become one of the two (or three) dominant mobile payment platforms. With a rapid adoption of new payment terminals and given the fact that consumers actually like the new payment experience, it’s conceivable that Apple Pay will be reasonably successful. Having said that, one would only hope that Apple continues to improve the platform and eliminates some of its weaknesses including the inability to draw directly from customers’ bank accounts and thus giving merchants and consumers a choice to eliminate the interchange fees.
Also seen on FuelMarketerNews — http://fuelmarketernews.com/mixed-bag-apple-pay/