The Apple Pay race is a marathon, not a sprint
Apple had long been rumored to make a big play in payments, and on Tuesday finally unveiled the first step with Apple Pay. The demo was slick, showing an elegant payment experience — so fast that they had to repeat it ‘in case you blinked’.
As only Apple can, they created a sense of inevitability by announcing that credit and debit cards from every major issuer, representing 83% of purchase volume would be eligible to use Apple Pay from day one. Announcing participation from dozens of major retailers — over 220,000 contactless terminals — seemed like a major coup, as well.
Tim Cook was proud to reveal a frictionless reality that makes paying completely seamless. As a consumer, I genuinely hope that experiences like this can become part of everyday commerce as soon as Apple Pay launches in October. As someone who has spent over a decade working within the payments industry, I’ve learned all too well that changing payment behavior takes time and living up to this promise will be more challenging than seems apparent at first glance.
Merchant acceptance remains a real risk
On the merchant acquiring side, Apple Pay transactions follow the existing contactless infrastructure that has existed (with very limited US adoption) for over two decades. The 220,000 terminals cited by Apple sounds big, but it is a drop of the bucket when you consider that over 8 million merchants accept credit cards in the United States alone.
Of the merchants named in the announcement, virtually all already accept contactless payments. In fact, most were a part of Google Wallet’s failed 2011 launch. Less than 20% of terminals shipped today are NFC-ready, and even fewer have the service activated. Some merchants have gone so far as to deliberately disable the technology for strategic reasons.
When choosing a payment method, consumers default to their… default
Even with Apple Pay’s sleek user experience, changing consumer behavior will be next to impossible without widespread merchant acceptance. While most consumers have multiple credit and debit cards, in practice the vast majority of their spend goes to their “top of wallet” card. Issuers run category bonuses (e.g. 3–5% rebates on gas, groceries and drug stores) at a loss because they know that if they get you to use their card for those everyday transaction types, you’ll get in the habit of using your card for almost every purchase.
If consumers are unable to use Apple Pay at most retail locations, they will get conditioned to not use it anywhere — even when at merchants that can accept it. Given the network effects involved in payments, the natural equilibrium is that a payment method that only works perhaps 10% of the time will eventually get used by consumers roughly 0% of the time.
Consumer payment behavior does not change overnight. Starbucks is the poster child of mobile payments success, but still hasn’t reached ubiquity. Their first national rollout was three and a half years ago (January 2011) and still only 14% of payments are via mobile.
E-commerce implications of Apple Pay are the most exciting
Retailers aren’t going to stop accepting plastic credit cards any time soon. Until then, consumers will continue to carry their cards and merchants have unclear incentives to invest in upgrading to contactless.
However, there is one area where we can expect significant engagement with Apple Pay: card not present purchases from consumer mobile devices. Given the high abandonment rates on mobile devices, merchants have every incentive to shorten the checkout flow. In this context, it’s easy for a merchant to identify an Apple Pay eligible device and steer them towards that method. Not requiring the user to type account numbers, billing and shipping addresses is a huge win for consumers and merchants alike.
Despite all the growth in e-commerce, face to face purchases still account for over 80% of all card purchases. It’s going to take Apple Pay a lot longer to get adoption in this massive, if slower-growing, segment.
Hope for more announcements like this
As a consumer, I genuinely hope to see Apple Pay get widespread adoption for both e-commerce and IRL payments. The benefits in terms of convenience and security are huge. But it will take time.
The payments market is massive — over $4 trillion per year is spent on credit and debit cards in the United States alone. Apple could make a huge business even if it only captures a small sliver of the volume. But, that doesn’t mean that other established payment methods are going to suddenly go from relevant to irrelevant. The lack of merchant acceptance could also be a great opportunity for other tech innovators. Despite the challenges I’ve mentioned here, my company, CardFlight plans to build solutions for this new ecosystem in the months ahead. And we expect plenty more companies large and small to throw their hat into the ring.
Will Apple finally crack the mobile wallet nut with Apple Pay? Or, will it be just another well-funded mobile wallet fail? Time will tell, and it won’t happen overnight.
About the author: Derek Webster is the Founder and CEO of CardFlight, a leading provider of technology to power mobile point-of-sale applications. Before founding CardFlight, he was an Engagement Manager for Oliver Wyman, where he led senior level strategy projects for leading card issuers and major global payment networks. Follow him @websterderek
