Apple Pay is being cited as the biggest announcement out of Apple's recent iPhone event. But some aren't so sure success of the new payment platform is the foregone conclusion many are suggesting. Here's why.
To a large extent, Apple was back to its old form at its recent iPhone event. While the public knew the broad outlines of what was going to be announced, the company managed to keep many of the details secret. Apple Pay, the company's mobile payment solution, was cited by many as the "sleeper hit" of the announcement, and the latest mobile payment technology that may finally replace the credit cards in most consumers' wallets.
Apple seems to have solved some of the key challenges that have dogged other attempts at mobile payments. The company has the merchant banks and card issuers on board, with all the major players supporting Apple Pay. Additionally, the Touch ID fingerprint scanner and Passport wallet technology solve one of the key issues with mobile wallets, where complex passwords or convoluted apps created a payment process that was more difficult than traditional plastic. Therein lies the rub for any new mobile payment technology: it needs to be easier than plastic.
The plastic benchmark
For many consumers, myself included, credit cards have become easier than cash. With high-speed processing networks, cards that no longer require signatures for smaller purchases, and compelling points programs, it's often faster to swipe a card than dig through a wallet for cash and wait for your change. Interestingly, the "devil's bargain" that card issuers made with the government when credit cards first came on the scene makes the payment form surprisingly secure. Cards in the US must legally limit the consumer's liability to $50, and many cards have a $0 liability limit. For consumers, credit card fraud represents a minor inconvenience but little potential for financial loss.
Merchants have an obvious incentive to implement more secure technologies; however, the hurdle in the past was always balancing the high cost of upgrading terminals and supporting technologies versus the cost of fraud. High profile merchant breaches in the past year have changed the tune of the various parties involved in credit card processing, but this presents a mixed bag for Apple Pay. Merchants are essentially being forced to update their credit card hardware, yet that hardware will not necessarily support NFC or Apple Pay. Even vendors with the hardware are not necessarily supporting NFC. Major retailer Best Buy has updated its credit card terminals to support new processing technologies, yet the retailer disabled NFC due to the support and training costs required to maintain the technology.
Classic chicken or egg
The limited numbers of retailers supporting NFC, and the subset of those that support Apple Pay, require that consumers continue to carry credit cards. Even if 10% of all merchants support Apple Pay, a very high estimate, the average consumer will have to go through an awkward research and decision process every time they pay for goods or services. Even if Apple Pay is faster than plastic on a per-transaction basis, the novelty of using the system will likely wear off until Apple Pay is more broadly adopted.
All of which presents a classic chicken or egg problem for merchants. Why deploy and support an expensive new payment technology when the only people who can use it are the limited subset of consumers with an iPhone, further limited by the version of the iPhone they carry. Compared to Apple Pay, technologies like EMV (the "chip" credit cards) offer significantly more security than traditional magnetic stripes, and already have significantly more support among consumers.
Can Apple Pay succeed?
Believers in Apple Pay note that the company has no shortage of fervent customers, industry relationships, and piles of cash. However, simple math is the company's biggest enemy, with iPhone market share in most countries hovering around 40% or lower, and the iPhone 6 an even smaller subset. While those numbers will shift, a technology that's limited to less than 50% of the credit card carrying public presents an uphill struggle, especially in a field that's increasingly crowded with new payment methods.
To ensure the success of Apple Pay, Apple could pull an "un-Apple" move and open the platform to other vendors, capturing the vast majority of smartphone customers just by allowing Android to use its technology. While this is unlikely given Apple's past, it's not unprecedented. Apple brought its iTunes software to Windows years ago, cementing the dominance of its iPod. If nothing else, Apple has thrown its weight behind mobile payments, a technology that's been hampered by lack of adoption and competing standards. Merely stamping an Apple imprimatur on NFC is not going to be enough to ensure success, but at least mobile payments finally have the support of one of the hardware industry's major players.