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Beyond the phone and the watch, Apple takes on the credit card industry with Apple Pay

Stuart Lauchlan Profile picture for user slauchlan September 9, 2014
Lost in the shadow of the sexy tech was Apple’s push into mobile payments, setting it on a collision course with the likes of PayPal and the credit card industry.

[sws_grey_box box_size="700"]SUMMARY - Lost in the shadow of the sexy tech was Apple’s push into the mobile payments space, setting it on a collision course with the likes of PayPal and the credit card industry. [/sws_grey_box]

You may have seen that Dennis has already taken a curmudgeonly look at the marketing hype behind yesterday’s Apple launches. Bah humbug to  you too!

I’ll declare up front that I’m having an iPhone 6 Plus as soon as it’s available and that despite my initial reaction to the first iWatch picture I saw, I’m sold on that now as well. So I guess that makes me the latest victim of what my esteemed colleague calls:

a company that thinks it can carve out any market with whatever marketing schtick it wants.

I'm in good company though:

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But leaving the watch (WANT!) and the phone (WANT! NEED!! MUST HAVE!!!) to one side for the moment, the third announcement yesterday, inevitably left in the shadow of the sexy ones, was Apple’s push into the mobile payments space, setting it seemingly on a collision course with the likes of PayPal as well as perhaps ultimately a hefty chunk of the credit card industry.

Actually Apple seems to have paved the way for co-existence there, with deals in place with Visa, MasterCard, and American Express, as well as six major issuing banks. That covers around 83% of all credit card volume in the United States.

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Meanwhile about 220,000 merchants will start out accepting Apple Pay, including Macy's, McDonalds, Walgreens, Toysrus, Whole Foods, Subway, and Staples, which is none too shabby a list to be getting on with.

According to Apple CEO Tim Cook:

Our mission is to replace your wallet, starting by focusing on payments. Apple Pay is going to change the way you pay for things forever.

Payments is a huge business. Every day between credit and debit we spend 12 billion dollars. That’s over 4 trillion dollars a year, and that’s just in the United States.

That’s 200 million transactions a day. That’s 200 million times we scramble for our credit cards and go through what is a fairly antiquated process.

Using NFC tech (Near Field Communications), iPhone 6 and iPhone 6 Plus will support Apple Pay with a new chip called the Secure Element that stores encrypted payment information. Transactions are conducted with a one-time code that doesn't transfer personal shopping information to Apple or credit card details to the cashier at the desk. Apps such as Groupon, OpenTable, and Uber will support Apple Pay in iOS 8.

Oh and you can use your iWatch (STILL WANT!!!) to make payments as well.

Do we care?

But will consumers be interested in using Apple Pay? A recent study by credit card comparison web site found that only 4% of Americans say they would always use their mobile phone to make a purchase and only 9% said “most of the time.”
Outside of the US, details of the Apple Pay strategic roll out are thin on the ground, but in most European countries, NFC tech is a practical reality already with chip and pin debit and credit cards that enable one touch payments in shops, so overseas markets may in fact be more receptive to the idea than the US.

That said, despite the downbeat nature of the study, the likes of PayPal are seeing mobile traction. Around 15% of PayPal’s payment volumes last year - or $27 billion - were mobile transactions, largely ecommerce-related, with an estimated goal this year of topping $50 billion.

According to research by Thrive Analytics, PayPal is well-ahead of its closest rival Google Wallet when it comes to the digital wallet market sector:


Research firm Gartner of course has its own big number to bandy around. It reckons that worldwide mobile payments surpassed $235 billion last year and is looking at a total market value of $721 billion and north of 450 million users by 2017.

So there’s a lot to play for potentially. But will Apple be the company that makes mobile payments real for main street? Ezra Gottheil, Principal Analyst at Technology Business Research reckons there is a good chance:

Cook…emphasized security and privacy, which will make this system acceptable to users. More important, however, was the network of partners which will allow this system to reach critical mass, solving the chicken-egg problem that has held back mobile payments so far.

Most major credit card companies and many major retailers are committed to this payment system. TBR believes other companies will soon follow, and mobile payments will be broadly adopted.

Avivah Litan, Vice President and Distinguished Analyst at Gartner Research, also points to the Apple partner network and specifically to the merchant side:

I firmly believe that merchant acceptance is what drives adoption of new payment systems, much more so than consumer acceptance does. For Apple Pay to succeed, merchants are going to have to want to accept it.

Litan argues that despite the emphasis Apple is playing on tough security, there will be sceptics among the 30 million merchants in the US that currently accept credit cards:

Unless ALL their shoppers use Apple Pay, merchants still have to spend money on all the onerous security functions required to be PCI compliant. Merchants are already spending money on upgrading to EMV terminals (chip) and have to get ready for that upgrade and liability shift in October 2015 when they will start eating more fraud if they can’t accept an EMV chip card payment.

Granted, EMV-ready terminals come with NFC acceptance capability and merchants have to be able to accept contactless NFC based EMV payments as well. But Apple didn’t say anything I heard about support for the EMV standard, at least not yet. (They likely will support it).

Apple does have one major asset in its installed base of iTunes subscribers who already entrust Apple with payment details linked to their credit cards.

Litan advises that Apple needs to learn from its iTunes experience and apply it to payment aggregation for merchants so as to be able to offer lower fees and rates than existing payment processors and banks. Ultimately Litan’s conclusion is:

This is very exciting news and has the potential to change the payment landscape, at least in the U.S. where merchants are being breached every other day and are up to their eyeballs in security issues and expenses. Apple can certainly ride the security wave and offer merchants and consumers more secure payments.

Sam Murrant, Consumer Payments analyst at Datamonitor, sees Apple's arrival as boosting NFC's prospects: :

Apple has put its brand, money, and marketing machine behind NFC – giving the struggling technology a huge boost. Apple clearly sees an opportunity here, and with its track record, a reversal of the technology’s fortunes may be expected. However, this reversal won’t come quickly, and Apple has major hurdles to overcome before it can be a reality.

Apple has made a good start here, bringing many big brands on board, but more merchants – particularly SMEs – must be persuaded to upgrade their POS terminals for consumers to be able to use NFC payments. Apple must also prove that it can solve the biggest problem with NFC – namely, what problem does it solve for consumers?

As for the longer term plans, Peter Roe of Techmarketview hypothesises:

a goal of building a much bigger global m-commerce business. The facilitation of payments is a means of “keeping score” and monetising all the other elements of a transaction. Apple will most likely have its eyes set upon capitalising on large swathes of the transaction value chain across many sectors, using its expanding device portfolio as the differentiator and talisman. Consumers, corporates and competitors really need to understand where [yesterday’s] announcement can lead!

My take

I want an iPhone 6 Plus. Did I mention that?

I also want an iWatch. I may have dropped a hint in that direction?

Do I want to use Apple Pay? Jury’s out on that one. As only US plans and retailers have been announced to date, I've got time to make up my mind.

As a Brit, I’m perfectly comfortable with NFC tech so the security aspects don’t alarm me from the outset. That said, if I’m honest, I always insist on typing in my pin rather than tapping the terminal to pay in high street shops, so maybe my comfort levels aren’t as high as I’d like to think?

Whatever the case, the announcement does bring a potentially market-revolutionary new player in the mobile payments sector which just had new life breathed into it. Now let’s see how the Android smartphone world responds.

Image credit: Statista image link

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