Apple Pay’s Impact On Payments

Steve Jobs reportedly once told Apple’s Mac development team, “It’s better to be a pirate than join the Navy.” When George Mallory was asked why he wanted to climb Mount Everest (Mallory attempted the world’s highest peak three times and was killed during his third try), the English mountaineer famously replied “because it’s there.” These two ideas, taken together, likely begin to explain why in 2014 Apple decided to take on payments.

Payments isn’t easy, and Apple could have easily sat it out except that buccaneers don’t sit things out, especially when there is booty to be claimed.

Or six vertical miles to be climbed.

Or a payments platform to get ignited.

Apple Pay has only officially been available for use for just about three months. It still has a long climb ahead of them.  As Paul Purcell told MPD CEO Karen Webster the day after Apple Pay’s launch, “it’s an important early inning development,” but it’s still early in the game – for Apple Pay, consumers considering mobile and all of Apple Pay’s competitors in the mobile space.

However, as inning one – The Early Days – comes to a close with the beginning of the New Year and the end of the holiday retail rush, we thought it was a good opportunity to go back thru the Apple Pay Ecosystem Tracker and summarize all of the big developments across the ecosystem since its launch in September and its rollout in October.

CONSUMERS

Why They Matter: They are the critical stakeholder. If they like it and use it, merchants will follow.

The Big Take-Away:  Consumers who use Apple Pay love it, but not many do – yet. .

In his article, Apple Pay, Now That We’ve Sobered Up, Dr. Evans pointed to Apple’s main hurdle in attracting consumers – its lack of merchants acceptance, since it is almost impossible for consumers to get excited (and develop a habit around using it) if it’s something they can almost never use.

“The media has started giving people the impression they could pay everywhere. My guess is that consumers will be incredibly disappointed at how few places they can pay. Will they take their anger out on Apple?” Evans wondered?

So far, it doesn’t really look like consumers are angry, but it does look like not many of them may be at all interested.

A little over a month in, and the vast majority of potential Apple Pay customers were not actualizing and using the payment service, according to a consumer survey conducted by InfoScout.

On Black Friday, InfoScout identified 408 panelists that had the iPhone 6 or the iPhone 6+ and who bought at a store that accepted Apple Pay that day. All of these folks, therefore, had Apple Pay and could have used it to pay for their purchases.

Only 4.6 percent of those who had phones that could enable Apple Pay who could have used it to pay did so. InfoScout asked those who didn’t pay with Apple Pay but didn’t why not (about half of the 10 percent that had if set up). Almost a third—31 percent—didn’t know the store accepted this new method of payment. They apparently didn’t make the connection between the store having an NFC terminal with the wave symbol and being able to pay with Apple Pay. Another 25 percent forgot to use it and 19 percent didn’t have their phones handy.  Of users who had never used Apple Pay InfoScout found 32 percent said it wasn’t clear to them now it worked, 30 percent didn’t see a need for it and 19 percent were concerned about security.

On the upside, consumers who use it really seem to like it. According to InfoScout, more than half of those who have tried Apple Pay say it is “amazing” and “easy to use” (52.6 percent in both cases). Only 3.5 percent found that it didn’t work and even fewer, 1.8 percent, said it was difficult to use.

A month later, ITG released its own study that showed that Apple Pay drove 1 percent of all digital payments dollars in the month of November. In store usage is most prominent at Whole Foods and Walgreens.

It’s not just how many customers one has, it also matter a great deal how much they can be made to spend.  And, out of the gate, it seems that Karen Webster was right – Apple’s more affluent user base buys more, and buys more via the mobile device than the average consumer.

While just 12 percent of a mobile users survey by Retale said they would be comfortable using mobile pay for a purchase over $250, iPhone users were three times more comfortable with this kind of spending. The same survey also found that Apple users were more concerned about their phone being stolen, than they were about their data being breached. It appears that what consumer’s fear most is not having access to their phone than data that, with TouchID and now tokenization for payment, they believe keeps it secure.

COMPETITORS

Why They Matter: Apple Pay works on a limited number of handsets and terminals, so there’s lots of runway for others to challenge it

The Take-Away:  Apple Pay has brought a new intensity to the competitive landscape. On the one hand, it has been a bit of the rising tide that’s lifted all NFC mobile payments boats. On the other, it has underscored the importance of getting digital account holders to register accounts and use them – and that is where the battle lines are being drawn currently.

They say a rising tide lifts all boats, and when it comes to NFC, Apple Pay might be the rising tide.

In November, Walgreens executive–Deepika Pandey, group vice president, digital marketing & customer experience—said that her chain has seen in-store NFC payments double after accepting Apple Pay.  Apple Pay competitor, Google Wallet, which has been struggling for years for any kind of usage, is also seeing a boost.

NFC use is driven by contactless plastic cards and contactless mobile payments. Both technologies haven’t caught the fancy of consumers and the number of transactions on either before Apple Pay was .00l percent of miniscule for everyone. Google hasn’t reported pre-Apple Pay use of Google Wallet but all indications are that it’s very small in store. Cynics say that 50 percent more of almost nothing is still almost nothing and is still not enough to get this Apple Pay rival off the ground.

Nevertheless, these early reports are interesting.  Most people don’t have iPhone 6’s, but do have Android phones., some even with NFC capabilities. NFC advocates and Apple Pay competitors are cheering for more merchant acceptance, since that only helps them, too.

One of the logos that wasn’t splashed across the screen during the launch of Apple Pay was PayPal. Bill Ready, CEO of PayPal’s Braintree unit, sat down with MPD CEO Karen Webster in the days that followed the launch to answer some tough questions about whether or not PayPal sees Apple as a major game changer or disruptor, what he believes their next move will be and PayPal’s future course.

While supportive of the attention that Apple has brought to the mobile space, he is was not quite ready to concede that the mobile world is always and forever changed – Apple will have the same difficulties other have had in igniting mobile payments, and especially one built on an NFC platform. Plus they are taking it on with a rather different entry strategy.

“It’s an interesting take on how to enter the space,” Ready remarked. “My quick assessment of Apple Pay is that they were thoughtful in going after specifically the plastic form factor of the card, but not really encroaching on the rest of the ecosystem, and looking to existing players in the ecosystem to do the things they do today. Apple is targeting the plastic form factor, but they are going to let the people who handle the transactions do that – handle the transaction. That’s a bit different from what other players have done, those that have tried to enter the wallet space and haven’t been able to do so successfully. Payments is really difficult, especially with handling merchant services and fraud protection and other factors,” he concluded.

Of course, within weeks of the launch of Apple Pay, eBay/PayPal decided to part company and PayPal will become its own separate entity in the first part of 2015. PayPal’s focus seems to be on gathering even more digital accounts – they have ~180 million today – and giving people more reasons to use them across all channels – online, in store and in app – and cross border. PayPal has been a huge boost in cross border volume as shoppers outside of their domestic four walls are able to buy what they want from PayPal accepting merchants, which has seen its acceptance grow dramatically over the last couple of years. Ready was also quick to point out that Braintree supports Apple Pay and enables it for merchants along with PayPal and even bitcoin.

Shortly after Apple Pay went online, Apple Pay went offline at several retailers including CVS, and Best Buy. What those retailers had in common were three letters – MCX. All had signed contracts three years ago that forbade them from supporting any mobile payments platform but their own.

Three years ago, that didn’t seem like much of a risk. Fast forward to Apple Pay, and boy did that open up a firestorm that got customers flocking to Twitter to express their frustration that they were no longer able to use their NFC handsets or contactless cards to pay at checkoug.

MCX’s product, CurrenC, would allow customers to do a bunch of things with their app via their smartphones – an app that they would need to activate by establishing an account linked directly to their checking account. Linking to a credit card is a no-no, at least for now. And why is that? Well, Wal-Mart and other MCX retailers started MCX in order to avoid paying ‘swipe’ fees, so network branded credit cards are a nasty no-no, including the network branded debit cards which are as cheap as dirt right now.

Davidson did note that it is the eventual plan of retailers to open up to competition from Apple Pay and other mobile providers, at some point in the future when CurrentC has had more of a chance to take root. But taking root is the real priority now – CurrenC is not in the market yet but says that it will be “soon.”

“I believe in the future that will be entirely possible. I believe and our merchants believe it will require more than one player to build the ecosystem.” He added: “One simply won’t build the market.”

Then, of course, there’s the Android ecosystem and the big question as to who will rule it if anyone. A certain mobile handset maker would like to – Samsung – and has designs on creating the Android equivalent of Apple Pay, reportedly with LoopPay, a Boston-based mobile commerce company that has devised technology that allows mobile phones to transact with any mag stripe reader today – or roughly 95 percent of all POS terminals. It’s a fact that the Android ecosystem is huge and popular, but very fragmented. Wresting control of it from an apps standpoint, never mind payment, has always been a challenge. Samsung and LoopPay, if the rumor mill is right, could sidestep some of those issues via its technology solution which will be embedded in phones.

And, finally, there’s Alipay and Amazon, both of which fashion themselves as the patron saints of digital payments. Alipay and its 300 million mobile only accounts and reported 800 million Alipay accounts is the financial services lifeline for the Chinese consumer. Alipay is also now accepted by many more sites than just Alibaba’s thanks to the efforts of players like Stripe and others who are enabling acceptance of that coveted brand. And, there are rumors of an Apple Pay/Alipay match up which has caused tons of speculation, including having Alipay “power” Apple Pay in China.

Amazon, of course, has taken a very different approach by building a marketplace for which there’s an easy way to pay with Amazon on line and in app. Amazon would like nothing more than to have everything that consumers want and need brought to them by Amazon. And, just to cover all bases, it appears that Amazon will open a bricks and mortar storefront in New York to cater to the desire of consumers to reach out and touch merchandise before they buy it.

REGULATORS

Why They Matter: They make the rules that the industry has to follow – and there are lots of rule makers and lots of rules.

The Take-Away:  Unlike many payment innovators Apple Pay probably isn’t going to stay under the regulators’ radar for long. Most payment innovators are so tiny that regulators don’t notice them and even if they do might figure that it isn’t worth spending a lot of their time to worry about. Apple Pay, though, is like the jumbo jet to the typical fly. Apple is the biggest tech firm in the world with ~$169 billion in free cash flow. You could take all the payment networks and through in a few big banks and you would still have some headroom under Apple’s market cap. So regulators may ask more question and earlier of this pesky new entrant.

But not surprisingly, as we go into this brave new world of tech giants entering payments, the regulators aren’t sure of the right questions or approach just yet. What might be more surprising is the degree to which regulators are circling the wagons.

Market Platform Dynamics CEO Karen Webster caught up with Marianne Crowe, Vice President of Payment Strategies for The Federal Reserve Bank of Boston.  Crowe is also a member of the mobile payments working group, which first and foremost help regulators stay on top of a mobile payments environment that is always changing, adding new players and shifting its terminology.

She says at this phase, regulators are less interested in writing specific new regs and much more interested in figuring out where the regulations need patching.

“Until it’s more obvious and I really don’t’ think it is yet, it’s hard to say if there needs to be any potential regulatory action around the data protection in a broad sense,” Crowe remarked. “Individually looking at certain things that are probably being addressed as far as a customer being able to opt-in in terms of their data be shared for marketing purposes in a store. There’ nothing broad yet and I think it’s because there is not enough traction in this area.  I still think it’s too soon to say where this is going until we see more volume and more traction,” she concluded.

But Apple Pay is going to make this process accelerate.

The CFPB is already asking questions.

According to its Director, Richard Cordray, “In a world where people can manage their money on the go, there is great potential to serve more consumers and allow them to take greater control of their finances. But we need to make sure all consumers are protected whether they are opening their wallets or scanning the screen on their smartphones.”

If Apple Pay is successful—and the jury will be out on that for some time—it could power a significant portion of payments in this country. Apple will be at the front line of fraud protection. Either Apple or application providers will be wrapping all sorts of loyalty and other consumer offerings around payments. Any and all of those could raise issues for an alphabet soup of regulators including the CFPB, FTC, Federal Reserve, and lots of state regulators.

With the rising attention to mobile payments, and the publicity around it, much of which has been generated by Apple and its card industry partners, 2015 may see regulators paying a lot of attention to Apple Pay and other mobile payment providers.

MERCHANTS

Why They Matter: No merchant acceptance, no consumer interest or adoption.
The Take-Away: Apple Pay’s decision to leverage NFC technology is and will be for some time a limiting factor in getting its scheme off the ground. It’s not enough for terminals to be NFC-enabled, they have to be turned on, which means it has to be integrated with merchant systems. While the EMV rollout in the US will mean that more terminals with NFC capabilities will be available in the market, merchants have to be convinced that Apple Pay is worth accepting. For many of them, that decision will be a combination of how many consumers have the capability to use it and whether accepting Apple Pay will bring them more customers and more volume and/or keep them from losing customers who want to use it.

At the end of the day, Apple Pay ignition needs consumers – consumers who press merchants to accept it, Webster noted.  “But aside from a few merchants that have signed on to Apple Pay on day one, all but one of which (Disney) have had NFC capabilities for eons and were launch partners for just about every other prior NFC scheme, merchants haven’t really been part of the Apple Pay narrative. It’s simply assumed that if enough consumers come storming into the stores waving iPhone 6’s wanting to use Apple Pay to pay, that merchants will enable it or else be subject to the wrath of consumers who don’t like being denied using their favorite payment method in their favorite stores,” Webster observed.

That hasn’t happened so much, as consumers who can’t use Apple Pay don’t seem to be all that obsessed with it – stores that don’t have Apple Pay, which most of them don’t, are just paying in a different way.  Webster noted that what is holding Apple back is the fact that is hardware – merchants need new hardware and so do consumers. Real ignition, real fast, she says, has to be about beacons and the cloud.

McDonalds now reports that Apple Pay is the payment mechanism behind 50 percent of all of its tap-to-pay transactions, which is more impressive than it sounds given the many years McDonalds has been accepting contactless payments and the fact that tap to pay transactions are teeny weeny. McDonalds has also been creative–although possibly impractical–about taking Apple Pay via its drive-thru.

Mobile payments—and especially NFC mobile payments—are still a tiny portion of U.S. retail purchases. “Toys ‘R’ Us, which supports Apple Pay in all of its 870 stores, said that although the number of mobile payments at its stores increased after the introduction of Apple Pay, there were still relatively few mobile payments because customers were still learning about the new technology,” the story noted.

Jan Dawson, a telecom analyst for Jackdaw Research, talking about the relatively few distributed Apple phones that can support Apple Pay and that meaningful impact is still several years away.

“Apple Pay is going to be a slow-burn success,” Dawson said. “Until then, it will be something of a novelty and something that most consumers use occasionally if they use it at all. That’s still enormous progress.”

Since going live with Apple Pay last month, the $14.2 billion 401-store Whole Foods grocery chain has used the mobile wallet to process more than 150,000 transactions, according to CIO Jason Buechel.

But the chain doesn’t solely see Apple Pay as a payment mechanism. During its recent earnings report analyst call, both of Whole Foods’ Co-CEOs spoke of the huge publicity benefit from having accepted Apple Pay, not to mention the positive coverage and associated buzz.

The move to accept Apple Pay (and also incorporate same-day shopping service Instacart) comes as part of a broader analytics push at the chain, the CIO said, which will also improve supply chain operations.

ISSUERS

Why They Matter: Their products are those which enable Apple Pay.

The Take-Away: Issuers view Apple Pay as their mobile payments ticket to ride, so much so that they agreed to pay 15 bps for each transaction processed at least in the US. The viability of this business model in parts of the world in which interchange is lower and being legislated lower remain unclear. However, the strength of the Apple Pay brand and issuer hopes and expectations for Apple Pay as a way to “cement” their product to a mobile payments “wallet” was strong enough for them to look past the fact that they are invisible, and that Apple Pay stands between them and their customers.

The mobile payment relationship between the major banks and Apple is, to put mildly, an interesting one. They are investing massively in promoting Apple Pay. They are paying Apple on each transaction. Their brand is invisible. Apple Pay stands between the issuer and the customer and is the brand the customer feels they have a relationship with. Even though the card in the Apple Pay wallet is an issuer-branded card, the consumer pays with Apple Pay – that’s how they describe it. And, the tokens that underpin the payments scheme are being managed by the networks on behalf of the issuers (or most of them.)

And, all because it is perceived to help issuers remain as a relevant part of the mobile payments landscape. It is, of course, their cards that are being registered as part of the Apple Pay wallet. And all of the tradeoffs that have been previously mentioned are a small price to pay to be in a wallet – set, forgotten about and used. And, of course, generating interchange revenue and even at a potentially higher rate if debit using consumers decide to set and use credit products instead in their digital Apple Pay wallets.

For now, anyway.

“For the banks and credit card networks, Apple Pay could threaten some revenue streams, as the technology giant looks to assume a more central role in the financial universe,” reported The New York Times. Karen Webster also pointed that once Apple “gets a head of steam” it could dictate terms that make 15 bps look like a bargain. Apple could decide that more (bps) is better, or that it’d rather ditch issuers (and networks) entirely and flip consumers to another form of payment. All too soon to speculate now since Apple needs to rev up usage, but one need only look at the music industry for evidence of how Apple approaches – and drives – the economics of the businesses they enter and decide to disrupt.

“But the eager participation of banks and card companies suggests both Apple’s clout, and the recognition among financial institutions that they face broader challenges from upstart technology ventures, many of which are not as eager or willing as Apple to work with the incumbent financial industry,” the Times reports.

By the end of 2014 issuers representing 90 percent of all issued cards in the U.S. could be available to be easily stored in Apple Pay’s mobile wallet by just taking a picture of the card. That sounds impressive, until one realizes that the way in which Apple decided to go to market required the explicit cooperation of the issuers. Most other wallets can claim that 100 percent of all issued cards in the U.S. could be stored in their wallets. Consumers just simply decide which card they want to use and register it.

For Apple Pay to be a global brand, well, they have to go global. It is reported that Apple is in discussions with at least one major UK bank to introduce its “wave and pay” Apple Pay technology in the UK in the first half of the new year. Reports, say the process has been troubled by speed bumps over terms of the deal.

That is not surprising.

Unnamed sources say Apple and one bank – which was not disclosed – are discussing the terms of establishing Apple Pay for shoppers, and a significant portion of the debate surrounds the level of access Apple will have to bank customer data. The bank is reportedly uncomfortable with how much information Apple wants to collect, though sources note that financial institutions are not willing to miss out on business by denying a deal with Apple Pay.

And, we bet they haven’t even gotten to the basis points part of the conversation yet. Interchange in the U.K. is on the verge of being legislated out of existence. So, it will be interesting to see where and how the business model ends up.

Apple Pay’s popularity have propelled discussions of Apple Pay to other parts of the world. Even though UK banks appear cautious today of jumping head-first into working a scheme, there are others who seem extremely motivated.

“I hope we can do something together,” Jack Ma said, Chairman, Alibaba Group

In October, Alibaba’s executive chairman, Jack Ma, said that Alibaba would like to partner with Apple on financial payments, but offered no details on what such a deal might look like.

Apple CEO Tim Cook, who spoke shortly after Ma at a Wall Street Journal tech conference, said that he was going to meet with Ma to discuss possible partnerships, but also didn’t offer any specifics, not even that such a deal might involve payments. Cook did volunteer that Alibaba has “all the traits of a company that Apple would like to partner with,” the story said.

The big banks, Citigroup, Bank of America, Wells Fargo, JPMorgan Chase and Capital One Financial, all played a prominent and public role in launching Apple Pay. That, some fear, will disadvantage smaller banks as more consumer spending will be driven to the “big card brands” who had a jump start on getting digital accounts established in the early days of launch.

The CEO of a small community bank expressed another concern: Apple will simply offer them a less workable set of financial terms than it has negotiated with the larger players.

“Apple’s got deep, deep pockets. I don’t expect them to back away,” he said. “And so it’s just another level of pressure for those of us who are still trying to serve our market,” noted Bob Steen, the CEO of Bridge Community Bank, an $80 million-asset institution in Mount Vernon, Iowa.

NETWORKS

Why They Matter: Do we really need to say?

The Take-Away:  Apple Pay leverages the existing payments network structure which advantages both issuers and networks. Apple Pay also leverages the network’s technology and security standards, furthering the network’s ambitions to further secure those standards globally and make them the centerpiece of digital payments worldwide. Apple Pay has also created a new revenue opportunity for networks – tokens and tokenization – which will become more important as more internet-enabled devices flourish. At the moment, this is all to the advantage of the networks. But like the issuers, Apple may have a different idea for how it views its relationship with the networks longer term. Today’s position of strength is no guarantee that a few years from now, things won’t shift.

Apple Pay replicates digitally, what the physical card world has in place today. And, that preserves the network’s place and role in the ecosystem in a very material way. Even though some analysts have noted that Apple Pay could, in the long run, push down the rates that both credit card networks and banks can charge merchants, for the moment, the networks have a pretty protected perch in Apple Pay land.

Tokens are a huge by product of Apple Pay and a big network advantage. Tokenized digital identities and transactions are both core to Apple Pay’s mobile scheme, and the tokenized digital identity capabilities offer a rich new revenue opportunity for networks. While it is expected that some large issuers may want to take this on themselves, most issuers won’t, leaving the networks in control not only of the services that underpin the delivery of tokens, but in how they are accessed and used to support other capabilities.

Visa’s presence as part of the Apple Pay ecosystem is reflected in the stats of its user base. More than 600,000 of the one million cards loaded into Apple Pay wallets in the service’s first three days were Visa cards. And, Visa is working with more than 1,000 financial institutions to support Apple Pay.

And while Visa and MasterCard both are strong backers of Apple Pay, both have used the latter end of 2014 to tout their own digital payments innovations. Visa’s Scharf made a point of telling analysts that Visa Checkout had ~ 2 million registered users, more than 200 financial services partners and a growing list of merchants including United Airlines, Virgin America and American Apparel. This was within days of Apple Pay announcing that it has crossed the one million registered user mark. MasterCard’s CEO Ajay Banga also remarked that MasterPass “picked up where Apple Pay left off” – a nod to its capabilities beyond just payments.

In October, Visa launched a sandbox development and testing environment for its Visa Digital Services. This effort is designed to help issuers enable Apple Pay in addition to a variety of other contactless payments across iOS and Android platforms. Networks just can’t bank on one mobile operating system or even one wallet. Payments is a scale business and making money means operating at scale. And that means supporting applications that cross mobile payments platforms and mobile operating systems, worldwide.

PayPal wasn’t the only missing logo when Apple Pay launched. Discover was nowhere to be seen, either. In late October, the CEO of Discover commented on this, clarifying that although he does believe that they will participate “soon.” Working with Apple Pay, he said, supports the firm’s overall goals of enabling mobile payments.

“We’ve been hoping [mobile payments] took off faster,” Nelms said. “It always seems to take a little longer than you would like. I think mobile payments has the prospect to add more features and functionality to consumers and their purchasing which is good for customers and good for our industry.” Nelms further stated that he and Discover are “generally excited” about the number of mobile efforts going on in the industry and looks forward to being a part of all of them.

*******

If Apple Pay did nothing else in 2014, it got the world talking about mobile payments and the ecosystem fired up to play with it, or in some cases, plan to play against it. 2015 will be all about who in the ecosystem does what, and with whom and when. And, we’ll be here to cover it all.