The Week That Was Apple (Pay)

Well, hello Apple, and welcome to the payments industry. We’ve been holding the door open for you for a long time.

As the whole world now knows, Apple this week announced the launch of Apple Pay. What our regular newsletter readers found Wednesday (Sept. 10) morning was a full issue of exclusive coverage dedicated to Apple’s announcement the previous day. Here’s a recap of what we published AND what the PYMNTS community had to say in response.

Market Platform Dynamics (MPD) CEO Karen Webster held the feature spot on Wednesday, offering up her first take of what its introduction could mean for the industry:

As great as this sounds, there are two limitations of Apple Pay right now for consumers and merchants.  And it’s that old chicken and egg issue that gets in the way of every new payments system.

At least as of today, no one has an iPhone 6 capable of working with Apple Pay. That will change on September 19th, but most people won’t be able to use Apple Pay next year because they won’t have the right phones. Estimates say that Apple will sell roughly 180 million phones over the next 12 months worldwide and about 25 million of those are in the U.S.

Since that is where Apple Pay works today, analysts say that the addressable market for Apple Pay is 25 million when they count the number of people whose contracts are up and who are eligible to buy a new phone. Apple is, of course, hoping that enough people find the iPhone 6 cool enough that they buy it anyway, contract terms notwithstanding, which could make that number much higher.

Then consumers that do have Apple Pay can’t really use at it very many places right now. Apple says that there are 220,000 merchant locations today that accept NFC but that’s a small fraction of the 8 million plus point of sale locations in the U.S..  Apple Pay ignition depends on merchants believing in Apple and consumers believing that merchants will believe in Apple.

So that’s why what happens next will be really important to watch.”

And readers chimed in, too, mostly to speak about how different a mobile payment landscape will be with Apple as a key player.

“This really is a game-changer but also a wolf in sheep’s clothing. There have been too many initiatives that have not gone anywhere over the last two years. There is a need for someone to take a major lead in setting the agenda,” wrote one reader. “Sadly, (existing companies) have all played the short-term initiatives game on all of these issues, edging things into several ‘wrong’ directions, which left a void of real leadership. And here it is.”

Another reader marveled how many things Apple chose to simultaneously attack with its payment approach. “Apple has entered the market with a long-term aim (again) rather than a quick-win that so many others fail with. They have had the foresight to address not only the NFC issue, and the EMV issue (vis-a-vis USA lack of security infrastructure vs ROW) but also the tokenization thing,” the reader penned. “They have left the risks within the current eco-system and kept MCVA on-board, too. What all commentators have really missed is that they have reversed the entire payment/cost chain with issuers paying for something and doing some of the work, too. That is key to making this work and evolving a ‘new era’. It will not be long before they decide that they want to take a slice of the risk, too, and then start to disintermediate things further. They have also very sensibly adopted the tokenization/NFC of the EMVCO, which leaves this as open-source for others to do the same and to make sure that we do not get competing solutions.”

Other readers focused on NFC and how quickly that approach may get a huge foothold in retail. “Most merchant outlets don’t (accept EMV) at this stage. That’s certainly true, but virtually all new POS terminals are shipped NFC-ready as the cost of controllers has gone down to a bare minimum. So in 3-5 years (one replacement cycle), virtually all merchants will be accepting contactless. Massive progress has been made in terms of new installations in 2013 and 2014 – and the speed is only accelerating.”

Readers are spoke of how much the overall payment space is about to be overhauled. “Banks don’t typically innovate: they adopt other’s innovations. Electronic checks, not ACH, are the fastest, safest and lowest cost payment method in the U.S. and they already work with 100 percent of checking accounts, unlike ACH. The Check 21 Act enabled the future of payments in the U.S. and that is real time fully electronic bank transfers using check data, but big banks control ACH and the card industry and have been hesitant to adopt new technology that would disrupt the ACH and card networks. That is all about to change in a very large way.”

Some readers reacted to the comments of a prominent American Express executive who said that magstripe is not broken so it’s unclear how quickly consumers will move to an alternative. That Amex executive “is absolutely correct about the failure of so-called mobile wallets being accepted by consumers. But he is equally wrong to blame merchants. The blame lies in a product without a sufficiently compelling business case to generate consumer interest, far less to generate acceptance. Mobile-enabling the function of paying by card at POS is a solution for a ‘non-problem’ — for consumers and for merchants. If mobile payment providers want their products to be considered as anything but a cute novelty, they need to offer something other than what is easily available now. For instance, leveraging the intelligence in the chips in most smartphones to offer payment-related services currently unavailable with mag-stripe cards. Until then, they need to stop whining and blaming others for their lack of success.”

In another Wednesday commentary, John Caron, MPD managing director, offered up his own views and perspectives:

What value does the consumer get from paying with their iPhone? Alone, not much. When Ahold USA’s Stop & Shop launched their mobile payment app (called SCAN IT!), they saw usage double when they added personalized offers (full disclosure, I worked for the company that built the app). What does this mean? Mobile Commerce and Payment is a value equation. The more value I receive, the more I’ll use it and so the cycle continues. What then is the value in NFC and iPhone? Again, I’d say not much when it’s just about mpay.

Why would Apple do this? Because they’ve got the world’s largest mpayment sandbox. More than 200,000 merchants, an existing payment network without the need for retailers to upgrade devices and an incredibly loyal user base who’ve already provided payment credentials (although I’d argue that half don’t have a valid payment card).

This will drive innovation from all parties from retailers to tech companies to advertisers to banks. But we’re far from the holy grail. Testing and learning how consumers will embrace NFC on the iPhone is a must. Don’t overthink it or over-engineer it. Try it. Test it. Change it. Learn from it. This isn’t about the iPhone. It’s about connecting the consumer with the physical store through a device that’s with them 24/7. Focus on the goal, not the technology, and you’ll create a better experience. NFC on the iPhone may even be part of that.”

PYMNTS Podcast interviews

PYMNTS also went out to some of the key innovators in payments to get their thoughts on Apple Pay – hours or even minutes after the news had broken in a series ofexclusive podcast interviews.

Among our guest key payments players to offer up their reactions in those interviews were Chris Garden, CEO of Paydiant, “The last interesting shoe to drop in payments; Paul Purcell, principal, Continental Advisors, “An important early inning development;” Dan Rosen, managing principal at Commerce Ventures, “Can’t wait to try it;” Seth Priebatsch, chief ninja at LevelUp, “Apple just did in two hours what no one else could do in ten years:” Will Graylin, CEO of Loop, “Their competition is the consumer’s habit of using their plastic card;” Doug Brown, senior vice president of mobile at FIS, “It’s a good thing for the overall ecosystem advancement;” Benoit Boudier, vice president of International sales at Roam, “It can be a game changer in terms of putting NFC and the contactless experience back on the map;” Shaunt M. Sarkissian, founder and CEO of Cortex MCP Inc., “If a rising tide raises all boats, well it raised some boats but it sunk a lot of other ones;” and Ed McLaughlin, MasterCard chief emerging payments officer, “It really is an exciting day.”

Also offering up their views in a podcast interview were executives from one the largest card issuers on the planet. Russ Mahy, JPMorgan Chase executive director of technology—”We believe this is a triggering event,” and Marc Massar, Chase Paymentech senior vice president and group manager for Enterprise Product—”I don’t think we can overestimate the value of this new experience.”

We were also the first to speak in a podcast interview with Bill Ready, CEO of PayPal’s BraintreeMy 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.” 

“The other issue here is that there are 220,000 NFC-accepting locations. That’s about 2 percent of merchant locations in the U.S. So that means Apple Pay doesn’t work at 98 percent of payment acceptance locations in the country. That’s a tough place to start from.”

Others’ views

But there were plenty of other perspectives, as well. Our coverage included others’ reactions to the Apple Pay announcement, including:

M. Troy Woods, TSYS president and chief executive officer—”Apple Pay will change the face of the mobile payments industry and our role in the digital marketplace;” Jimmy Fortuna, NCR Hospitality vice president of product development and chief technology officer­—”We believe Apple Pay and Apple’s extraordinary reach among consumers will further enable NCR to create business-transforming innovations for our customers;” First Data CEO Frank Bisignano—”Staying ahead of these trends, as a grand collaborator, we are also giving developers tools they need to quickly and easily code and enable online and mobile payments, including Apple Pay;” and Visa CEO Charlie Scharf—”We said from the beginning that token services would provide great new consumer and merchant experiences and you’re seeing it today in our efforts with Apple and there’s more to come.”

Issuers also had a lot to say:

Jim Smith, Wells Fargo head of virtual channels—”Apple Pay is a strong offering in those areas and we know our customers want and need this option as they live their increasingly digital lives;” Randy Hopper, Navy Federal vice president of credit cards and business optimization—”Now, with Apple Pay, [our members will] be able to save time when shopping while having a safe and easy experience;” Frank LaPrade, Capital One chief enterprise services officer—”Working with Apple, were excited to bring Apple Pay to tens of millions of Capital One customers;” Pamela Joseph, U.S. Bank vice chair and payments division head—”Combining Apple’s history of innovation with the scale and loyalty of U.S. Bank, Apple Pay has the ability to impact and drastically accelerate the adoption of mobile payments;” and Barry Rodrigues, Citi head of enterprise payments—”We are looking forward to delivering to our cardmembers another way to simply and quickly make payments for a broad range of purchases such as buying a coffee, groceries or purchasing digital music.”

As did the merchant community:

Faisal Masud, Staples Inc. executive vice president, global e-commerce—”Our customers will love the convenience of Apple Pay, which will offer an easier, faster and secure way to check-out at Staples;” Walter Robb, Whole Foods Market co-CEO—“Our customers are going to love the convenience of Apple Pay, which will bring a faster, easier, more secure and private way to make purchases at Whole Foods Market;” Matt Roberts, OpenTable CEO—”With Apple Pay, OpenTable app users can skip adding a card to their profile and simply settle their check with a single touch using iPhone 6 or iPhone 6 Plus, saving diners even more of their precious time;” Joe Choti, CEO—”With Apple Pay, millions of patrons will be able to check out with a single touch, making for a seamless, secure and convenient user experience;” and Groupon CEO Eric Lefkofsky—”Bringing Apple Pay to the Groupon mobile app makes it easier than ever to find and buy the best things around you.” 

Strategic issues

The mobile payment relationship between the major banks and Apple is, to put mildly, a delicate one. Apple’s move has the potential to vastly increase mobile-payment revenue by making more transactions digital, and to also shift share, as issuers vie for top of “Apple Pay” position. But, they have also had to give their pound of flesh to make it happen. It is reported that issuers are rebating 15 bps to Apple on each transaction. As the smoke clears from Round One, it appears that the banks chose to start by playing this game the Apple way. What the round did decide is that EMV is the global standard that will drive in store and mobile payments, and that tokenization is a core element of that standard.

“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. “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.”

No way to Apple Pay

Walmart and Best Buy reportedly announced they will not initially accept Apple Pay transactions. Because of contractual obligations with a competing mobile wallet, ConnectC (aka MCX), which Walmart founded and still dominates, it remains to be seen whether the marketing side of these retailers have the stomach to turn away from the potential opportunity to support the transactions of the 800 million iTunes customers who will be easily enabled to use Apple Pay.

Best Buy “installed NFC-enabled scanners in many of its stores but switched them off in 2011 because the cost of supporting the platform was too high,” a company spokesman said in a Wall Street Journal report. The retailer has no plans to change course following Apple’s announcement,” the Journal said.

The MCX approach “requires only a software download and can be used on existing iPhones and Android devices, whereas Apple’s is only for the latest generation handset,” the story said. The MCX offering, called CurrentC, is slated for a national rollout next year. Supporting the competing Apple Pay before it’s even started its own rollout would seem awkward.

Perhaps not so coincidentally timed, a new survey by Princeton Research Associates (for suggested that consumers aren’t necessarily going to embrace mobile payments. They found that only 4 percent of Americans say they would always use their mobile phone to make a purchase and less than 10 percent said they would be interested in so doing “most of the time.” That’s one of the big question marks though. Apple Pay today is ONLY about payment – and the 10-year history of NFC-enabled initiatives suggests that consumers don’t really feel compelled enough to substitute card for phone if payment in store if all that is at stake. Of course, consumers in the U.S. at least have never been asked to Chip and PIN-it, so it is quite possible that the Chip card experience is so radically different that consumers will gladly reach for their mobile devices.

Fashionistas on the Apple Watch

Apple Pay will work not only on the new iPhone 6 and iPhone 6 Plus, but also through the new Apple Watch also introduced this week that will roll out next year.

Apple’s new smartwatch has divided fashion mavens who may prove pivotal to its broad acceptance, based on Reuters interviews with a range of fashion observers.

Some praised the Apple Watch, which will start at $349, for its clean aesthetic. But others said the watch has a masculine aura, while still others called the design pleasing but less than revolutionary.

“It’s not pretty,” said Roseanne Morrison, fashion director for industry consultant The Doneger Group. “It’s very future techno as opposed to feminine sexy.”

Eric Wilson, fashion news director for InStyle Magazine, called it “a status symbol to carry,” but described the design as “generic” and “a very masculine watch.”

Other fashion critics were effusive. “It is immaculate in terms of how function meets design,” said Alexandra Shulman, editor of British Vogue. But Marie Claire tech editor Jenna Blaha said she was impressed with the Watch but would need to touch and feel the device before recommending it to readers.

End to QR codes?

The relative dominance of the QR code in the Chinese mobile-payments market reportedly may be coming to an end, thanks to Apple Pay.

In the wake of the announcement of its NFC-based payment system that is officially gunning to be the digital wallet of the masses, Apple has expanded the masses to include the m-pay enthusiastic Chinese through a deal with China Union Pay.

What about the Telcos?

How should telcos around the world react to Apple Pay? Should they ride along and cooperate fully—potentially hurting their own mobile wallet efforts—and sell as much data, bandwidth and phones as possible? That would be a continuation of the telecom players’ existing model, conceding the lead on mobile payment to Apple.

“Apple and telecom operators (are) vying for an all-encompassing ecosystem, which includes shopping, file storage and sharing, music and video streaming, and now payments,” reports The Wall Street Journal, which quotes Deloitte analyst David Blackwell as saying “The device manufacturers can actually put that ecosystem together in a way that the telecom providers thus far have been unable to do.”

On the one hand, Apple’s move—especially it’s embrace of NFC—could validate and enlarge the market for mobile payments, making consumers more comfortable with the idea. But whether that will help telco mobile wallet efforts or steamroll over those efforts is an open question.

As it relates to Apple Pay?  Telco’s should be afraid, they should be very afraid.

VeriFone benefiting

Apple’s announcement that it’s going into the payments business has been good news for point-of-sale terminal maker VeriFone. Currently less that 20 percent of U.S. payment terminals are NFC-ready, reports Bloomberg, a fact that may now change now that Apple is official NFC’s banner carrier.

“The fact that Apple is promoting NFC as the technology for mobile payments is a big positive for VeriFone, not to mention Apple will be putting VeriFone terminals in their own stores,” Gil Luria, an analyst at Wedbush Securities Inc., told Bloomberg in an email.

Yes, just another week in payments  …..