Will the Apple Fall Far From the (Contactless) Tree?

Apple started some tongues a’waggin’ about two weeks ago when reports of its contactless patent filing were released. Is Apple getting ready to enable its users to pay with their iPhones at the point-of-sale? Is this the first step in empowering their 110 million iTunes users to start paying for things not-Apple? Or, is it ho hum, companies file patents all the time and hardly anything happens with any of them so what’s the big deal?

Of course Apple isn’t the only one playing the iPhone contactless game. Visa just announced that it and Device Fidelity are going to collaborate and turn iPhone handsets into contactless payment devices.

These efforts come on top of Square: that’s the new iPhone-based system that allows merchants to take cards on their iPhones to sell physical goods. There aren’t any published reports yet, but extrapolating from the number of comments filed about the app and the downloads since its release on May 12, one might surmise that as many as 10k people have downloaded the Square application in less than a week’s time. This strikes me as a pretty good start though the real test is how many merchants sign up for the service and start taking charges.

We’re bound to see more efforts to turn the iPhone into a way for consumers to pay or for merchants to accept. And of course Android isn’t going to be far behind.

The big question is whether these new devices could do what the card networks and their issuers haven’t been able to: persuade merchants to spend the bucks on installing readers at the point-of-sale that take contactless. As our readers have heard from us over many years, the great hopes of contactless have thus far been dashed by the fact that merchants don’t see enough interest on the part of cardholders to make the investment and consumers don’t really see enough benefits from paying with contactless to care much about whether a merchant has contactless or not.

There are few factors now to consider in evaluating whether this could change.

First, most people don’t have a smart phone (75 percent don’t) and only a fraction of those have an iPhone. At the moment there probably aren’t enough people who might want to use these phones at the point-of-sale to get merchants interested.

But that could change quickly. iPhone, Android, and other smart phone sales are exploding. A few years from now it is easy to see that well over half of consumers could have a smart phone and many of these phones would be running the kinds of cool apps that were first developed for the iPhone. It is also important to keep in mind that these users may have an intense desire to use their clever apps to pay and contactless may be what they need to do that. Contactless cards didn’t catch on because consumers didn’t care about them (at least not enough). I’d expect smartphone users to be at lot more enthusiastic. It doesn’t take a large fraction of interested users to get merchants to pay attention to them—we think the magic number is around 5-10%.

If anything is going to get contactless ignited this could well be it.

Second, smart phones are so smart that they may not need contactless. This is a point that we’ve been making for a long time. Contactless seemed like the great technology hope many years ago. But life—and technology—has moved on. Square isn’t using contactless. It’s relying on the fact that the iPhone/iPad are wireless devices with interactive screens. We think this is big. Smartphones may well become the dominant way people pay (and in some form perhaps even the major device used by merchants to take payments) at the physical point of sale. But that doesn’t mean they have to be contactless. They may provide some other clever interface. Apple’s teaching us to tap, not wave.

And that’s my guess—businesses that are focused on putting contactless in mobile phones are, oh, so last decade. Entrepreneurs should be focused on what value can be delivered to consumers and merchants using the new technologies that have become available.

This brings us back to Apple. This company has the incentive and opportunity to drive mobile phone payments. In addition to the device itself Apple has two major assets. First, more than 110 million iTunes account holders all of whom have wallets populated with a credit card. That’s a base that vies with PayPal, but unlike PayPal Apple has a great offline delivery mechanism. Second, Apple has thousands of entrepreneurs who are trying to figure out creative ways to incorporate payment functionality and features into iPhones. It is simply unpredictable what they will do. But what is predictable is they will come up with lots of ideas no one at major payment players have thought about. The combination of these two assets – together with the iPhone customer base – can make Apple a significant player in the payments space.

And, Apple has strong incentives to do this. Think about it: if iPhones could become a highly useful tool for paying for things in the physical world that would vastly expand iPhone sales; then there are the sales of related devices like the iPad to merchants. If that’s not enough there’s also the possibility that Apple could control the wallet for these phones and extract a small fee for managing that wallet—as we know in payments small transaction fees times billions of transaction adds up.

Conclusion: if you are in payments you should watch Apple, but don’t think it is all about contactless.


Karen Webster is the President of Market Platform Dynamics (MPD), a management consulting firm that helps companies profit from industry disruption. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.


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