Apple Pay and Mobile Payments’ Secret Weapon

The launch of Apple Pay has started a lot of conversations about winners and losers in the mobile payments space. The fact that Apple Pay launched with an NFC payments capability for in-store payments has everyone high-fiving over the notion of an NFC dominated mobile payments scheme becoming the de-facto standard for how payments are done in store using a mobile device and the role of Apple Pay in igniting that standard. In-store payments is where the world is focused right now because brick and mortar stores drive 90 percent of consumer spending, double digit growth in e/m-commerce notwithstanding.

But I think that’s the wrong place to look for signs of who’s going to win or how it’s even going to happen. After all, NFC capabilities have been present in stores and inside of mobile handsets (and contactless cards before that) in the U.S. and in lots of other places around the world for a decade. What’s been missing is enough consumers with the right POS device to enable those transactions and  of course, a reason to use a contactless payment method with those devices. So before we start talking about the technology that  will power mobile payments, we better start focusing on what consumers need to transact.

And that’s a digital account.

Get enough digital accounts and merchants will open up acceptance on their sites and inside of their brick and mortar storefronts all day long for that method of payment. At that point, it doesn’t really matter much to them whether that happens via NFC or something else – all they want is a good business case for why they need to go to the trouble. Naturally, that business case has a lot to do with making it possible for those consumers to buy stuff – and maybe even more stuff – in their stores. And in a world where consumers move easily between channels, digital accounts that live in the cloud and that can power transactions across any number of channels – online, in app, and in store – is seen by them (and their consumers) as really, really attractive.

But having a digital account is just the first step.

Step number two is making sure that consumers actually get into the habit of using those digital accounts in lots of places and to buy lots of things. That means it has to be easy to use and available to use in the places that consumers shop frequently.

Now, this shouldn’t be news to anyone and I’ve talked about this concept before – remember the infamous Webster’s Habit Forming Theorem that I introduced and wrote about last summer? This not so scientifically rigorous but utterly practical theorem basically boils the essence of payments ignition down into solving for one particular problem set: getting a critical mass of willing and able consumers into the habit of using a particular payment method. But that’s a lot harder than it sounds since moving consumers to something new means moving they away from what they are currently in the habit of doing. For most, that means breaking a decades old habit of reliably and conveniently using their credit and debit cards everywhere they like to shop.

And that suggests – strongly – that the winners in mobile payments should be laser focused on not only getting LOTS OF digital accounts but getting consumers to use them – and OFTEN.

So, does that imply that players with existing digital accounts have an advantage in winning the mobile payments game?

Only if they’re able to keep those digital accountholders engaged and continue to add new ones to the mix.

Take Alipay. It’s a widely used payment method for Chinese consumers in a variety of online environments, including paying their bills. It’s pretty much the de facto standard for doing that. But getting consumers into the habit of using those digital accounts on their mobile devices for offline transacting required that Alipay kick things up a notch or two this year. That’s why it took its mobile payments battle to the streets, literally, to build habituation and usage of its 800M digital accounts in the offline world (and to beat Tencent’s Tenpay which was doing the same thing).  Both cabbies and consumers were given an incentive to accept and use Alipay for the payment of taxi rides which was so successful, that visitors to Chinese cities that didn’t have Alipay accounts found it really hard to get a taxi. Then, in another brilliant move, its 2013 Singles Day promotion generated ~$6B in offline transaction volume in a single day by getting consumers to use their accounts in physical stores. Jack Ma promises that Singles Day 2014 will be even more successful.

It also matters where the mobile payments game is played.

Amazon and its 220M accounts has both a critical mass of consumers who use Amazon accounts – and often – on Amazon and a huge advantage in enabling frictionless commerce there. That advantage, however, becomes a huge disadvantage when Amazon tries to persuade other on and offline merchants that they’ll play nice if they bring those 220M account holders to their physical or virtual storefronts. But, as long as Amazon can continue to give consumers what they want inside of the Amazon marketplace, it’s not clear they should even bother to try.

And  it matters how engaged existing digital accountholders are.

PayPal has about more or less the same number of digital accounts as Amazon but faces a different challenge when trying to leverage its digital account advantage. PayPal has to convince consumers who aren’t their super-duper diehard users that they should use PayPal as their de facto payments method online, in app and  ultimately, in store. It’s why they’re back to reminding consumers that they can use PayPal at and ToysRUs and Home Depot and Sports Authority and that they can get free shipping when they do. It’s also why they’ve been aggressively expanding their online acceptance to include a variety of merchants including Neiman Marcus, Saks, and J Crew, revving up acceptance in mobile apps that garner frequent usage like Uber and expanding acceptance in offline establishments like restaurants and QSRs that do too. And probably why efforts related to PayPal’s in-store activities have seemed pretty muted for a while and messages related to their One Touch mobile payments feature and online payments experience has gotten a lot louder.

Google and Google Wallet have perhaps the toughest challenge of all: not many digital accounts and not many places to use those accounts. Google won’t say for sure, but its also not denied estimates that there are roughly 20M total Google Wallets in market. This is after 3+ years of trying to build a digital accounts base. Google started out as a digital wallet using NFC to transact in physical stores, a focus that has all but been trashed in favor of forcing more activities related to Android apps and commerce into Google Play. Anytime anyone wants to buy apps, play games, and now order from Google Shopping, it has to be done using Google Wallet. Sending money to friends via Gmail is also an effort to get debit and credit card accounts on file in Google Wallets too. But there’s still a huge question mark about whether even that’s even enough to ignite Google Wallet outside of Google Play. Like Amazon, merchants don’t trust that they wouldn’t be letting the fox in their henhouse if they accept Google Wallet. And  without enough things to buy with a Google Wallet account, consumers will wonder why they need one, especially when there are other options that offer more value across the channels and merchants they like to shop.

So, what does all of this mean for the most talked about new player in payments ever, Apple Pay?

On the one hand  Apple Pay is starting with 800M iTunes accounts worldwide, which is the shiny lure that is hooking lots and lots of merchants. And  it’s the in store aspect of Apple Pay that has people very jazzed and what Tim Cook spent most of his time talking about on stage at the launch. But the reality of Apple Pay is that very few people are likely to use it in the first year or even the first couple of years in a physical store. No matter how you cut it, in year one, Apple Pay will have minimal acceptance at bricks and mortar stores with only some fraction (and I think a small fraction) of the 25 million iPhone 6’s being used to pay for things at those 220k merchant locations. That will neither set the world on fire nor ignite Apple Pay for the same reason that every other NFC payments scheme has had a tough time igniting: making changes at the physical POS is a long, tough slog, made harder when there are not enough consumers with digital accounts and phones to make it worth the merchant’s trouble.

That means that for Apple Pay to make an impact in payments and for it to ignite, it will have to go to the cloud to mobilize the portion of its 800M digital account base that represents the U.S. (to start). And that’s what their in app and SDK ambitions suggest they’re doing. But, they’re going to have to do more than just embed Apple Pay in a few mobile apps if they want to be a major player in mobile payments. Online commerce is increasingly initiated via the mobile device – 51 percent of it, according to the latest stats – yet converted on the desktop – 70 percent of it. For Apple Pay to capture a dominant share of mobile payments, it will have to offer Apple Pay users more opportunities to use it – in app, online and in store and a reason to give it a try and then, to keep using it. That means Apple will need to move to the cloud. Once it does, it’s pretty easy to move in store payments to the cloud too using iBeacons and BLE to push offers and information related to the consumers shopping excursion and then payment that leverages a tokenized standard that doesn’t need an NFC terminal to complete.

But, that certainly doesn’t mean that it’s game over for everyone else with digital payments ambitions or even that Apple Pay has a running head start. Time is an important currency in building a critical mass of consumers and merchants. As we’ve seen, the longer it takes any player to get traction in mobile payments, the less chance they have of ever being successful. See Softcard/ISIS which, despite its press announcements of working with Apple Pay, will continue to struggle until the carriers decide to pull the plug and finish it off for good. I’m afraid that even Apple Pay can’t save it (and I’m not convinced they’d want to help a telco-backed payment method anyway). Apple Pay lives in the iOS ecosystem and is available today only to those with the new iPhone 6. In the U.S., that addressable market is the fraction of 25 million consumers who will enable Apple Pay at some point over the next 12 months. That leaves a market of around ~65M iPhone and about 76M Android users in the U.S. according to Statista who are able to use mobile payments online, in app and in store. They can be made willing by leveraging many of the same tools that you can imagine Apple Pay will also use: Beacons, promotions, and issuer and merchant incentives.

So, the race is on for getting digital accounts and getting consumers to use them with frequency – online. It’s why you see Visa offering a million free pizzas as an incentive to get consumers to establish Visa Checkout accounts, why you see LevelUp positioning itself as the “gateway” to Apple Pay for local merchants who want the benefits of both Apple Pay and a local consumer base without having to think hard about how to do it, why you see Samsung and PayPal working together on the Samsung smartwatch, why you see PayPal giving its consumers incentives to use it to shop online and in app.

I’ll be writing more soon about the specific signposts that will make it easy to recognize the winners and losers in the digital payments game. The ability to get a critical mass of digital accounts and consumers using them is one big signpost that everyone has to pay attention to.

Even, and maybe especially, Apple.