Is Apple Pay Fizzling? No Way Man, It’s Sizzling!

Honest disagreement is often a good sign of progress.
-Mohandas Gandhi

If the man doesn’t believe as we do, we say he is a crank, and that settles it. I mean it does nowadays, because now we can’t burn him.
-Mark Twain

There are many ways to look at a new product launch especially one as multifaceted as Apple Pay. Resident dismal economist David Evans says this latest mobile payments scheme is fizzling but has been roundly criticized for being impatient, not to mention cranky.

And maybe here’s the proof from a new report that says the folks in Cupertino have “the ability to significantly transform the mobile payment space.”

That’s the conclusion of ITG anyway. Their new Investment Research Report on Mobile Payments on Apple Pay is upbeat.

The report draws its data from the proprietary ITG consumer research panel. It found that Apple Pay was responsible for 1 percent of digital payment dollars in November 2013. Google Wallet by comparison accounted for 4 percent of digital payment dollars. The ITG report notes this and that Google has been in existence since 2011, whereas Apple Pay got up to 1 percent in less than a month.

“This is a strong showing considering that the service is only available to Apple customers with the newest hardware and it is currently supported by a relatively limited list of merchants,” noted ITG.

To get another point of view, interrupted Evans on Christmas Eve who unsurprisingly said, “Bah Humbug! Four times next to nothing is still next to nothing.”

ITG also notably found that 60 percent of new Apple Pay customers used the service on multiple days through November and that Apple Pay customers used the service roughly 1.4 times per week. Apple’s mobile customers also liked to reuse the service, roughly two-thirds of the time they returned and reused the service after one success with a merchant. Finally, the report indicated that the average consumer will use the service for a little over 5 percent of their future card-transactions once they have used the service. Market Platform Dynamics CEO Karen Webster says she’s not surprised by the finding. “I just used it to pay for my Christmas fixings at Whole Foods and it worked like a charm.”

ITG’s survey paints a much different picture than the InfoScout survey, done on Black Friday, which showed that most people (about 90%) who could use Apple Pay hadn’t bothered installing it and only half of the 10% that had it and were at a store that accepted it, used it.

The report that Apple Pay’s strong early momentum could pose a particularly strong threat to dominant online payments player PayPal, ITG speculated. Steven Weinstein, Senior Internet Analyst at ITG Investment Research noted his opinion that PayPal will find it difficult to match Apple Pay’s ease of use or appeal because it lacks some of Apple’s security features (biometric authentication) and doesn’t have the same privileged relationship to card networks and issuers that Apple has secured.

On the surface, their numbers also seem to indicate some weakness for PayPal relative to Apple Pay as well. While 60 percent of new Apple Pay customers were returning to use the service multiple times during the month of November, they said PayPal users were returning just 20 percent of the time.

Evans again wouldn’t write PayPal off so fast. “So long as Apple banks on NFC for the time being its success will take place at the intersection of a very small microscopic island of iPhone 6 users and NFC-enabled merchants. PayPal has a shot by focusing on payment methods that don’t depend on having a particular handset and that can be used across all merchants.”

And Webster pointed out, PayPal doesn’t need issuers to sign on, which has been a source of friction between issuers and PayPal over the years. Consumers just get to stick any payment method in their PayPal wallet that they choose to and flip and flop back and forth as they wish when they transact, while being incented by PayPal to use the DDA as the default method of payment.

The IDG report also included the top spots that Apple Pay is getting used at – Whole Foods, Walgreens and McDonalds lead the list. Almost 60 percent of Apple Pay transactions and almost half of the dollars spent with Apple Pay are happening at five retailers. Whole Foods alone account for almost 30% of Apple Pay spending in November.

That’s not surprising either, said Webster. All three merchants are those where consumers visit frequently. Consumers tend to visit the grocery and drug stores at least once a week, and QSRs multiple times a week. Frequency and habituation is the key to creating preference and adoption – both on the merchant and consumer side.

ITG’s Chief Economist was interviewed on Bloomberg Radio on Christmas Eve and spoke about retail trends, their report and Apple Pay’s influence on spend. As the world goes virtual, so does the wallet, he remarked. His belief is that having Apple Pay will influence more people to shop and spend more in stores given its convenience and ease of use. Of course, this is the great hope of Apple Pay and every other digital wallet.

And what we’ll be watching for in 2015. There are still many wildcards in the mix and problems to be solved for. For instance, whether and how Apple Pay will work across all channels – for now there is no browser based solution – and how quickly other merchants and apps accept it.

And, how PayPal exploits its digital, cross channel and cross operating system advantage along with its 187 million registered digital accounts.

And how the networks and issuers who need both of them respond.

Top 5 Apple Pay Retailers, Transaction and Spending Distribution
Rank Merchant % of Apple Pay Transactions % of Apple Pay Dollars
1 WHOLE FOODS 20% 28%
2 WALGREENS 19% 12%
3 MCDONALD’S 11% 3%
5 SUBWAY 3% 1%
Top 5 58% 45%