Why Apple Pay Is Fizzling and What It Means for the Future of Mobile Payments

“When he rolls into a gas station to fill his tank, [Jack] doesn’t get out of his car. He punches a few buttons on his cellphone and within seconds he has paid for the fuel. With the same quick keystrokes on his phone, he pays for virtually everything he needs: groceries at the supermarket, a few oranges from a market stall, a shoeshine on the street, a cup of [coffee] from a café…. [T]he future has arrived: cash is disappearing, credit cards are unnecessary, and daily shopping is speedy and digital. Almost every merchant, even hawkers on the street, accepts payment by cellphone. It’s an innovation that could transform the continent…. ‘I don’t even carry money any more,’ says Bob.”

Mobile payments has ignited. Kiss cash and plastic goodbye.

But not if you live in the United States or most other developed countries.

Jack and Bob live in Somaliland, a breakaway region of Somalia, and their real names are Bakrhad and Adan. Bakrhad used his mobile phone to buy sweet milky tea. On average they and other mobile money users make 34 transactions a month using their cell phones. In Somaliland, and several other lesser-developed countries in Africa, Asia and Latin America, the dream of mobile payments has come true. Here’s the original story which was published last year.

Mobile payments hasn’t ignited yet in the United States. So far every attempt to change that in a big way in the US has floundered. Big-company backed entrants such as SoftCard (aka ISIS), funded by the mobile network operators, and Google Wallet have sputtered. Hardly anyone has those mobile payment methods and those who do can’t use them at about 98 percent of merchant locations.

But that was before, Apple Pay, right? Tim Cook told us on September 9, 2014 that Apple was going to revolutionize payments. The traditional payments industry was elated. It isn’t often that you see banks and network execs just about doing handstands and dancing in jubilee! The media jumped on this. Finally, mobile payments had come to America.

Shortly after that announcement I expressed my skepticism. Hardly any merchants would accept Apple Pay and hardly any customers would have Apple Pay. And aside from it being Apple there wasn’t any really compelling reason to pay with an iPhone than with a card or cash.

I wasn’t ready to call it though. Apple has a highly successful track record of disrupting ecosystems. It also has dedicated customers who could become such evangelists for Apple Pay that merchants would feel compelled to get NFC terminals and take Apple Pay. I said we would need to look carefully at the level and growth of transactions.

Now I am ready to call it, and much earlier than I thought I would.

Apple Pay is fizzling. And unless it drastically changes course Apple Pay will follow the hundreds of other attempts, made around the world in the last seven years, that have sputtered along at low levels of use or, much more frequently, have just flat-out died.

The evidence from Black Friday confirmed my fears. InfoScout did a survey of 400+ people who (a) had IPhone 6s and therefore could have had Apple Pay on their phones who (b) were paying at stores that had NFC terminals that accepted Apple Pay. So these are 400+ people who could have paid with Apple Pay. Less than 5 percent did. For more details see the article here.

Several people who commented on that article said that those were actually pretty good results this early on and they weren’t surprised at the number. If they were talking about a new product introduction in a regular industry they’d probably be right.

Payments, though, is a two-sided market and getting anything off the ground in that kind of market requires solving the classic chicken and egg problem. It’s hard to get merchants excited about a payment method if consumers don’t want to use it, and its hard to get consumers to use a new payment method if merchants don’t take it. Solving the chicken-and-egg problem in payments is easier than solving Fermat’s Last Theorem but a lot harder than running a four-minute mile. Hardly anyone succeeds.

Apple Pay set a huge hurdle for itself. It offered people an alternative that they could use at only about 2 percent of merchant locations in the United States and, just to put an exclamation mark on that, that they could not use at 98 percent of merchant locations.

That’s just about everywhere.

Compare Apple Pay with Discover, which was the last general-purpose payment network to enter the US.

Discover Cards could be used from the get-go at a wide variety of merchants across the country, including all Sears’ stores, and it was signing up 1200 stores a day around launch time. It wasn’t long before Discover was accepted at the majority of US merchants. That was easy for Discover because the card could be used in most machines in the US in exactly the same way as existing credit cards were used—the merchants just had to sign up.

Apple, on the other hand, has to persuade almost all merchants to install and turn on NFC.

Apple Pay set another huge hurdle for itself. It offered people an alternative that they could only use if they bought an iPhone 6. Their existing base of customers couldn’t use it. That has enormous implications for merchants.

It means that virtually none of the customers walking into their stores initially are going to be able to use Apple Pay. Knock off all the people with Android phones. Then subtract the folks with older model iPhones. That leaves a sliver with iPhone 6’s that could be capable to having Apple Pay. Then those iPhone 6 users need to enable Apple Pay. And finally those iPhone 6 users need to decide they want to actually use Apple Pay.

And this is why the InfoScout statistics are just devastating to Apple Pay.

Unless a large proportion of those users are evangelizing Apple Pay, asking about whether they could use it, and putting pressure on merchants to accept it or else lose their business, merchants have very little incentive to make any effort to accept it.

And effort is needed—they need to educate their cashiers and most importantly install NFC terminals if they don’t have them. As it turns out a small fraction of a small fraction of customers are using Apple Pay at merchant locations that take Apple Pay. There is just no evidence that there is a groundswell of consumers demanding that other merchants take Apple Pay, or that merchants risk losing sales is they don’t take it.

Some readers who commented on the InfoScout evidence also said it was just the start for Apple Pay. That is true but I read just the opposite into it. The people who have gone out and gotten iPhone 6’s are the early adopters. These are the people most likely to have an interest in Apple Pay. If you can’t get your early adopters excited in one of your key new features you are in trouble.

Apple cannot ignite its payment method using this approach. Too few merchants are able to take its payment method. Too few consumers are able to adopt its payment method. And too fewer consumers that can adopt its payment method seem to want to use it.

It isn’t going to happen for Apple so long as it pursues this strategy. It is like trying to run a sub-four minute mile going up hill, on a hot day, carrying a sack of potatoes. (Homework assignment for Apple: please read Paying with Plastic to learn the economics and history of payments and Catalyst Code on how to start a platform business. Ok, this is self-promotion. Both are by me and Dick Schmalensee. You also might want to go talk to the folks who got Discover off the ground in the mid 1980s; that was the last company to solve this problem in a big way in the U.S.)

I really don’t say this with any satisfaction.

It’s hugely important for the payments industry, consumers, and merchants to get make mobile payments ubiquitous. Mobile payments provide the opportunity for highly secure payments. And it provides the opportunity to create a variety of financial services, retail, and other applications that integrate the power of mobile, location, and payments. Done right it could also help increase financial inclusion and thereby reduce the dependency of people on banks just as it has done in West Africa.

If we want to see a mobile payments system achieve ubiquity in the United States (or in the European Union which is even farther behind than the US) in the next decade payments businesses, entrepreneurs, and investors need to take a cold hard look at what has gone wrong with SoftCard (aka ISIS), Google Wallet, and now, even, Apple Pay.

First, everyone needs to stop drinking the NFC Kool-Aid.

A decade of failed attempts to get NFC-based contactless cards off the ground, and now half a decade of failed attempts to get NFC-based mobile payments off the ground, should convince us that, whatever the merits of this technology is, it is a loser from the standpoint of igniting mobile payments. And anyone who thinks that the conversion to EMV – and the installation of terminals with NFC – is going to solve this problem needs to look at Europe. Countries like the UK and Portugal have high penetrations of NFC-based terminals at physical point of sale. Yet contactless cards just can’t get traction. We could all ruminate on why that is and come up with excuses for why it happened and why it will somehow be different. But it seems like it is time to just move on to something else. The fact is that most of the successful mobile payments systems are not based on NFC—Alipay in China, Starbucks in the US, and every successful mobile payments system in lesser developed countries—should make one wonder whether NFC is simply a curse.

Second, in the United States and other highly developed payment markets, it is not possible to introduce a successful mobile payments platform unless it solves a problem, or provides some significant additional product or service, beyond simple payments. People en masse are not going to change their payments behavior for something that is just a bit better. They need a huge push and that has to be something that gives them a lot of additional value. Mobile payments took off in Somaliland because people needed a safe and secure way to move money around the country. Mobile payments using a clunky feature phone turned out to be a lot better than giving cash to a courier who might steal it or might be robbed in that violent country.

To me the interesting mobile payments players in the US are Starbucks, LevelUp, and Uber because in different ways they wrap a lot of value around payments. Apple Pay doesn’t. While it is a far more spit and polish than SoftCard or Google Wallet it fundamentally doesn’t do any more than a person can do with a card.

There are several necessary elements to igniting a national mobile payments platform in the US.

First, it has to be a method that most merchants can adopt relatively easily and has some prospect of creating incremental sales for them. They have to believe that they will get more business if they adopt something new and will lose business if they don’t. That’s critical since only a portion of this addressable market will in fact adopt. Mainstream consumers won’t adopt mobile payments unless they can use it in a lot of places.

Second, it has to be a method that most consumers can adopt relatively easily. That means that it has to work with both iPhones and Android, and with most models of those phones. Merchants aren’t going to go to the trouble of taking a mobile-payments method unless a significant share of their consumers want to use it.

Third, it has to be a method that provides significantly more value for merchants and consumers than existing payment cards.

These are necessary conditions. All three conditions must be met for success. The hundreds of mobile payments failures around the world have failed to meet at least one of these conditions—most often the third one: they just didn’t stop enough pain to get consumers and merchants on board. The handful of successes, such as m-PESA in Kenya, Starbucks in the US, and bKash in Bangladesh meet all three conditions.

To its credit, Apple has energized mobile payments in the US and perhaps has increased the interest in other developed countries as well. It has introduced a number of slick innovations in how credentials get put into the wallet and in the business model for working with the existing payments ecosystem. However, for better or worse, it has provided a massive opening for others to seize the mobile payments mantle and ignite a successful platform.

When it comes to mobile payments, for me, all bets are off on who will ignite a successful mobile payments platform in the US and other developed countries, and whether anyone will in five years. And I say five years, instead of ten, only because today I am feeling cheerfully optimistic.

If you want to live in a cashless society, where most consumers and merchants are using their mobile phones for payments and other financial services, pack your bags and head to Somaliland or a few other destinations that are as long on mobile payments as they are short on 3 star Michelin restaurants.