Why Apple Pay Needs Merchants More Than Merchants Need Apple Pay

There are three things that I think we’d all agree are irrefutable outcomes of the launch of Apple Pay.

  • Apple Pay has dominated just about conversation about mobile payments since 9/9.
  • Apple Pay was the kick in the pants that everyone in the ecosystem needed to get the mobile payments flywheel focused and moving in high gear.
  • Apple Pay’s ignition is tied to its ability to get merchants on board.

Okay, so maybe I need to make my case for the third one.

As you all know very well, the chatter across all of payments is that it’s more or less game over for everyone but Apple in the iOS ecosystem. Pundits cite the fact that Apple has embraced the payments status quo by getting issuers on board (so much so that they’re paying to be part of the Apple Pay wallet), getting 3 of the 4 networks to play ball their way, legitimizing NFC as an enabling payments technology and commercializing a tokenization scheme tied to the Apple Secure Element that pretty much sets the standard for cardholder security.

The payoff for Apple, of course, is that, beyond its initial launch, the most powerful technology company in the world, with the biggest cash horde, has been able to make the profit-challenged banks, awash in legal fees, pay for massive amounts of marketing. In fact, I noticed an ad last week as I was reading the Wall Street Journal on my iPad for a Citi card product that had its own logo and the Apple Pay logo side by side! And, it’s not just Citi– just visit the home page of every single issuer that is supporting Apple Pay and you’ll find Apple Pay front and center and just about everywhere else. Then, of course, the three networks are kicking a bunch of bucks into the marketing. Hey,  I’m even sure Apple had to budget more than a senior execs annual salary in marketing expenditures, too.

But aside from a few merchants that have signed on to Apple Pay on day one, all but one of which (Disney) have had NFC capabilities for eons and were launch partners for just about every other prior NFC scheme, merchants haven’t really been part of the Apple Pay narrative. It’s simply assumed that if enough consumers come storming into the stores waving iPhone 6’s wanting to use Apple Pay to pay, that merchants will enable it or else be subject to the wrath of consumers who don’t like being denied using their favorite payment method in their favorite stores.

That’s sort of true as we saw when Rite Aid and CVS decided to make public their decision to shut off Apple Pay rather than let those few consumers who could and wanted to use it, use it. But in that case they actually shut down NFC in order to prevent their customers from paying with Apple Pay. That’s a lot different than merchants just not having NFC in the first place or turning it on.  For that, consumers really do need to be agitated enough to  move business to merchants that court them by getting and turning on NFC terminals..

All that said, for Apple Pay to ignite, it will need to get enough consumers excited enough to use their iPhones to pay at enough merchants that matter to them.

That means that Apple Pay will have figure out a way to get enough of the right merchants on board.

And that will have little to nothing to do with NFC technology in the first instance. I know, bad news for everyone who believes that just because US merchants are being forced to upgrade their terminals to accommodate EMV, they’ll automatically turn on NFC and, voila, enable Apple Pay. Unless, of course, Apple decides to take some of their 15 bps issuer bounty and give it to merchants to buy NFC terminals faster and subsidize incentives to offer Apple Pay to their customers.

Short of that, ignition will happen because there will be something about Apple Pay – here in the U.S. and everywhere else in the world – that will make enough consumers want to use it.

Something that adds enough value to their shopping experience that, in turn, delivers enough value to merchants that they will want to support it.

Where value is defined as helping merchants sell more stuff to consumers who want to use Apple Pay.

And, where value is defined as helping consumers do more than just swap out a phone for a card to check out in a store.   Consumers are a lot smarter than that. If that’s all they wanted they really could have taped a contactless card to the back of their phones like some folks were suggesting a few years ago. And, we all know what happened to the whole NFC sticker initiative.

Yes, I know, I’ve said this before and I must be sounding like a broken record. But I swear, I’m just not sure the supporters of Apple Pay really get it.

Here are a few observations in support of my right to keep pounding away at this point.

You’ll notice that Apple has made its SDK available to developers for use in app, but they haven’t said when (or how) they’ll let developers enable payment using Apple Pay at the physical point of sale (or the mobile browser, but let’s stick for now to in store payments). Yes, e/m Commerce is growing like a weed, but it’s still a teensy weensy part of payments volume. According to eMarketer, ecommerce was ~6 percent of retail sales in 2013, is expected to be a smidge more than that next year. But it won’t break double digits and account for 10 percent of retail sales for another four years.

That means that 90+ percent of payments volume still comes from the physical store today and it will be a very long time for that to materially change. Some categories, like fuel and hospitality and food services, will never go online even though the way that consumers pay for their purchases may be via an app on their phone.

So until the majority of things that are sold in stores are bought online with a consumer never setting foot in a store, the challenge for any mobile payments player, especially Apple Pay, is to solve a problem that the merchant has in getting consumers to shop in their stores.

Today, tomorrow and the day after that, that big problem will be, well, not to create a big problem for a consumer or a merchant where one doesn’t exist today.

Paying for stuff in a store isn’t a problem.

But there are plenty of things that could be made more convenient for consumers that increasingly shop in stores, mobile phones in hand, all things are harder than it sounds for Apple Pay because:

  • Apple Pay is only about payment today.
  • Apple Pay can only be used by the very few consumers with iPhone 6’s and 6 Plus’ who want to use their phones to pay for things in a store.
  • Apple Pay can only be used at the very few merchants that are enabled for NFC.

The total universe of Apple Pay consumers will only ever be Apple consumers, even though it’s true that they are more affluent and drive more spend overall. Over the next 12 months, in sheer numbers, that’s ~26 million, worldwide, if analysts are correct in their forecasts of Apple iPhone 6/6 Plus sales.

Tim Cook told us that 1 million consumers activated their cards in the first 72 hours of Apple Pay’s launch, and that those consumers can use those accounts at 220k merchant locations.

If one does the math, that means that about half a percent of all cardholders in the US are able to use Apple Pay at roughly 2 percent of all merchants in the U.S.   .

So, for Apple Pay to ignite at the physical point of sale where the overwhelming bulk of transacting happens today, it will have to:

  1. Increase the number of consumers with iPhones that can be used for payments in physical stores.
  2. Increase the number of merchants who can accept Apple Pay so that consumers have more opportunities to use their phones to pay for things at merchants
  3. Add value to the merchant and consumer shopping experience so that merchants want to accept and consumer want to use Apple Pay.

Three things that will make it incredibly hard for Apple to simply bank on the NFC-is-coming-thanks-to-EMV-strategy to get merchants on board.

In addition to taking too long, having terminals that are NFC enabled is different than turning them on. And, NFC doesn’t solve any problems for merchants right now and if you ask them, they say it even creates new ones.

Like letting Google Wallet into their stores which merchants decided a long time ago they wanted no part of.

But I think there’s an easy way for Apple to check all three of the boxes that I just mentioned. And, it involves getting on board its Apple Pay platform stakeholders that Apple knows better than anyone else how to accommodate and make happy:


Apple should let developers use all of the tools that Apple has created for them –  iBeacons, iPhones and iPads, its operating system, the cloud, consumers running around with iPhones and now a payments capability – to push innovation to the edge and let  innovators figure out how to add value to consumers and merchants. And if past is prologue, they’ll do what they’ve always done – create apps and for this use case, apps that solve the real problems that merchants have in getting consumers to want to shop in physical stores.

Now this is admittedly a software/app and not necessarily a hardware play that won’t sell more iPhones  right away. But Nielsen says that when people buy smartphones they no longer make decisions based on features (cameras, even fingerprint scanners and even payments), but on what the ecosystem offers them – which are the apps.  It explains why Amazon’s Fire phone flopped but why Apple is such a sticky platform.

So, even though payments may be the lowest common denominator for all merchants, helping merchants sell more things and strengthen the relationships with their consumer is where the rubber will meet the road for Apple Pay.

But that’s more than a little tricky given how Apple Pay has gone to market, at least so far.

Priority number one for merchants is selling stuff in their stores. Payments is a means to that end.

But today, Apple Pay can’t accommodate anything but payment. Apple Pay may be breathed new life into NFC but NFC will be hard pressed to breathe new life into payments. It’s not the primary reason why consumers will want use their smartphones in the store.

But here’s why they do.

Research suggests that more than 60 percent of consumers use their smartphones to pay because of the loyalty benefits that they get when they do. It’s why Starbucks is the most successful in store mobile payments scheme – at least so far – accounting for 11 percent of its volume. It’s why Dunkin’ Donuts’ mobile app usage has also hockey sticked and why LevelUp has also gained so much traction among QSRs. In all cases, frequent consumer usage accrues rewards at those merchants. And, incremental volume for the merchant. Payment isn’t the tail that wags that mobile payments dog. Loyalty is the killer app that drives sales and, ultimately, mobile payments adoption and ignition.

But Apple Pay has a big problem standing between it and its ability to deliver on this critically important value proposition.

Apple Pay’s tokenization scheme, which in-store is linked to NFC, makes it impossible for merchants to match the token issued by the networks back to their customer profile. Most merchants use account numbers and customer name (taken from Track One data) as the way they do that. Anonymized PANs and DANs and tokens now make that impossible. For loyalty programs to work, merchants have to know who’s buying stuff from them.

Further, the network’s NFC spec doesn’t support private label cards. And, although private label cards represent a small part of the payments mix, for most merchants, they represent their most valuable customers.

And, both things are what Apple Pay has to sort out – and in a time frame that is relevant to their ignition.

Ironically, Apple Pay’s ignition today is constrained by hardware – people with iPhone 6’s and terminals that can enable NFC payments. That’s a particularly odd strategy for a company that’s all about apps and ecosystems and has written the book on how to harness the power of a developer community to drive the innovation that has made its products so desirable by consumers. I don’t recall Apple ever deploying a new feature, widely advertised as the killer app that should make people rip up their phone contracts and shell out $600 for a new phone, that only a small number of people could use. There may have been situations in which Apple launched a new feature that was only available on new phones, e.g. TouchID, but never an app that most people who got the new phone couldn’t actually use most of the time.

If I were writing Apple Pay’s ignition playbook, I’d be trying to work on taking the Apple Pay payments platform way beyond just payments to eliminate friction from the shopping experience in a physical merchant and strengthen the relationship between the consumer and the merchant. That will, of course, vary based on the merchant category. It does suggest that Apple Pay bag its “go broad/go shallow” ignition strategy that my colleague David Evans wrote about recently. That strategy is uniquely–and unfortunately–Apple Pay’s since no one has ignited platforms successfully in the past using that strategy.

I would hope that Apple is wise to all of this as well, and that NFC is its first act but not its grand finale. If that’s the case, when Apple Pay is ready to release its SDK for in store payments it’ll come with all sorts of things that will appeal to merchants by expanding the opportunities for innovating how consumers and merchants interact in the stores.

If not, there are lots of other players who’ll use this window of opportunity and their assets to do just that – including the merchants. Instead of messing around with CurrentC and a value proposition based solely on having cheaper rails, merchants could even get clever and create their own ecosystem to do just that. Merchants may complain about the cost of accepting payments but there’s proof point after proof point that merchants don’t go out of their way to make it difficult for consumers to use the method of payment they want to use in stores.

One small business owner, Andy Charles, who owns a candy shop in Portland, Maine said it best when interviewed some time ago in connection with the American Express surcharge settlement,  “When somebody’s in my store, I want them to be impressed by both the quality of my products and the service they receive. And if I suddenly have to get into a conversation where I’m penalizing them if they use a credit card, it doesn’t make for very good customer service.”

So, cheaper payments for merchants and payments only as a feature on a new iPhone for consumers won’t cut it. What will is the ability for any iPhone—or Android– customer to benefit from having an entire ecosystem developing apps that’ll make their commerce experience in store more valuable.

And, that will get merchants interested in accommodating that method of payment.

Let’s see who steps up to the plate first.