An Inconvenient Apple Pay Truth

Let me tell you a story about global warming and mobile pay — Apple Pay in particular — and what they have in common.

Let’s start with Al Gore. Al Gore’s interest in global warming started when he was an undergrad at Harvard University.

While there, he studied with a professor who was one of the first, in 1957, to measure carbon dioxide levels in the Earth’s atmosphere. That body of work suggested that global warming was the likely future result of the oceans’ inability to absorb excess levels of CO2 generated by the projected growing use of fossil fuels. Fossil fuels — such as coal, natural gas and oil — generate nearly 90 percent of all human-produced CO2.

That topic, and Gore’s interest in environmental issues more broadly, became the cornerstone of his career as a senator and his legislative agenda as President Clinton’s VP — with mixed success. The data backing up his claims was challenged and politicized by growing concerns over job losses at home and possible trade wars with developing nations that were among fossil fuel’s heaviest users.

Gore’s 2006 movie, An Inconvenient Truth, was his attempt to take his story to a different audience — the lay consumer. In it, he shares the data used to support the same environmental concerns and likely “planetary emergency” that he had begun raising 17 years earlier.

“I’ve been trying to tell this story for a long time,” Gore says at the beginning of the movie, “and I feel as if I’ve failed to get the message across.”

It’s a message he continues to share every opportunity he can — now with new data points to support his thesis. As our keynote speaker at our first Innovation Project 2013, Gore managed to traverse the connection between commerce and global warming. His exchange with Russell Simmons that year on the topic sort of brought down the house.

You had to be there.

In the ten years since Gore’s crusade, consumers and innovators alike have taken his call to action to heart and have done everything from paying more attention to recycling, to pouring investment capital into renewable energy and electric cars.

The “inconvenient truth,” though, wasn’t so much the story Gore was telling — and had been for many years — but the broader conversations that it started and the realities that very powerful stakeholders were forced to address as they listened.

Which brings me to Apple Pay and The Wall Street Journal’s article last week on its hype not living up to its hope, 2.5 years after its launch.

The WSJ’s article is dated April 6, 2017, and cites Apple Pay’s struggle to get adoption because of consumer concerns about security and sales clerks’ confusion over how to instruct consumers to use it.

Better 30 months late than never, I suppose, and somewhat ironic to have this story told now by one of the outlets that helped to fuel its hype, even after it became increasingly clear that the bloom was falling off the Apple Pay rose – and not long after its start.

Just three weeks after we released our latest quarterly mobile payments adoption study results, it was made astonishingly clear that the already disappointing Apple Pay performance was being taken to a new level: Consumer adoption and usage moved from flatline to decline.

Coincidence? Or is it simply impossible not to tell the non-hyped Apple Pay story any longer?

You decide.

The Inconvenient Apple Pay Truth

Despite being the most adopted general purpose instore mobile wallet in the market, our research over the last 2.5 years suggests that Apple Pay isn’t used much.

Consumer adoption — consumers with the right phones and the app in a store that accepted it and who tried it once peaked in March of 2016.

Consumer usage — consumers with the right phones and the Apple Pay app shopping in stores that accepted it and who used it more than once peaked in March of 2015. Nearly 49 percent of Apple Pay users (48.6 percent) told us in March of 2017 that the reason they don’t use Apple Pay is because they’re happy with their existing payments methods — up from 37 percent two years earlier.

And even though we’ve seen a slight uptick in security concerns (15 percent in March of 2015 to 20 percent in 2017), we’ve also seen steady declines in users telling us that their reasons for not using the app have little to do with knowing they can or how to do so in the store.

After watching what consumers do and reporting what they’ve said for the last 2.5 years, we can also safely conclude that Apple Pay’s lack of usage isn’t for the reasons the WSJ’s story cited, either — it’s not because consumers don’t think it’s safe to use Apple Pay or they are confused about whether they can. And, at least in the stores in which I’ve shopped, sales clerks seem well-versed and helpful.

What we see from our data is that consumers with phones that have the Apple Pay app and who shop in a store that accepts it know they can use it, know that it will work and 80 percent of them feel safe doing so.

They just think what they’re using instead – the dowdy plastic card – is just fine – and have decided not to use Apple Pay.

They’ve simply chosen not to use Apple Pay.

For Apple Pay, that means that the storyline can no longer be “just give it time and consumers will come around.” The inconvenient Apple Pay truth is that not enough consumers see the value in it, so 19 out of every 20 people who could use it don’t even bother anymore.

No consumer interest means no merchant interest. No merchant interest means no partner interest to prioritize Apple Pay over something else — at a time when partners have plenty of other options.

All of this, of course, is coming at the most inconvenient time of all for Apple Pay — when contract renewals for the app are being re-upped. Apple is hoping the banks don’t turn the negotiating tables on them and pull, well, an Apple.

An Inconvenient Truth: The Hype Machine Is FINALLY Slowing Down

Now the WSJ weren’t the only ones to jump onboard the Apple Pay hype machine in its early days — as they aptly reported in their story, it was in overdrive from the very beginning.

This is why we decided to track, as accurately and consistently as we could, Apple Pay adoption and usage from its earliest introduction into the market. At its launch, Apple Pay was clearly the mobile payments shot heard ‘round the world,’ and we wanted to see how consumers would respond — especially those critically important early adopters with the potential to drive its critical mass.

Our quarterly studies, done since November of 2014 in collaboration with InfoScout, didn’t simply ask consumers what they might do, but observed what consumers with the right phones shopping in the right stores did the moment a transaction was completed. Did they or didn’t they use Apple Pay for that transaction, we wanted to know — and we asked enough consumers every quarter to make it credible: some 4,000 consumers every quarter and in March of 2017, just shy of 8,000 consumers. We reported results every time we did those studies — and we did those studies eight times. In between, we wrote a raft of commentary highlighting Apple Pay’s growing headwinds.

It’s why we could report, with confidence, two years ago, that the Apple Pay adoption was a very slow roll – that now seems to be moving backwards. And its device/technology-driven (not app/cloud driven) everywhere in the U.S. strategy created obstacles for consumers and merchants from the start.

Not enough people with handsets and devices and not enough of a concentration of places to use it created an ignition problem of massive proportions that even the biggest technology company in the world would have a hard time overcoming. Critical mass and scale are the lifeblood of payments innovation — Apple Pay set itself up to deliver neither.

But the root of Apple Pay’s ignition problem wasn’t only that. Its failure to solve a pressing consumer problem in a market where payment via a plastic card works fine every single time that a consumer walks into any store and up to a countertop terminal to pay became its Achilles’ heel.

Red flags that we talked about from the start. There’s even a whole chapter in Matchmakers: The Economics of Multisided Platforms, published in May 2016, that takes you through a powerful lesson in platform ignition failure, using Apple Pay as the case study.

After the initial “gee whiz” of the early adopters wore off, Apple Pay began experiencing the adoption/usage decline that has accelerated since March of 2015.

And now, everything’s different.

The Inconvenient Truth: Apple Pay’s Share of Spend Is Low

The WSJ, in their story, featured quotes from Eddy Cue, the Apple SVP who looks after the services side of the business of which Apple Pay is a part. He was quoted as saying that Apple Pay “will eventually replace cash, debit and credit cards as the primary payment system.”

What Cue didn’t offer were numbers — number of users, share, of spend, transactions and, most importantly, dollar volume — which would help to support his claims. Aside from the vague “users and transactions increasing five and sixfold” that we’ve heard repeatedly in earnings calls, we’ve never seen anything specific publicly shared by Apple on Apple Pay.

We thought we’d  update some of our back- of-the-envelope calculations about adoption and usage and share of spend – and here’s where we come out based on our data set. We admit, these are crude, and would be a lot better if Apple released real data.

But here goes.

Number of Apple Pay Users

In the U.S., there are 207.1 million smartphone users, and 44.5 percent of those users — or 92.5 million — own iPhones. Of those, 74.1 percent own a handset capable of supporting Apple Pay (6 and higher). Our Apple Pay survey tells us that 21.9 percent of that subset of iPhone users have actually tried Apple Pay, so the number of iPhone users who have tried Apple Pay once is 15.0 million.

In terms of regular users, again from our study, we know that 18.4 percent used it more than once. That puts the pool of regular Apple Pay users using Apple Pay in physical stores at 12.6 million.

That’s 12.6 million active users after 30 months in market.

Apple Pay Share of Spend

Here are a few assumptions that we’ve made:

We know that stores Apple reports as accepting Apple Pay have $420 billion in annual sales. We come to that number by acknowledging that $392 billion is derived from the stores who are part of the Top 100 retailers — the rest is an assumption based on remaining spend at other smaller merchants.

We assume that people using the Apple Pay app in those stores spend, on average, what other consumers spend.

Using that $420 billion, we start doing the math:

1 percent of people have iPhones, and 74.1 percent of those have iPhones that work with Apple Pay, which means that 32.7 percent of people have the right kind of iPhone with the right handsets. Multiply that by $420 billion in sales and that equals $137B of potential sales by Apple Pay users.

We know from our data that Apple Pay is used in 4.03 percent of all eligible transactions. That means that Apple Pay is driving $5.5 billion in transaction volume, exclusive of motor vehicles and gas stations. That’s about .10 percent share of retail spend.

We can push the assumptions around here and there, but no matter how you cut the data, using any number of assumptions — and based on a data set that reflects 2.5 years of consistently surveyed consumers about their Apple Pay usage — Apple Pay’s share of retail spend appears to be really small.

If it were bigger, more merchants would be doing more to accept Apple Pay, and more of them would be doing more to drive consumer usage. I’ve heard more than one large merchant tell me that given its low usage and low share of spend, they’re either not as interested in making Apple Pay a priority and/or see no reason to promote its usage in favor of other methods that can drive incremental usage by adding more consumer and merchant value.

If Apple Pay’s share of spend were larger, we’d know — because Apple would tell us. At the end of March, Apple released data on the success of Beats, and in December, Eddy Cue told the media that Apple Music was well past 20 million users.

There have only been crickets when it comes to Apple Pay and reporting data on Apple Pay usage — even as recently as last Thursday.

Apple Pay data may be the most closely guarded Apple secret since the invention of the iPhone.

An Inconvenient Truth: Time Is a Currency That Matters

Cue, in his interview with the WSJ, posed the question whether it “matters if [Apple Pay] gets there in two years, three years or five years? — Ultimately no,” he was quoted as saying.

As all of you students of platform ignition know, time really does matter, especially in the dynamic payments space where time is perhaps one of the most critical currencies there is. The longer it takes to get traction, the more risk there is that someone or something else will — and at your expense.

Especially when you’re nearly three years in and not much has happened to move the needle in any meaningful way.

And when you’re trying to convince banks to stick with you and keep paying.

And make the case to the investor community that you’re going to rock it with services revenue that’s predicated on Apple Pay being a bit hit and taking 15 percent from issuers.

And when foot traffic in physical stores — where you’ve staked your claim — is cratering at the same time online payments have exploded, including the use of apps to pay for things that consumers would usually purchase in physical stores. While Apple Pay was working hard to sign up in-store merchants, cloud-based apps were busy signing up merchants in segments where feet were going inside physical stores and leveraging their cloud-based roots to get traction by offering consumers the chance to save time by ordering and paying for something in advance. And getting acceptance online.

And when other players have used those 30 months to build a consumer base that they can take to merchants desperate for shoppers and spend.

And when online acceptance marks are publicly disclosing the number of users that they have onboard, and cloud-based mobile wallets with a broader value proposition are too — and appear to be soundly eclipsing the Apple Pay user base.

And when consumers, including the early adopters who’ve given up using it with regularity, are now presented with other options in other channels where they’ve formed their own shopping habits over the last 30 months, and that Apple now must work very hard to bring onboard.

And when the ecosystem of payments sees that Apple, by virtue of its experience with Apple Pay, has lost some of its power to drive deals and hard bargains from the position of strength that it had this time three years ago.

Back in 2014, Apple could demand 15 basis points from banks that were hoping to get on the fast-moving Apple Pay payments innovation train. Right now, large banks have a pretty strong case for reversing the deal with Apple — and even ask Apple to pay them a few basis points for providing access to their cardholders.

The inconvenient Apple Pay truth is that if Apple is really playing the long game, they might have to be willing to pay for it. And, while they’re at it, give merchants some incentive to push it.

Let the next three years of Apple Pay payments begin — without the hype this time.

Also, check out Mobile Wallet Adoption: Where Are We 2.5 Years In?

These statistics were originally presented on March 15th at Innovation Project 2017 by Karen Webster, CEO at PYMNTS.com.