On September 9, Apple announced Apple Pay, an easy, secure way to make mobile payments using their latest devices, - the iPhone 6’s and Apple Watch. The reaction to the announcement has been mostly positive: “[F]or now, at least, analysts believe if there is any company to persuade consumers of the mobile wallet’s value, it is Apple.” Same with the payments community: “Well, hello Apple, and welcome to the payments industry. We’ve been holding the door open for you for a long time.”
Apple Pay is embracing a number of industry standards, including NFC (near-field communications) for contact-less payments; Secure Element, a dedicated device chip; and network-based tokenization to protect sensitive financial data. Apple is collaborating with the big credit card networks, several banks and a number of merchants in the development and deployment of Apple Pay. In addition, the company is hoping to stimulate innovation by publishing their APIs so developers can embed Apple Pay services in their apps.
Currently, the digital payments infrastructure is quite fragmented, with different players pursuing different standards. By embracing key industry standards, Apple Pay could encourage their widespread acceptance around the world, and thus help coalesce this fragmented payment ecosystem. In addition, by reaching out to financial institutions, merchants, application developers and others, Apple is helping bring together the different players in the payments ecosystem, something that’s absolutely essential to succeed in such a complex undertaking.
Karen Webster, CEO of Market Platform Dynamics and founder of PYMNTS.com, wrote that “depending on how things unfold, [Apple Pay] could be the new Gorilla in the mobile payments ecosystem.” But, she added: “As great as this sounds, there are two limitations of Apple Pay right now for consumers and merchants. And it’s that old chicken and egg issue that gets in the way of every new payments system.”
Apple Pay requires the use of new devices, - e.g., iPhone 6, Apple Watch, - and those will take a while to deploy in the US and around the world. And, while consumers can use Apple Pay in roughly 220,000 merchant locations, that’s a small fraction of the over 8 million point of sale merchants in the US. “Apple Pay ignition depends on merchants believing in Apple and consumers believing that merchants will believe in Apple. So that’s why what happens next will be really important to watch.”
Our existing payment system is quite complicated, somewhat expensive and difficult to change, but it actually works quite well, handling just about all transactions within a few seconds. Consequently, for the vast majority of people with credit or debit cards, there may not be a sufficiently compelling reason to embrace mobile payments. Critics have noted that, “Mobile-enabling the function of paying by card at POS [point of sale] is a solution for a non-problem - for consumers and for merchants.”
Harvard business professor Clayton Christensen points out that new-market disruptions, rather than direct competition against entrenched offerings, is how disruptive innovations generally succeed in the marketplace. New-market disruptions are new products or services which can reach brand new customers whose needs were previously unserved by existing offerings.
The billions around the world without access to traditional financial services are precisely such unserved potential customers. Mobile digital money could be their ticket to financial inclusiveness and membership in the global digital economy. For them, access to mobile-based payments goes well beyond convenience, potentially transforming their financial lives.
“Studies show that broader access to and participation in the financial system can reduce income inequality, boost job creation, accelerate consumption, increase investments in human capital, and directly help poor people manage risk and absorb financial shocks,” says an excellent new report, The Opportunities of Digitizing Payments, prepared for the G20 Global Partnership for Financial Inclusion by the Gates Foundation, the Better than Cash Alliance, and the World Bank.
The report notes that while 50 percent of adults around the world have accounts at a financial institution, more than 2.5 billion do not and are thus excluded from the formal financial sector. This includes 80% of poor adults, defined as those living on less than $2 per day. In advanced economies, almost 90% of adults have financial accounts, compared to 41% in developing economies, - 46% of men and 37% of women.
There is growing evidence that the poorer you are, the higher the costs and risks of cash. Being stuck using cash consumes extra time, involves high fees, and makes it hard to rise out of poverty. “Without access to the formal financial system, women, poor people, small businesses, and otherwise excluded people must rely on their own (extremely limited) informal and semiformal savings and borrowing to finance educational and entrepreneurial investments, thus making it harder to alleviate income inequality and spur broad-based economic growth.”
The report includes a number of findings and recommendations which are summarized below. Its overriding finding is that the digitization of payments has a major impact on broad-based economic growth, financial inclusion, and women’s economic empowerment:
- “Digitizing helps overcome the costs and physical barriers that have beset otherwise valuable financial inclusion efforts.”
- “Digital platforms offer the opportunity to rapidly scale up access to financial services using mobile phones, retail point of sales, and other broadly available access points, when supported by an appropriate financial consumer protection framework.”
- “Digital payments can promote women’s economic empowerment by facilitating greater account ownership and asset accumulation and increasing women’s economic participation.”
Its recommendations include seven key steps for governments to follow:
- “Digitize their payments and receipts, including social transfers. Digitizing has the potential to dramatically reduce costs, increase efficiency and transparency, help build the infrastructure, and broaden familiarity with digital payments. When governments shift their social, salary, and procurement payments and taxation and licensing receipts to electronic form, it creates a foundation upon which the private sector and person-to-person payments, such as international and domestic remittances, can build.”
- “Engage actively on the regulatory agenda. Some regulators are still hesitant to embrace the digital financial revolution that is emerging, and have reasonable concerns that need to be specifically addressed.” These include fostering competition by enabling a broad range of providers to offer financial services; ensuring that consumer protection and risk-based prudential and integrity requirements are met; and encouraging new business models to address critical concerns like anti-money laundering and the financing of terrorism.
- “Convene public and private sectors to create a basic technical payment platform infrastructure across which providers can compete on product development. . . A safe, reliable, secure, and affordable platform, open and shared among market participants, will act as the catalyst of financial inclusion and will foster adoption of basic financial services at a large scale.”
- “Create an enabling environment that fosters private-sector innovation. . . Empowering a diverse range of private-sector providers will increase competition, reduce costs, empower consumers, increase the scale needed for sustainability, and drive financial inclusion.”
- “Guide digital financial service providers to educate consumers and small businesses about their options to increase confidence, competence, and adoption.”
- “Recognize the role of remittance providers in offering a digital entry point to formal financial services for senders and receivers. . . Instead of remittances being cashed out, remittances sent to a bank account, e-wallet, or smart card, for example, can go into accounts that support safe saving and also increase transparency and traceability.
- “Look to multilateral development banks and comparable agencies as sources of comparative expertise in this emerging field. Governments may need technical assistance and resources as they undertake this agenda.”
The evolution to mobile digital payments is truly a historical transition. “Technology-enabled business model innovation can help build inclusive financial sectors that enable people to improve their lives,” writes the Digitizing Payments report in its conclusion. “Governments, the private sector, and the international community should focus on addressing the challenges of a move toward making digital payments available to the billions of unbanked adults around the world.”
The development of such a 21st century payments infrastructure is one of the most exciting, important and challenging projects the world will undertake in the years ahead. Let’s hope that initiatives like Apple Pay will help propel forward the complex evolution toward mobile digital payments.