Apple Pay was launched in September of 2014. It was positioned as a relatively easy, secure way to pay for purchases in physical stores as well as online using a variety of supported Apple devices including iPhones, iPads, Macs and Apple Watch. The general reaction to Apple’s announcement was quite 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.”
The payments community welcomed Apple with open arms, hoping that Apple could play a major role in bringing together the different players in the fragmented payments ecosystem, much as it had previously done with iTunes for music and the App Store for smartphone apps. Apple Pay embraced 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. In addition, Apple collaborated with the credit card networks, several banks and a number of merchants in the development and deployment of Apple Pay, as well as publishing the APIs so developers could embed Apple Pay services in their own apps.
“Say hello to Apple Pay. It’s the new kid on the payments block and, depending on how things unfold, it could be the new Gorilla in the mobile payments ecosystem,” wrote Karen Webster, CEO of Market Platform Dynamics and an expert in digital payments. But, she also added a prescient note of caution: “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.” The chicken and egg issue is that there aren’t enough consumer devices supporting Apple Pay, and there aren’t enough merchants that accept it. Both, consumers and merchants, have to be convinced to move away from payment systems they know well and feel comfortable with.
Webster’s answer is succinctly given in the title of an article she published earlier this year: The Mobile Wallets Results Are In, And They’re… Underwhelming. She opens the article by reminding us that when Apple Pay was launched in 2014, “the conventional wisdom was that the plastic card was about to be as dead as the flip phone, killed by the same disruptive culprit - the smartphone.” This view was further reinforced by the subsequent launch of Samsung Pay, Android Pay and Walmart Pay, as well as the continuing deployment of MasterCard’s Masterpass, Visa Checkout, and PayPal One Touch.
But, the conventional wisdom was not quite right. The key barrier to the adoption of these mobile payment innovations is that while the payment system that we’ve long used is highly complex and inflexible, it actually works quite well. “As it turns out, consumers like dipping and swiping just fine and are not dissatisfied with their plastic cards, even if they happen to have a phone in their hand with the capacity to use a mobile wallet.”
According to Webster, fewer that 5% of consumers who have one of the main digital wallets actually use it. 22 percent of potential users have tried Apple Pay, but only 4% use it. Samsung Pay has the highest usage at 4.5 %.
What’s the reason for these disappointing results? It’s not concerns over security or ease-of-use. Basically, most consumers are happy with their current payment methods and don’t see why they should switch to mobile payments unless given some compelling incentives.
The most direct incentive is to offer consumers points and rewards for using mobile payments. A few months ago Samsung Pay launched such a reward program. Some gas stations offer discounts when buying gas with their app, which requires paying directly with a checking account through ACH. SmartPay, for example, offers a 10 cent discount per gallon. Convenience is another major incentive, as is the case with the automatic payments when using Uber, Lyft and similar transportation services or the ability to order ahead at Starbucks and other stores.
“Consumers may not be looking for a different payment method explicitly,” notes Webster, “but if an improved payment method can connect them to a solution for a commerce problem they already have, they are much more likely to want to adopt it. No one wants to wait in line for coffee, or stand in the freezing cold any longer than they have to to get gas, or argue with their cabdriver about how much change they’re owed - and with a tap to pay on smartphone today, all of those problems can be eased.”
Industry analyst Horace Dediu has an interesting take on the slow progress of mobile payments, likening the competitive struggles of Apple Pay, Samsung Pay, and others to a kind of war of attrition against non-consumption, that is, against consumers’ reluctance to change. In such a war of attrition, there are no decisive battles to be won or lost. It’s a slow-moving operation in which the winners are those that grind it out and last the longest.
Challengers must be persistent, - it’s impossible to win against non-consumption in one battle. “It takes literally millions of decisions for adoption: each consumer, each merchant, each bank, each point of sale. It’s a relentless grind of pitching, selling, demonstrating and shaming into action.”
Over the past three years, progress may seem hard to spot because there’ve been no big wins, only relatively small progress compared to the huge number of world-wide payment transactions. But Dediu remains optimistic with the slow but sure accumulation of advances that, over time, could add up to a big victory for mobile payments, and especially for Apple Pay.
“Merchants tell Apple that 90% of contactless transactions in the US were Apple Pay. Apple sees continuous growth and cited 500% growth in y/y in payments last quarter. The total amounts to hundreds of millions of transactions worth billions of dollars. Anecdotally, the points-of-sale supporting the system are growing. 76% of the top US merchants have agreed to deploy by end of this year. But the total market is probably measured in billions of transactions and trillions of dollars. There is a lot to go.”
Three years is a very short time for a transformation as complicated as that of our payment systems. It requires continually offering merchants, consumer, financial institutions and other participants in the payments ecosystems more reasons to embrace the new technologies. But, as the often repeated adage reminds us, transformative innovations are over-hyped in the short term but under-hyped in the long term. This will most likely be the case with the complex evolution of our digital payment systems.