If anyone can turn the smartphone into an in-store payment device, it’s Apple Inc. At least that’s the prevailing opinion among analysts and experts in the payments industry. That’s partly due to the 500 million active accounts on iTunes, each tied to a payment card. Compare that to the 244 million active accounts of e-retail giant Amazon.com Inc., and the claim starts to make sense.
A crucial enabling technology in the Apple Pay system is Near Field Communication, a wireless technology that will enable the chip in an iPhone—and other phones that embed NFC ships—to pass payment card data to a store terminal, eliminating the need for a shopper to swipe her card. NFC has been highly touted as a payment mechanism for over a decade, but it has yet to make much of a dent in retail payment. Apple’s embrace, analysts say, could make a big difference.
“Apple’s foray into NFC is a landmark and will ignite the mobile payments market globally, but especially in the U.S. where adoption has lagged,” says Pascal Caillon, the general manager of North America for Proxama, a provider of proximity marketing, loyalty and contactless payment technologies.
Apple unveiled on Tuesday two new iPhones, the Apple Watch and its mobile payment platform called Apple Pay. Apple Pay is incorporated into the Apple Passbook mobile wallet, backed by American Express, Visa and MasterCard and card-issuing banks responsible for 83% of credit card transactions, the company says. Apple Pay uses NFC, the iPhone’s Touch ID biometric fingerprint scanner and encryption to enable in-store payments by holding the iPhone close to a payment terminal. Apply Pay also allows retailers to use its finger print scanner to let consumers make purchases inside applications on the iPhone.
Users can either transfer their iTunes credit card details to Apple Pay or they can take a photograph of their card in order to add a credit card to Apple Pay. After verifying a credit or debit card with the issuing bank, the card is active in Apple Pay. However, Apple says, the payment information is not stored on the phone. Rather, a 16-digit device identification number is combined with a one-time payment number with a dynamic security code for each payment. The consumer’s identity is verified using the Touch ID biometric fingerprint scanner. The results, hopes Apple, is a secure way to pay with a smartphone in stores.
The barrier to widespread adoption, however, is merchants buying point-of-sale terminals equipped with NFC, which Apple Pay needs to work. In fact, up to this point, adoption has been downright sluggish. In 2013, NFC-related transactions made up only 2% of mobile transactions, estimates research firm Gartner.
And other mobile wallets, such as the Google Wallet, haven’t had much traction, either. Only 82 of the Top 500 e-retailers in the 2014 Internet Retailer Top 500 Guide support Google Wallet. That’s down 7.9% from 89 in 2013. Among Second 500 e-retailers, only 76 support Google Wallet in 2014, down from 83 in 2013.
Apple addressed the question of where consumers will be able to use Apple Pay initially by saying that it will be accepted by retailers that operate more than 220,000 stores across the United States. Bloomingdale’s, Disney Store USA LLC, Macy’s Inc., McDonald’s, Nike Inc., Petco Animal Supplies Inc., Staples Inc., Subway, Toys “R” Us Inc., Walgreen Co. and Whole Foods have all signed on to accept Apple Pay when it debuts this fall. However, that’s a small percentage of the 9 million merchants that currently accept credit and debit cards for payment.
“Everyone wants a crack at Apple’s customer base, so there are some merchants falling all over themselves to participate,” says Steve Mott, the CEO of BetterBuyDesign.com, a virtual investment and consulting company. “However, due to the slow ramp-up expected, merchants will be able to drag their feet on whether to commit or not.”
Merchant adoption will likely come down to consumer adoption. “If enough customers complain about not being able to use their Apple Pay, and non-accepting merchants start to lose business—also a distant prospect, given consumer insouciance about mobile payments in general—the merchants will start to commit,” he says.
And consumer adoption of Apple Pay will depend on how easy it is to use, says Matt Schulz, senior industry analyst at CreditCards.com.
So far, few consumers have used their smartphones to pay in stores. And, when asked, before Apple made its Apple Pay announcement, most said they weren’t interested in the option. More than 60% of shoppers say they would never (44%) or hardly ever (18%) use their mobile phone to make a purchase, according to a CreditCards.com survey released this week of 1,003 U.S. consumers. Only 4% said they would always use their mobile phone to make a purchase and 9% said most of the time. Only 2% of smartphone users have made a purchase in a store using their phone, according to a Federal Reserve survey in March. 21% of those surveyed by the Federal Reserve said they were likely to do so if they had the opportunity, but 44% said they were “very unlikely” to make a purchase using their phone.
“If Apple can make paying by smartphone an easy, seamless and secure experience—and even possibly add in rewards or other incentives—I think many people will embrace mobile payments,” he says. “What our survey shows is that, as of right now, there’s still a lot of convincing that needs to be done.”
Some retailers need to be convinced, too. Wal-Mart Stores Inc. and Best Buy said they will not accept Apple Pay, likely because of their backing of CurrentC—a mobile payment app recently launched by Merchant Customer Exchange (MCX), says Mott, who worked with merchants on MCX. Neither retailer would confirm that.
MCX has been touted by supporters as a merchant-friendly payment system that would require retailers to pay lower fees than they do today for processing credit and debit card payments. , How exactly Apple plans to make money from Apple Pay transactions is not yet clear, especially as the company says it will not charge merchants or consumers to use the payment platform. Apple did not respond to a request for comment.
Despite the sluggish adoption of NFC to date, an important deadline is looming: the deadline for retailers to transition to EMV chip-and-pin payments. EMV stands for Europay, MasterCard, Visa, the three payment card companies that developed a standard for the use of chips in payment cards in the 1990s. In October 2015, the payment card networks plan to shift liability for fraudulent transactions to the party that has failed to deploy EMV technology, a move designed to push retailers to deploy card-reading terminals that can accept chip cards.
This means retailers will have to purchase new terminals, and most new terminals include NFC technology. The cost, Mott says, comes from turning the NFC capability on. “Retailers will face new fees from processors, and terminal providers, in some cases, which are annoying, but fairly modest if volume-based,” he says.
If retailers who operate online and offline aren’t ready to get on board with NFC just yet, they have other options for getting involved with Apple Pay, says Mott. One option is to harness the payment system for in-app purchases, which Target Corp. and Groupon plan to do. (Look for an in-depth story of how they’re doing this next week on InternetRetailer.com.)
Another option is building a presence in Apple’s Passbook app, says Jack Philbin, CEO and co-founder of Vibes, a mobile marketing firm. In addition to housing Apple Pay payment information, Passbook can integrate brand’s loyalty cards. Retailers that aren’t ready to install NFC-enabled terminals can get shoppers accustomed to using Passbook for their loyalty cards in the retailer’s store, which will make the transition to using Apple Pay at that retailer easier when the time comes. Retailers using Passbook can employ barcodes or quick response codes to scan loyalty cards in stores, which make the barrier to entry much lower, says Philbin.
“This makes Passbook one of the go-to apps on the iPhone,” Philbin says. “Apple put it on everybody’s home screen for a reason two years ago, and now we’re seeing the benefit.”
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