Over the last few years, whenever I’ve spoken with clients about mobile payments or wallets and near-field communications (NFC), I have repeatedly heard the same response: “we would be interested, if only the iPhone would also support it.” Since this autumn, this excuse has vanished. Apple Pay is now available, and, indeed, it supports NFC.
I am deeply impressed with Apple Pay so far; Apple seems to have done many things right. Not only does it have the superior user experience that you expect from Apple; it also has state-of-the-art security and privacy with a secure element and tokenization, coverage of proximity and remote payments cases, full wallet integration and cooperation across the payments ecosystem. Apple is very conscious about which parts of the ecosystem it can control and which it cannot. Hence, it’s no surprise that the network of partners is already huge.
The challenges ahead are still significant. In the US, the first launch market, the coverage of NFC terminals is low. The number of merchant establishments accepting electronic payments in the US is around 7 million (which is only 35 percent of all 20 million merchant establishments in the retail and hospitality sector). But only 220,000 of those stores accept NFC payments, or as little as 3.1 percent. This is far from being a critical mass. Making payments is a routine task for all of us, and behavioral patterns change slowly.
Early iPhone 6 users will eagerly wait to pay for the first time with their phones, and when they find the first NFC-capable acceptance terminal, they will be impressed by the ease of use. But what happens next? In more than 96 percent of payment cases, NFC payments are not accepted. The level of frustration can quickly reach the tipping point when users don’t bother asking anymore and simply use a credit card or cash—the payment patterns users are already accustomed to. Though NFC payments are quicker and easier, users will give up trying after a couple of times, even ones who are in the payments business like me.
Solving the issue of low NFC adaption in the retail world is a highly complex task. Even though Apple has a premium position and the market awareness to push adoption, there are also strong forces against it. Retailers in the US struggle with EMV migration and don’t want to get even more dependent on the international card schemes underlying Apple Pay. Transaction fees of 2 to 3 percent are a massive burden for merchants. The MCX initiative, founded by retailers as an alternative to Visa and MasterCard, might not be successful and appealing to the user, but the alliance still has the market power to seriously damage or even abandon other mobile payments initiatives in the US, including Apple Pay.
Interestingly, the situation in Europe is completely different. Due to market regulation of interchange fees by the EU, fees on Visa and MasterCard payment transactions will be capped at 0.2 to 0.3 percent, which is a fraction of the US fees. Hence, European retailers are more likely to support Visa and MasterCard transactions. In European countries with strong national card schemes, like girocard in Germany, the international schemes will even have the potential to gain significantly larger market shares. This sounds like fertile ground for Apple Pay—but maybe only at first glance. As much as the retailers benefit from regulation, the banks will suffer. Their revenue will be drastically cut down. Considering that Apple requests 0.15 percent cut of purchases, the banks would lose half of their remaining transaction fees’ turnover. There is not much left for a profitable business case, and it is highly doubtful that many banks will support Apple Pay under these circumstances. Hence, in Europe probably the banks, and not the retailers like in the US, might become a showstopper for Apple Pay.
So, will the Apple Pay revolution fade out? Certainly not. In the worst case, Apple Pay will change the mobile payments market as much as Google Wallet did. Google Wallet’s approach pushed new innovations into the market that were broadly adopted by many other players for their NFC payment solutions. Apple Pay will likely be more successful due to excellence in execution, and it could play a big role in helping to overcome at least some of the current market hurdles for mobile payments.
The payments market has already been shaken up this autumn; it will never be the same again. Every stakeholder in the ecosystem is somehow impacted by Apple Pay, and this fires dynamics that cannot be stopped. The revolution has started.