In January 2014 I wrote about Apple Inc.’s (AAPL) possible future entry into the mobile payments world. I outlined the terrain and the rivals it would face in this uncertain space. But recently when Apple CEO Tim Cook introduced Apple Pay, their brand new mobile payments system along with the iPhone 6, it raised two major questions that I will try to answer below.
- What is different about Apple Pay to make it more successful than its predecessors?
- Is Apple Pay the next big thing, or is it setting the stage for the next big thing by Apple?
1. Apple’s mantra tends to be “Do it right” over “Do it first”. However it means that others like PayPal, Google Wallet, etc., have a head start in this market. But so far no one has been able to deliver on the promise of replacing people’s wallets with their phones.
Adoption of a new technology, especially involving personal, financial information, can make consumers nervous. Security and convenience are top priorities for most. A platform like PayPal handles the data security issue satisfactorily by not revealing the shopper’s credit card or bank information to merchants. But it is lacking on the convenience front. You can use PayPal to make online purchases easily but the same cannot be said about brick and mortar stores where a larger number of customers still shop. So even if using credit cards may expose people to a greater risk of fraud, the lack of universal acceptance of mobile payment systems at major retail outlets limits their adoption and active use.
But I think the following factors distinguish Apple from its competitors in the mobile payments space.
i) Hardware: Unlike Google or eBay, Apple has the advantage of producing its own devices that work seamlessly with its software. This gives the company more control over the transaction to ensure a smoother money exchange, better user experience and repeat customers. The integrated hardware and software ecosystem is also a great cross-sell platform for all things Apple.
ii) Data Security: Near Field Communication or NFC technology that the company is using for Apple Pay enables a user to wave their iPhone before an enabled terminal to make a connection. Another chip called the secure element completes the transaction by generating a random, unique number instead of using the actual credit card number for each transaction. While a random number generator is available with traditional credit cards as well, it can only be used online. But with this technology it can be used by customers in stores. An additional layer of security comes from Apple leveraging its existing Touch ID technology for fingerprint authentication before payment.
iii) Brick and Mortar: Apple has taken the next step by making mobile payments about using your mobile device to make a payment wherever you are shopping and not limiting it to just shopping on the mobile device. It has engaged popular retailers like Starbucks, Target and McDonalds to accept Apple Pay at their outlets, improving its odds for mass appeal. Customers will be able to use this payments system at over 200,000 merchants.
And the best thing is that it has MasterCard, Visa and American Express on its team. This payment support network is critical because one of biggest hurdles to widespread adoption is convincing merchants to install the required terminals. Having major payment processors with high customer penetration aligned with Apple makes it a more lucrative and credible step in the eyes of the merchants. Conversely the typical customer is likely to have a credit card enabled by one of those providers and is more likely to adopt Apple Pay if it can be used in most major stores; rather than only a select few. Additionally people can still earn their rewards, miles, etc. on the credit cards while all they do is wave their phone near a terminal to pay.
iv) Customer Loyalty: The Company tends to have something of a fan following among its core customer base. It reportedly has over 800 million registered iTunes accounts which is a large potential customer base for its mobile payments system. If the iPhone6 (and maybe even the smartwatch) sales exhibit strong growth then this benefit can become more tangible.
- 2. So is Apple Pay the next big thing in the mobile world? It may be. But even if it does not make the regular wallet redundant, it paves the way for the next wave of mobile integration for the likes of Apple.
i) NFC Tags: A sizeable new revenue stream is an obvious reward if the company proves successful in this latest endeavor. But the NFC technology that it is using for payments can also be a testing ground for becoming a more pervasive part of a customer’s everyday life. The use of one’s mobile phone as something of a universal remote that controls appliances, thermostats, security systems and so on can be accomplished with near field communication. In fact appliances that can be synced with smartphones are already available today. But for Apple this could be the beginning of building an increasingly integrated system where its customers rely on the company for many aspects of their routine. This could open up exciting new avenues of growth for the company.