August 19, 2016
Apple Pay and the Future of Mobile Payments
A great step forward, but no challenge to the status quo
By Andrea Dunlop, Vice President, Card Services at Optimal Payments
Apple launched Apple Pay on iPhone 6 to industry-wide acclaim and many media outlets proclaimed it a tipping point for mobile payments. But, what’s most interesting is, rather than revolutionizing payments in the three months since its launch, Apple has found a place in the existing payments ecosystem. Rather than introducing a competing system, like it did with the record industry and iTunes, Apple Pay is an enabling technology, working with the major card networks and banks to get their cards onto Apple mobiles for in-store and on-line payments. To gain widespread adoption and use, however, Apple Pay will still need to overcome some hurdles.
An insight into the technology
The three key features of Apple Pay on the iPhone 6 are Near Field Communication (NFC), TouchID and the secure element. All three together enable in-store NFC payments, while the latter two technologies enable online payments.
The addition of NFC onto the iPhone 6 (some years after it was available on Android and even BlackBerry devices) is great news for supporters of NFC technology, and a boost for retailers that have already invested in upgrading their point-of-sale equipment to accept contactless.
As with everything they do, to help ensure consumer adoption, Apple has focused on creating a simple, sleek customer experience and as such has already succeeded where many in the mobile-payments space have failed.
The customer journey begins with a frictionless registration where cards can be added to your Passbook directly from your iTunes account or by taking a photo of your plastic card. Touching the iPhone 6 on the NFC payment terminal triggers the phone to display the default card, and completing the payment is as simple as touching the home button for fingerprint verification by TouchID. If you want to choose a different payment card you can scan through your Passbook and select another registered card. For on-line payments, Apple Pay will provide a new one-touch way to pay online—not only at their own stores (iTunes, iBooks and the App Store) but also at third parties; so we can expect to see Apple Pay as a new payment button and when we’re paying online we can authorize the transaction using TouchID.
However, according to a recent report by InfoScout, a U.S. research company providing real-time shopper insights, there is poor consumer awareness of which stores accept the NFC payments technology and a lack of understanding of how the service works.
The report finds that not even one in 10 (9.1 percent) consumers have ever used the service to make an NFC payment and less than five percent made an Apple Pay purchase during Black Friday. The research also adds that among the 90 percent of iPhone 6 and 6 Plus users who have yet to try Apple Pay, the main reason for not choosing to do so was because they weren’t familiar with how it worked (32 percent). Moreover, 30 percent said they were satisfied with their current payment methods, while 19 percent said they were concerned about security, 11 percent said they hadn’t heard of Apple Pay before the survey and 5 percent said they tried to register a card with Apple Pay but it didn’t work.
Where are the roadblocks for Apple Pay?
The issue of scale for Apple Pay will play out over the next two to three years as distribution of both Apple phones with NFC and contactless retailer terminals increases. Apple Pay will create more enthusiasm for NFC and help make it more widely accepted. However, the speed and scale of iPhone 6 adoption and the current small number of retailers upgraded for NFC acceptance (optimistically 5 percent of retail locations in the U.S.) means that Apple Pay is still not enough to transform offline payments in the near-term. In Europe, it’s a similar picture – though there are disparities between the regions, with the U.K., Poland and Slovakia significantly further ahead, and others like the Scandinavian markets and Germany lagging behind.
Other issues for Apple Pay are with U.S. debit and the need to be compliant with the Durbin Amendment for debit cards. At the moment, it seems that the tokenization of debit cards in Apple Pay will only work with Visa and MasterCard on new EMVCo specifications. And if the 8+PIN networks are not enabled for tokenization of Apple Pay debit transactions, it will be impossible to offer retailers the required choices in transaction routing. Durbin compliance means making availability for retailers to route through one signature and one unaffiliated PIN network. While it appears that Bank of America has done it with First Data’s Star Network, this looks like a one-off and is rumored to have been a multi-year project, so there is a lot of work to be done to enable compliant debit across the industry.
The key takeaway is that Apple Pay has been major news for the payments industry and is set to reignite interest in NFC mobile payments, while simultaneously supporting the status quo for banks and the major card companies. And, these are helpful developments for driving e-commerce and m-commerce volume.
Andrea Dunlop is the vice president of Card Services at Optimal Payments. She is a payments industry veteran with previous stops at Visa Europe and Royal Bank of Scotland. Optimal Payments is a global provider of online payment solutions.