Apple and mobile payments

by Jan Dawson   |   August 21st, 2014

In last week’s column, I talked about the current state of smartwatches. I described weak demand met by weak supply, and the resulting poor sales of the offerings in the market today. I also talked about what it might take for a new product in this category to stimulate demand. One of the potential use cases for a smartwatch or other wearable is payments, and I’ve been asked by several reporters over the last few weeks whether the iPhone 6 will have an NFC chip, potentially for payments. Today I want to explore that particular opportunity a little more.

The current state of mobile payments in mature markets in the West

It’s important to be clear what we’re talking about. Firstly, I’m not talking about m-commerce – i.e. buying things from e-commerce providers through a web browser or even an app. What I am talking about is using a mobile phone to buy real world items in a retail location. It’s also important to note the current state and uptake of mobile payments is radically different between certain emerging markets (e.g. Kenya) and different mature markets, such as the US and Europe, which behave fairly similarly, and Asian markets such as Japan, where mobile payments are more established. I’m going to focus mostly on mature markets such as Europe and the US, where mobile payments have still not taken off to any great extent.

Let’s quantify current uptake for mobile payments in  these markets. Here’s some data from a recent survey among US adults I conducted as part of my smartwatch report:

Mobile Payments Survey responses

As you can see, take-up is very limited so far, with around two thirds of US adults never having used any form of mobile payments. Even if you exclude those and focus on those who’ve tried mobile payments at least once, only about a quarter use it regularly, half use it occasionally and another quarter gave up after their first experience.

The mobile payments vicious circle

So why is this? The reasons are fairly obvious:

  • Current offerings typically depend on NFC chips in phones combined with an app or service that can make use of it. Only around half of smartphones in the US have NFC embedded (the iPhone, notably, doesn’t have NFC)
  • Google Wallet, the pioneer in this space, has become harder and harder to use on smartphones, as certain carriers have blocked it and Google has restricted use to phones running relatively new versions of Android (about 21% of Android devices globally)
  • Isis, the effort from several of the big US carriers (soon to be rebranded), has only been in trials in certain markets for much of its history, and is only now beginning to roll out more broadly.

But the biggest reason of all is there is a chicken-and-egg problem with terminals and devices, as shown in the diagram below:

The mobile payments vicious circle

As long as few people have devices capable of making payments, there will be little reason for store owners to install terminals to work with them. And as long as there are few places where mobile payments can be made, users will see little reason to either buy devices that can make them or set up an account to make use of them. Whether the underlying technology is NFC, a barcode scanner, Bluetooth LE or something else, store terminals need to be able to communicate with the smartphone to create a secure transaction. I live in one of the test markets for Isis, but even here there are relatively few locations where Isis payments are accepted, and the availability in much of the rest of the country is far lower.

Breaking the vicious circle

There are two possible ways to break this vicious circle, as shown in this diagram:

Breaking the mobile payments vicious circle

You have to break the cycle either on the terminal side or the end user side. Breaking it on the terminal side would mean subsidizing the terminals on behalf of retailers, which wouldn’t be cheap. As Tim Bajarin wrote in his great piece on the Disney MagicBand, Disney spent $1 billion just to install the MagicBand infrastructure in its theme parks. Now extrapolate that cost to all the retail locations in the United States and you have a good sense of the size of the investment needed. Any player willing to subsidize that would have to have very deep pockets indeed.

The other way to break the cycle is to create massive end user demand, something the mobile payments products in the market today haven’t been able to do. For Google Wallet, the challenge has been the split between three parties that need to come together to make it work but haven’t: Google, Android OEMs and carriers. For Isis, the problem is somewhat different: consumers don’t necessarily look to the carriers as payment providers, and Isis has been poorly marketed, leading to low awareness and demand. What would happen if Apple were to enter the market by introducing some kind of payments technology as a built-in feature of the next iPhone or a wearable device? Millions of consumers in the US would suddenly have a tightly-integrated solution built into their devices. One that carriers couldn’t block and which would no doubt receive heavy promotion from Apple and the tech press.

Were Apple to introduce such a device or devices though, it would still suffer – at least at first – from the same problem of a lack of terminals which could accept payments. Wide availability of a mass market payments solution could potentially boost sales, but it would take time. As such, this would arguably be the first time Apple would introduce a major feature which wasn’t that useful at launch. Poor initial experiences for would-be users of its payments products could sour them on the product, which would be bad for ongoing interest. Yet this is the sort of thing which would be impossible for Apple to solve ahead of a launch announcement without a massive risk of leaks. I’ve written separately about how Apple might break its usual launch pattern for wearables, but this is one factor working in the opposite direction: Apple might need to give retailers, not developers, a head start.

Technology choices – to NFC or not to NFC?

I think it’s far from guaranteed Apple will launch a payments service, even though it has many of the pieces in place to do so at this point, and it could be an interesting new angle on the wearables space. But if it does, the question remains how it might be implemented from a technology perspective. The path trodden by the two major existing US providers is NFC, a technology Apple has stubbornly resisted adopting so far. It’s an established technology and, as such, would be relatively straightforward for Apple to add to its devices. So it’s a good option in some respects.

But even as Apple has resisted embracing NFC, it has more wholeheartedly adopted other technologies which could form the basis of a payments service, notably Bluetooth LE. Where other services have used NFC for pairing, Apple has used Bluetooth LE. Where other services have used NFC for quick data exchange between devices, Apple has used Bluetooth and WiFi. With the launch of iBeacon functionality, Apple has also sparked extensive interest among retailers in installing Bluetooth LE hardware in stores to track users and push promotions. So Bluetooth LE, which is also capable of very accurate proximity sensing, could become the technological basis for a payments service, especially given the existing investment by retailers in iBeacons.

For these reasons, and despite the obvious appeal of NFC, I’m still not convinced Apple will use it in any payments service it offers. At the same time, I think it’s interesting to think about the role of Touch ID on either an iPhone or a wearable device as a form of authentication, which would dramatically reduce the friction compared with opening an app and keying in a PIN. That could potentially work with either Bluetooth LE or NFC.

Huge barriers remain

For all the potential associated with an Apple entry into the payments space, the vicious circle described in this post remains a formidable obstacle to any player in the mobile payments market, including Apple. Unless Apple is willing to make a major investment in subsidizing terminals, it risks launching a payments product which will have limited appeal at first. The one solution is to give retailers a head start by pre-announcing a product which won’t be available for several months, to provide the infrastructure ahead of time. But even that might have a limited impact before devices are in consumers’ hands. In this arena, as with smartwatches, there is potential for Apple to come in with a disruptive offering, but so much will come down to the execution.

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw, a technology research and consulting firm focused on the confluence of consumer devices, software, services and connectivity. During his thirteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.
  • PhilT

    I think in London (where I live), contactless payments are starting to take off in a big way. Most new credit/debit cards have NFC chips built in and I pay for my lunch every day using one! London Transport is introducing the use of contactless credit cards on the transport network next month and one of the carriers (EE) is supporting it with the ‘Cash On Tap’ app – 10 years of Oyster card usage across the network should encourage adoption. The key point here is that NFC is the encumbent technology. I’m crossing my fingers for NFC on Sept 9th…!

    • JKL

      Contactless credit cards will become the norm within a few years in the UK as new cards are sent out when old ones are replaced, it’s still less of an advance compared to the introduction of “chip n pin” and you still have to enter your pin. They are basically just credit/debit cards. A bit of a “meh” technology wise. Also the minimum transaction cost to the merchant is still to high.

      Oyster is far more interesting, though not for NFC, and it’s still a decade behind what’s going on in the Nordic countries.

      • Will

        ” you still have to enter your pin” – not if you buy something under a certain amount. You can buy your morning coffee very fast this way.

        • JKL

          Depends on the merchant and there’s still the minimum charge problem, plus the Byzantium charging system that can only be in place to hide, thereby increase, the costs.

          This is why a simple, secure, non cash paymeant system could really take off. The natural providers for this are the carriers. The implosion of Nokia has left Apple as probably the only handset maker who could also offer such a service.

          • Will

            I don’t know exactly what your complaining about but I love my wireless card.

            Why would you expect the next generation of payments from a handset maker? So confusing. It has no power over how we can legally buy things.

      • Will

        What do Nordic countries do so differently?

    • StevenDrost

      True, people often get caught up comparing which technology is “better”, that they miss the fact that business and consumers are interested in the most effective solution at the time. NFC’s install base make it the more likely technology to be adopted for a terminal.
      But, what if we are not talking about a new terminal for stores to install? What if any existing IOS device can become the terminal or the payment takes place on the users phone which then generates a scanable code which can be read by any existing terminal.

  • Glaurung-Quena

    “NFC, a technology Apple has stubbornly resisted adopting so far.”

    Stubborn implies that they haven’t done so for silly or trivial reasons. This is not the case.

    Please do your homework. NFC uses antennas with a very large area. Phones that implement it have to use plastic back shells, and plaster the inside of most of that shell with the antenna. Apple’s approach to phones is to shave off every gram and every cubic millimetre they can. And their trade dress has become metal rather than plastic casing.

    It’s impossible to implement NFC in an Iphone 5 or 5s, and apple probably regards it as a phone version of 5 1/4″ floppy drives on the desktop — a large heavy and crude way to do something for which there are much better solutions.

    • http://www.beyonddevic.es/ Jan Dawson

      Please don’t put words in my mouth. That’s one of the meanings of the word stubborn, but not the only one, or the one I intended – see second definition on this page: http://dictionary.reference.com/browse/stubborn:

      “fixed or set in purpose or opinion; resolute”

      Also read the rest of the piece – if you see me saying or implying anywhere that Apple is being silly or trivial by avoiding NFC, please point it out to me.

    • Will

      “much better better solutions” — depending on context.

      Sharing a photo in the subway is impossible except using NFC. Paying for bus and subway tickets is impossible using BLE or whatever, but perfect for NFC.

      Just saying that it’s not the “heavy and crude” way of doing things.

      • JKL

        A) Airdrop
        B) True, if you are not set up to use BLE then you can’t use it, same with NFC. Also where I live the buses don’t have NFC readers so … not perfect or impossible.

        • Will

          You can’t use airdrop if there’s no WiFi or signal. And I’m talking specifically about London, which will implement contactless in 2 weeks. Also, lots of other countries use it already

  • Space Gorilla

    “Isis, the effort from several of the big US carriers (soon to be rebranded)”

    Now there’s an understatement, soon to be rebranded indeed.

  • stefnagel

    Great post. Can iBeacon be the thin edge?

  • Peter

    From what I have read, Bluetooth LE is capable of exchanging more data, and more securely than NFC. But I could be wrong here. But if it is so, then Apple’s use of BtLE rather than NFC is unsurprising (apart from the antenna issue, which I hadn’t heard about earlier).

    Apple doesn’t engage in a “features race” or otherwise add capabilities just so they can say they have them. Anything there is part of a plan. TouchID and Secure Enclave are way too over-engineered to just be a way of unlocking your phone. the plan that makes sense if for these to be the super-secure vault for payments. But as the chart point out, there have to be terminals.

    Well, most of the terminals will be replaced soon anyhow as part of the switch to chip-based cards (unfortunately chip+sig rather than chip+PIN, but that’s another issue). Including BtLE shouldn’t be a hard thing for terminal makers (I wonder if they’ll do NFC at the same time?). So the lack-of-terminals thing but not really be a problem if Apple moves fast.

    But the big question for me is how Apple will make money in these transactions. The stores won’t stand for an extra charge on top of the existing Visa/MC one. But Visa or MC might be persuaded to split the charge because fraud losses will be very low, if not zero. In fact, Apple might well provide some indemnification against fraud as part of the deal – that would certainly demonstrate faith in the security of their solution.

    • StevenDrost

      If Apple were to enter this space, I don’t believe it would be to create a new profit center. I would argue their success is based of giving away software and services to promote their ecosystem.

      • Peter

        That might well be the case. After all, they keep saying that iTunes Store is slightly profitable, but not a whole lot (lots of cash flow, but not much net).

        OTOH, Apple has for a long time been talking up how many iTunes accounts there are – with credit cards. I believe that the comments go back to the “Steve” days although I can’t be sure. Maybe the plan is just to sell lots more iPhones, but I would not be surprised to find something more in all this.

  • http://naofumi.castle104.com/ Naofumi

    An interesting development in Japan is a new kind of mobile payment (au wallet) that doesn’t use NFC; instead, it uses the good old credit card technology. Hence you can use it at any shop that accepts a MasterCard. Furthermore, you don’t need an NFC-capable phone at all. You simply charge the card and convert loyalty points via the web or mobile. This card is apparently quite popular.

    This is in Japan, where even the feature phones came with NFC, and almost everybody owns a card that you can use for NFC payments (one that we use primarily for public transport), but doesn’t necessarily use.

    And still the majority don’t use these NFC cards for regular purchases at all.

    I’m no expert on mobile payments, but it looks like changing peoples habits is really, really hard. Even if NFC was on everybody’s phone or even if the majority of shops had NFC readers, that probably wouldn’t be enough.

    A couple of percent worth of loyalty points doesn’t seem to make too much of a difference either. It may get you to “early-majority” but won’t get you into the “late-majority”.

    I think it may be even harder than what’s suggested in the article. The only cases where NFC cards or mobile payments would work are those where there is quite a huge usability benefit (like when you are rushing to catch the train).

    • Space Gorilla

      “changing peoples habits is really, really hard”

      Very true. I tend to think if Apple does anything on this front it will ‘plug into’ existing systems (habits) and probably start from a foundation of identity first.

    • Will

      “changing peoples habits is really, really hard” – true, the London Underground is trying very hard to tell people to take their Oyster card out of their wallet because of the upcoming wireless payments system. People still don’t do it…

  • http://www.breaktap.com BlairMacGregor

    I have an iPhone 5 and use the Dunkin Donuts app on my phone (with pre-stored credit card) to pay for my coffee every morning. The person at the counter scans a QR code, it’s immediately reflected in my balance and away I go.

    Maybe widespread adoption just has to come from the individual retail brands (through demand from their customers) rather than a company like Apple spending a lot of money up front subsidizing technology and hoping retailers catch on. Brands like DD that have a multitude of locations w/products that are conducive to a get-it-and-go approach and are bought repeatedly (coffee, gas etc.) are the best candidates for mobile payments. But for a lot of businesses, it’s not much of a value-add. If I’m waiting on line with half a car-load of Ikea furniture, is the ability to pay on a smartphone going to save me much time? Not really. That’s where the weak retail appeal comes in. And giving those kinds of retailers a head start with subsidized equipment isn’t going to help IMO.

    • pk_de_cville

      Great point, Blair.

  • qka

    Yeah, I can see why the major US carriers don’t want to be confused with the Islamic State of Iraq and Syria (ISIS), even if they share common behavior.

    • JKL

      LMAO