Apple and mobile payments

on August 21, 2014
Reading Time: 5 minutes

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:

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.