Apple Pay in China a New Catalyst

China is quickly becoming Apple’s largest market and, in many respects, one of the most important to the Apple growth story in the next five years. This is why Apple Pay starting to roll out in China with Union Pay and a number of major banks is potentially a huge catalyst for mobile contactless payments in general in China.

Similarly in the US, Apple owns the largest share of NFC capable devices in active use than any other vendor. Which means there is no single brand better positioned to drive secure mobile payments than Apple. In China as of the end of Q3 2015, our primary research indicates over 40% of active iPhones in China are comprised of iPhone 6, 6s, 6 Plus and 6s Plus models. By Q2 2016, well over 50% of iPhones in China will be NFC/Apple Pay capable. No other single OEM is anywhere close to this number of active devices in use being NFC capable. Couple that with a growing installed base of NFC capable Apple Watches and a culture in China that has increasingly become tech savvy, and the stage is set for mobile contactless payments to thrive. In fact, as optimistic I am about Apple Pay and mobile contactless payments in the US, I believe China will quickly surpass the US in percentage of mobile retail transactions from mobile devices at point of sale.

I say this with confidence because, when Chinese consumers are asked if they believe their smartphone will become their primary tool for transactions, they have the largest number of respondents who strongly agree with this statement than in any other market. 35% of consumers in China believe their smartphone will become their primary tool for commerce compared to 8% of Americans. China is ripe for Apple Pay.

While no other vendor has more active devices in use in China, the ecosystem for mobile payments is being laid beyond just iPhones. NFC will be rolled out in POS terminals across the country and quickly in major retailers in top cities like Beijing, Shanghai, Shenzen, etc. While iPhones are extremely popular in those top tier markets, Android at large is still the dominant operating system. Local leaders like Huawei and Xiaomi will adopt NFC and likely their own mobile wallets throughout 2016 as well. While Apple has the more elegant solution, there will be competition from Android OEMs as well looking to appeal to this new consumer behavior. Fragmentation may slow down the adoption of Android-based mobile wallets and contactless payments, but it will get fleshed out over time.

The dynamic to watch is how companies like Alibaba respond with AliPay. While mobile contactless payments, meaning using your phone to tap or authenticate a payment at retail, remains low in China, now over 50% of smartphone owners in China engage in mobile commerce each month. Meaning, use their phone to make a purchase over the internet. When it comes to mobile e-commerce, AliPay is the dominant transaction method. You have to imagine Alibaba will want to maintain this position and not let Apple take control of their customers. One thing to watch will be more retailers accepting AliPay at retail. This will be interesting to see if, when given a choice, consumers stay loyal to AliPay or start to alter their behavior in light of the benefits of Apple Pay as it gets more widely accepted.

While it is interesting to talk about Apple Pay, NFC, mobile commerce, AliPay, etc., the real winners in all of this are the components companies providing the solutions to roll out tens of millions of new payment terminals necessary to make this transition. From the companies providing NFC technology like NXP or those providing touch-screens for the terminals or those providing the terminals themselves, all are poised for explosive growth as many markets support NFC transactions at retail.

While markets like the UK have embraced NFC for some time, that market alone never acted as the catalyst to drive this adoption. Both China and US, but perhaps more quickly in China, will be the catalyst that moves this forward. And I believe faster than many are anticipating.