Apple Pay Today and Tomorrow

on October 23, 2014

Apple Pay, announced at the iPhone 6 launch in September, was made available to users on Monday as part of the iOS 8.1 update. Anyone in the US with an iPhone 6 or 6 Plus running the new software can now make NFC payments in retail stores which support the technology and anyone running iOS 8.1 on a device with Touch ID can use the technology in apps which support it. So, now that it’s available in one form or another to a large number of people, where does Apple Pay go from here?

Three possible short term scenarios

I was asked by several reporters last week for my opinion on how the Apple Pay launch would go. I tended to outline three possible scenarios which I think are useful for thinking about how the service will proceed in the short term (I’ve named each of the scenarios for easy reference later in this piece):

  • Disaster – Lots of early glitches, receive high profile attention, scare users off, platform fails to take off in the short term
  • Hit – People’s first experiences with the platform are overwhelmingly positive, they find plenty of places to use the technology, many people instantly start using Apple Pay over other methods for all possible purchases
  • Slow Burn – People try the service out for the novelty but subsequently find there are few places where they can use it, revert to previous ways of paying for almost all purchases until the technology becomes more widespread

A few glitches but no disaster

Let’s look at each of these in turn. The Disaster Scenario was always a long shot. Though given some other recent Apple glitches, it was still a possibility. But it has not occurred. Such glitches as there are have been are due to buggy third party apps such as Uber, Bank of America and others. Some of which have led to double and triple charging for purchases but not due to Apple’s technology itself. This is new territory for Apple – its app review process has always been thorough (though not perfect). But whereas buggy apps in the past were only ever annoying to users, they now have the potential to be costly which has surely raised the bar on that process. My guess is we’ll see the kinks in these apps and associated back-end platforms ironed out quickly, but it’s an aspect of the new level of liability associated with third party apps. These glitches have also been poorly covered in the media, with some coverage describing them as Apple Pay glitches rather than third party app problems, which won’t help the reputation of the platform. But the glitches have been small and contained enough I don’t think most users will be put off from using Apple Pay as a whole.

No huge hit either

The Hit Scenario was also something of a long shot. Though by and large people’s initial experiences with Apple Pay have gone smoothly, many of the payments made were likely experimental in nature and made for the novelty of it. The reality is most of the retailers most people use don’t yet accept NFC payments. Apple has talked about around 200,000 NFC equipped retailers, but the total number of retailers in the US is in the millions so this is a small fraction. The MasterCard Nearby iOS app is a useful way to discover which retailers are likely to accept Apple Pay and this screenshot shows the rough area in which I live and work:

MasterCard Nearby screen shot

On Route 92, which you see near the top, there are dozens of retailers of different kinds, including supermarkets, fast food restaurants, hardware stores, hairdressers, gas stations and so on. But there are only three along that road which accept Apple Pay today: our local grocery store called Smith’s, a Subway and a local Chipotle equivalent. The area lower down the map looks far more densely populated with locations, but that’s a popular spot for big box retailers and the like and there are many times as many stores as there are icons on this map. I’m not saying all this to beat up on Apple. Its Apple Pay network is already broader, both in terms of device base and retailers, than essentially every other mobile payments network after just a few days. But the point is most users aren’t going to be able to make Apple Pay their default payment option. It will remain something they use occasionally. And it’s very hard for any new technology to catch on quickly when it’s only applicable in niche situations.

Slow burn was always the likeliest scenario

The third scenario was always the likeliest, for all the above reasons. Given the relatively low adoption by retailers of NFC technology today, and the relatively small percentage of the iPhone base which even has a compatible device, the service was always going to start quietly, beyond some excited day one experimentation. Taking a step back from the US launch (which is, after all, what we saw this week) to a global scale the platform hasn’t even launched yet, so even the many new iPhone 6 and 6 Plus owners around the world can’t use the technology and many won’t be able to do so for some considerable time. As an in-store purchasing experience, Apple Pay will remain niche both on a global scale and in the specific countries where it launches for the foreseeable future. But the launch went at least as well as could be expected, with many users and reviewers (myself included) finding the technology works pretty much flawlessly in stores. As availability of Apple Pay-compatible terminals spreads within the US, and as merchants and banks outside the US start to sign on, the appeal and utility of the service will grow enormously over time. But that’s the key point: this service won’t be truly mainstream for years to come.

The longer-term picture holds much broader promise

Of course, today’s iteration of Apple Pay is just the beginning. While I’ve focused on the in-store version of the technology, the in-app version has mostly got off to a good start, absent those third party glitches. But there’s obviously a future beyond even these two implementations of Apple Pay and Apple already has the infrastructure in place to do much more:

  • Apple Pay via the Apple Watch – we already know this is coming in 2015 and it’s important for two reasons: firstly, the convenience of using a device already close to the terminal as opposed to one buried in a pocket or purse; secondly, the much wider range of older iPhones which will suddenly be able to use Apple Pay in stores. Both will increase the utility and addressable market for Apple Pay.
  • Person-to-person payments a la Venmo – Apple has a huge, interconnected network of iOS users who are already accustomed to sharing messages via iMessage and files via AirDrop. It’s not a huge leap to imagine Apple using Apple Pay as the basis for a peer-to-peer payments service.
  • A Mac version of Apple Pay for online shopping a la Paypal – Apple Pay exists only on the iPhone for retail sales, but already exists on the latest iPads for in-app purchasing. Who’s to say future MacBooks won’t come with built-in Touch ID sensors, and/or that a standalone USB-based Touch ID sensor won’t be released for existing Macs? On that basis, online retailers could use Apple Pay to smooth and secure payments on their websites as well as in their apps, dramatically expanding the usefulness of the technology.

A good start, but a much brighter, bigger future awaits

Apple Pay as it stands today is merely the beginning, with in-store payments the headline feature and in-app payments an important additional component with a wider addressable market. But this is a slow burn technology and platform, which will take years to reach full maturity. And there’s plenty of scope for Apple to build Apple Pay as a service well beyond its current starting point. In the space of just over a month, Apple Pay has become by far the most promising mobile payments technology in mature markets, which is quite an achievement given the existing players in the market with much longer histories.