Apple Pay Today and Tomorrow

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.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen 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.

31 thoughts on “Apple Pay Today and Tomorrow”

  1. Hi Jan.

    Any thoughts on international roll-out. In the UK we seem to have a lot of NFC enabled terminals and most bank cards support NFC now. For purchases below £20 it’s now my default way to pay.

    On one side I can see that we have everything in place to make Apple Pay work here, but on the other side the Apple Pay experience is probably slightly slower than simply tapping a card (We don’t have the current poor experience that the US has).

    The big plus point is the enhanced security and I don’t think that Apple has prioritized as a major selling point.

    1. It’s a good question. Though I grew up in the UK, I left 10 years ago and though I travel back frequently I’m not as familiar with the situation there as I was. Why do you only use it for transactions under 20 pounds?

      The Apple Pay experience is extremely simple, but in both cases you’re pulling something out of a pocket or wallet and tapping it to the terminal. As you say, perhaps not as big an improvement as the current situation in the US. I do expect Apple to play up the security aspect – they certainly made a point of it when they first introduced Apple Pay, and again at last week’s event. I just think they’re letting eager early adopters iron out kinks before they make a big push around it. As I said in the piece, it’s also a bit counter-productive to push too hard before there’s lots of support for it.

      1. Hi Jan

        Contactless transactions are only supported up to a maximum of £20 for reasons of fraud prevention. There is no user authorisation so it’s easy to use a stolen card for contactless transactions – until the card is blocked of course.

        Another advantage for Apple Pay 🙂

          1. That’s right. We don’t have contactless + PIN. Contactless has really been markets as cash replacement. I would normally use it for getting a coffee, paying for lunch or getting a few groceries on the way home from work. Until you pointed it out I had never contemplated using it with a PIN for larger transactions.

            So that’s somewhere, in the UK, for Apple Pay to go that contactless doesn’t go yet.

          2. I can confirm that it’s the same in Japan. NFC cards and even NFC-enabled phone based payments are only for small purchases (which do not require authentication, and thieves can use equally easily if they get your card/phone).

            It think that it’s a very important point. People seem to think that there is a single mobile payments market, but that isn’t the case. There is the market for small transactions (small cash replacement) and the market for larger transactions (credit card or $100 bill replacements). I suspect that most NFCs in use are the former. Apple Pay is the latter.

          3. £20 – about $32, currently. Hopefully Apple Pay’s security (one-time tokens etc…) + TouchID will allow this to be increased to something more useful – £20 doesn’t buy you much these days 🙁

        1. I think the Apple will ( must) move to change to “done” button to an “ok” button to confirm a shopper wants to complete the transaction. That isn’t possible with a pay and way card without a user having to involved interacting with the POS terminal.

      2. Apple going to global is going to be very tough. In most of Europe the interchange fees – the fees merchants pay to the other 3 parties involved in processing card payments – processor, issuer and acquirer – are regulated to about 38 basis points. Apple introduces itself as a new 4th party in that process today in the U.S. takes 15 basis points for every transaction as a point of sale. In the U.S, some 500 issuing banks have a agreed to give up some of their interchange fee wind fall to Apple. And frankly they can afford to because the current interchange fees range between 1.75 and 2.75 basis points depending on whether a debit or credit card is used and if that card is actually present during the transactions or not.

        The parties involved in processing card payments are not likely going to give up nearly 50% of their fees in Europe ( for example) for the privilege to support Apple. And if Apple reduces it’s fee’s, then the merchants in the U.S. will forces the U.S. card issues (the banks) to concede that discount to them.

        1. I’m sure they’ll go market by market and see where it makes sense, just as they do with hardware products. This is a far more complex picture with all the many parties involved, so I’ve no doubt it will be harder and will take longer than those products, though.

          1. Yes. It’s a slow burn as you point out. Payments are hard and the backend systems are very complex. Apple knows that. Their next step is likely to get sku level receipts working here in the U.S., observe the habits by users and iron out bugs before moving this to a new region.

            Having spent so many years in the payment business I find it most ironic that it’s taking a retailer like Apple to move the rest of the banking system and other retailers to innovate.

  2. Play to Pay: Apple Pay will play out across maybe one billion credit card carrying adults. Which is why all the banks signed up immediately.

    1. Much bigger, without a doubt. A far larger company in every way, with more influence and more impact on our lives, in more ways and over a much longer period of time.

      1. If you’re referring to Apple, Amazon sells a huge amount of stuff, they move into more and more new categories all the time, and they’re expanding so fast it’s like an explosion. They now produce their own TV shows, and Jeff Bezos bought the Washington Post, possibly so he can influence the US Government.

        Benedict Evans said maybe Bezos wants to take over the world. Evans was joking but it’s actually kind of believable.

        1. After that last earnings report yesterday (and the last few before that, and Amazon’s huge forecast loss for the holiday quarter), Amazon won’t be taking over much of anything.

        2. Amazon is a moderately large middle-man. Not nearly the behemoth one would infer from what you hear from the media. Huge sales-tax advantage; still never made any money. Revenues are about the same as Home Depot, less than Kroger, a small fraction of Wal-Mart; and revenue is the most flattering metric since profits are zero. Ebay is about the same size, if you look at the actual quantity of goods sold, and all these other companies are consistently profitable.

          I’ll give credit to Amazon for what it’s done, but let’s not get carried away. Apple is many times larger in everything that matters.

  3. Slow burn +.

    It is NET EASY to Apple Pay via NFC if it’s there. You will likely already be on your iPhone since you’re waiting in line. There’s no app to open when it’s time to checkout. So while the support obviously will take time to rollout, will you use it opportunistically when you know you can? You bet you will.

    The leaving of wallets at home won’t happen anytime soon. ID and all. But the thinning of wallets (no longer being tethered to plastic to pay) just might in a couple of years.

  4. I have a question that I haven’t been able to find the answer to. What happens if you intend to pay using something other than Apple Pay, but happen to attempt to unlock your phone, using Touch ID, when Apple Pay is activated? You might just happen to do this, for any number of reasons.

    Would it not simply interpret your unlock attempt as a payment attempt, and put through the payment instead?

      1. My guess is that proximity is the answer. If the phone is close enough, it will register as a payment. If not, it will unlock. That would also prevent the charge being unintentionally paid by another person in line. So a proximity of inches, rather than feet or even one foot or so, must be necessary.

        But I’m just guessing. Still curious.

    1. The phone has to be within an inch of the reader for this to happen. You cannot be a foot away and have it process the payment. Plus the card must be visible on your screen at the time you place your finger on the TouchID pad. At least, that is my experience.

  5. Slow burn is a smart strategy I think. It gives the naysayers time to fool themselves into believing Apple isn’t doing anything special or particularly successful. How many years did we listen to the naysayers blather on about the iPhone not being a big deal, not doing very well, being in trouble, has that even stopped yet?

  6. i think Apple Pay’s success will depend on effective promotion. It will need to develop its own network effects starting almost from scratch: the presence of large numbers of compatible devices (mainly iPhones 6) is a prerequisite, but not a sufficient condition for success. People need to be incentivized to use it, to replace their present habits with new ones, to work its use deep into muscle memory.

    It will have to gain enough momentum through brute force to compel the large merchant chains, who are resistant, to adopt it. At that point it will be on its way to universal acceptance.

    I don’t think it can accomplish that based only on its inherent benefits, which exist but which are subtle. It has awesome potential, but I think it will need to be carefully nurtured to reach it.

    1. I totally agree that it depends on effective promotion and not so much the seamless experience for the end-user.

      The interesting thing is that it’s not Apple that is doing the promotions. It’s the credit card companies and the banks. They are running the commercials and are developing the app that Jan showed in his screenshot. Credit card companies are fighting each other to be the default card on each user’s Apple Pay setup.

      As I understand it, there is a significant financial benefit for credit card companies and banks to adopt Apple Pay, and the competition factor makes it even more intense. Although it might be a slow burn, I expect these companies to continue promotions in one way or another for quite a long time.

  7. This is the scenario I think Apple hopes to see: With Apple Pay embedded as the way to pay in apps, this will drive customer usage, which in turn, will drive more current apps to include it, and more new stores to release apps to use it, and more developers to write new iOS apps with it. This regular in-app usage will increase the desire of iPhone 5S/6/6+/iPad Air 2/mini 3 users to also use it in stores, which Apple hopes will lead to more iPhone upgrades/sales and Apple Watch sales.

  8. Based on how the Watch will allow you to make payments without having to use the TouchID sensor on the phone in your pocket/purse — assuming it’s using a secure Bluetooth connection — my guess is OS X compatibility will happen in the same way. With your phone nearby you could brush your finger over the TouchID Home button to authorize Pay transactions.

    As a freelance designer I’m more interested in something that will eliminate the need for PayPal in general so I can get my money faster (dealing with an “uncleared” status for the first time…not happy) and in a more convenient way.

    I’m not sure that’s on Apple’s whiteboard but if it is it should scare the bejesus out of Square and other headphone-jacked-enabled-card-swiper vendors. Imagine two iPhone 6’s inches away from each other transferring money? No extra hardware, no additional accounts, no waiting for approvals or another vendor to authorize the transfer. Just credit card to credit card (or gift card).

    As for the slow burn theory I agree. Right now an incredibly small number of iPhone users can take advantage of NFC payments but in two years time (iPhone 6s and iPhone 7) more people would’ve upgraded to the latest model thereby expanding the number of Pay users.

  9. CVS and Rite-Aid have just given Apple Pay a huge vote of confidence. You might think that’s strange and indeed it is.

    Earlier this week Apple Pay worked at both pharmacies, although neither of them were “partners”. It “just worked. But on Friday, they both decided to specifically un-support Apple Pay and did this by disabling NFC in their POS terminals. This also disables PayPass/paywave and Google Wallet which have been working for some time.

    So in order to un-support Apple Pay, they have disabled existing mechanisms that customers use and like, causing a lot of customer confusion and resentment. That is a huge vote of confidence that Apple Pay will be a roaring success.

    1. And if retailers have shown us nothing, they’ve shown us they can provide a secure payment system. Oh, wait.


  10. Real success for ApplePay is in the In-App purchasing.
    Apple can force retailers to support ApplePay thru their app
    or be banished. Apple can’t do that at the Store.
    Customer need to start forcing Target to allow to purchase
    from the app and pick up at the store in 1 hour.

    On the mac, your scenario is ridiculous.
    Not only you need touch_id but also need Secure Element
    and Secure Enclave. All that depends on Intel and
    Apple is not about to allow PC OEMs get the tech especially
    when Intel will put it in their tablet SOC.
    Also FBI is against Secure Enclave in principle.

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