Company Case 10

Apple Pay: Taking Mobile

Payments Mainstream
After leaving his office in Manhattan, Tag stopped at a nearby Panera to grab a
Frontega Chicken Panini and Green Passion Power Smoothie as a quick dinner on his
way to see some friends in Soho. Upon ordering, he held his Apple Watch to the
contactless reader near the register, gently pressed his finger to the TouchID fingerprint
sensor on the small screen, and let Apple Pay do the rest.
Wanting to get across town as soon as possible, Tag used his Uber app to summon an
UberX car. During the car ride, he remembered that he needed a couple of new dress
shirts. With a few quick clicks on his watch, he selected the shirts through his Macy’s
app. With a simple tap, he used Apple Pay to seamlessly complete the transaction. As
he neared his destination, Tag added a tip to the bill for the ride through the Uber app,
which he’d already configured to use Apple Pay as the default. With one simple press of
his finger to TouchID on his watch, he exited the cab.
Three purchases—offline, online, and, well, sort of in between—no wallet required. No
traditional wallet, that is. This new reality—one that many early adopters are already
living—is rapidly expanding toward what some experts predict will become the future for
everyone. Folks like Tag don’t even carry traditional wallets anymore, only their mobile
devices and perhaps an ID and a backup credit card for retailers that don’t accept
mobile payments—yet. After years of predictions that mobile payments would replace
cash and credit cards, there are finally signs that it might actually be happening. And
Apple is leading the way.

Hardly New
The ability to pay for transactions with a mobile device is hardly new. In fact, the first
technology for mobile payments was invented by Sony way back in 1989. It was first put
into use in Hong Kong’s subway system in 1997 and began taking root in Japan in
2001. The tech-savvy Japanese warmed to the idea quickly, and mobile wallet apps
were being used on mobile phones throughout Japan by 2004. Ever since, more than
245 million Japanese mobile phones have been equipped with the capability to make
mobile payments, and Japanese consumers use mobile payments for everything from
transportation to food and household purchases.
So it seems odd that a similar system has not taken root in the United States, although
it hasn’t been for lack of trying. Companies have been experimenting with different
approaches for years. PayPal was the first to take advantage of the smartphone
revolution by creating a payment app that gave just about every smartphone the
potential for mobile payments. About a year later, Google entered the mobile payment
game with the launch of Google Wallet. In the past five years, numerous other
companies, from small start-ups to electronics and retailing giants, have tried to gain
market acceptance in mobile payments. They include the likes of Samsung, Square,
and CurrentC, a mobile wallet app backed by a consortium of U.S. retailers (with
Walmart leading the way) that hope to cut credit card companies and their fees out of
the buying loop.
But none of these players—individually or together—have made much of a dent in
replacing traditional credit cards and cash as a form of payment in the multi-trillion-dollar
U.S. retail market. Although the mobile payments concept may seem like a no-brainer
for convenience-loving American consumers, numerous barriers on both the buyer and
seller sides have kept the concept from gaining momentum. With its recent launch of
Apple Pay, Apple is clearly a market follower. But it’s a feat that the innovative company
has performed to perfection time and again—take a new technology, make it better than
any of the initial offerings, then watch the market explode as the Apple version becomes
the runaway market leader.

Overcoming Negative Consumer

Perceptions
As with every new technology that involves paying for things, consumers have concerns
about the security of mobile payments. Paypal, Google, and the others took significant
measures to design secure systems. However, most consumers just weren’t
comfortable with the idea that their phone might be used as a portal to their credit cards
and bank accounts if it fell into the wrong hands. Never mind that the same could be
said of a wallet or handbag, far less secure devices.
Recognizing consumer reluctance to place digital versions of their financial devices in
one app, Apple took security to a higher level. Requiring a fingerprint makes the
process much more secure than the more common safeguard of entering a passcode.
And if a mobile device is ever lost or stolen, the owner can use its Find My iPhone
feature to immediately lock down Apple Pay or even wipe the device completely clean.
Additionally, every compatible Apple device is assigned a unique Device Account
Number. This is encrypted and securely stored in a dedicated security chip on the
device. That and a transaction-specific security code are the only numbers that Apple
transmits to merchants. In fact, the merchant doesn’t even need to know the customer’s
name. Credit and debit card numbers are stored only on the local device, not on Apple
servers. This makes Apple Pay even more secure and more private than paying by
credit card.
Beyond consumer security concerns, previous adoption of mobile payment apps has
been slowed by perceptions of a clunky user experience. If convenience is the biggest
draw for consumers, then anything more arduous than the already convenient swipe of
a credit card simply won’t cut it. Setting up any of the existing mobile payment apps
takes time and effort. Using such apps at the point of purchase is far from seamless,
especially if the technology isn’t working quite right. “I don’t want to be that guy holding
up the line while we fumble around to get it all to work,” says one business columnist,
“just like I don’t want to be the guy who holds up the line boarding an airplane because
his mobile boarding pass can’t be read.” Mobile apps that hit the market prior to Apple
Pay required entering a passcode and—in some cases—hitting multiple buttons. That
took longer than the traditional swipe of the card, even if everything worked as intended.
With Apple Pay, users still need to configure the app. But Apple already has 800 million
credit cards on file with its existing iTunes store. Not only can this facilitate a set up that
is already streamlined compared with existing apps, it’s a sign that iTunes users may be
more comfortable with using the app given that they have already given their credit card
information to Apple. And with the TouchID sensor, Apple has the transaction down to a
one-touch process. That’s quicker than swiping a card and going through the typical
menu, not to mention quicker than inputting a passcode.

Establishing Points of Acceptance

For mobile payments to penetrate the market, consumer acceptance is necessary. But
companies face a twofold challenge in making such a technology successful.
Consumers won’t adopt it if retailers don’t accept it, and retailers won’t invest the
resources necessary to accept it unless there is sufficient consumer demand. And the
lack of consumer demand is the biggest factor that has kept retailers from jumping onto
the mobile payments bandwagon. As a result, there are currently too few retailers that
accept mobile payments to convince people that they can leave their credit cards at
home.
But thanks to Apple, that situation is changing rapidly. It may be because of Apple’s
clout or because of the company’s massive and loyal user base. But in less than a year,
Apple has signed up far more retailers than all the previous mobile payment providers
combined. “You need so many points of acceptance to make mobile payments work,”
says a mobile payments analyst for Forrester Research. “Apple has made that happen,
striking partnerships with top national brands across a variety of categories that will give
consumers plenty of opportunity to use the service.” Apple has also signed up enough
credit card issuing banks and credit unions to cover 83 percent of charge volume. In
fact, Apple Pay has gained enough steam that Best Buy and Meijer will soon be
accepting the payment app, despite having signed exclusivity agreements as part of the
CurrentC consortium.