Apple Plays the Long Game: Six Reasons Why Apple Pay Could Succeed Big Time

Apple Plays the Long Game: Six Reasons Why Apple Pay Could Succeed Big Time

Apple Plays the Long Game: Six Reasons Why Apple Pay Could Succeed Big Time

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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Recently, at a Trader Joe's store in Los Angeles, a cashier was asked how much people were using Apple Pay at checkout. "Quite a lot," she said. "And it is much faster than when people use the chip card."

While an anecdotal incident, it's a telling reminder how difficult it is for a new payment medium — even with a superior value proposition — to get off the ground. About 13 percent of all cardholders have Apple Pay linked to a credit or debit card. This is a level that has remained flat over the last four quarters, according to an April survey of 3,000 consumers by Phoenix Marketing International, a consulting firm based in Rhinebeck, N.Y. Apple Pay has also faced resistance by many larger merchants, such as Walmart, Target and CVS, who have refused to enable near-field communication (NFC) at the point of sale, and instead have pursued their own mobile wallets.

Yet quietly, Apple keeps working behind the scenes to build out its network and functionality that could set the stage for rapid growth — eventually. "Apple is doing the right set of things in terms of adding layers of value around the core payment service," says Jeff Crawford, a senior manager at First Annapolis Consulting, based in Annapolis, Md. "We like the prospects, but it will be over the long term."

Looking down the road, here are six reasons Apple Pay could just be getting started:

  1. Revenue opportunities. The revenue potential in mobile payments is too great for Apple to give up. While Apple doesn't disclose its agreements with issuers, the fee is about 15 basis points for each transaction, according to industry estimates. Worldwide card volume is expected to grow to $55 trillion by 2025, according to the Nilson Report, an industry newsletter based in Carpinteria, Ca. By then, if Apple had 10 percent of the market, 15 basis points would translate to $8.2 billion in revenues. "It's totally a scale business," says Greg Weed, director of card performance research at Phoenix Marketing International. "That is why there are so many established and new players trying to get a fraction of that total, because even a small fraction can add up to a lot of money."

  2. Sizable lead among 'pay' wallets. Among the proliferation of mobile wallets, Apple Pay sits out in front. Of smartphone users who have a debit or credit card, 49 percent use mobile 'Pay' apps, either Apple, Samsung or Android, according to a First Annapolis survey. That compares with 39 percent saying they use retailer apps to pay. Of the Pay group, Apple-only users made up 50 percent, with Samsung only coming in at 17 percent and Android at 13 percent.

  3. User base growing worldwide. Apple also keeps expanding its user base worldwide, adding countries piecemeal. In early April, Apple Pay debuted in Taiwan, and in a few days an estimated 600,000 users had linked their iPhones to credit cards, according to the country's Financial Supervisory Commission. Worldwide, about one million Apple Pay users are being added globally per week, and transaction volumes are up 500 percent over the last year, according to Apple. Users in many countries overseas are also much more accustomed to paying with mobile apps.

  4. Expanding merchant base. Apple has grown its base on the merchant side. Apple Pay is now accepted by big-name brands such as Starbucks, Macy's, Best Buy, Staples, Whole Foods, Panera Bread, McDonald's, Walgreens and Chevron. Apple has also worked with retailers to integrate Apple Pay with websites and apps, such as Airbnb, Fandango, Expedia, StubHub, Instacart and Lyft, along with some of the traditional retailers mentioned above. "The more people that use it, the more merchants turn it on, the more other merchants will feel the competitive pressure to do the same," Crawford says.

  5. Added functionality. Over time, Apple has added a number of features that bring benefits to merchants and issuers, such as push provisioning, promotional messaging and transaction messaging. With promotional messaging, for example, issuers can offer merchant discounts, such as statement credits. Apple has also folded Apple Pay into its latest version of Safari for users of its latest operating systems on Mac laptops and iPhones. With loyalty, users since September 2015 have been able to tap a button in a participating retailer's app such as Walgreens and Kohl's, which automatically adds the loyalty program to Apple Pay.

  6. EMV open to disruption. Apple Pay — and the other wallets — still have opportunities to displace EMV transactions. While EMV transaction times have sped up, they are still slower than those of an Apple Pay transaction. This assumes the cashier knows how to operate the terminal, and the user properly linked a card to Apple Pay. If those two things happen, a customer need only hold down the home button with the thumb and hold the device near the terminal to pay.

This kind of simplicity helps nurture Apple's devoted audience, a portion of which is willing to wait in line for new products, and all of whom are willing to pay more for a better user experience, notes Brian Roemmele, a payments expert who developed 'Pay Finders,' an app that helps users find merchant locations that accept Apple Pay.

The EMV transaction is also clunky, he says. "The U.S. consumer will never ever be comfortable sticking a card in a machine for X number of seconds, waiting, then pulling it out," Roemmele says. "They are only going to deal with a card that swipes something or by hovering their phones, which is faster."

So while Apple Pay hasn't lived up to the hype, it has managed to achieve 34 percent penetration of its compatible device base in just two years from launch, according to First Annapolis. "Remember, it took 20 years for debit cards to go mainstream," adds Weed. "It takes a long time to establish a new payment behavior, and this certainly is a behavior change," he says. "Right now there are still a lot of explorations. It's all being built gradually."

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Charles

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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