min read

Will Apple make payments and, for that matter, wearables cool?

by Tim Spenny , 15.09.2014

Sure, we've made huge strides in technology in the last decade - but adoption is not only a pragmatic decision, but also one of style. Tesla made electric cars the thing of middle-aged mens' dreams, with its incredible performance and sleek design coming together to exceed our wildest expectations of what an electric car could become.I mean, we all remember some of the first electric cars. They were at best, nerdy, and at worst, off putting, and sales reflected this critical flaw. Now that Tesla has proven that electric cars can be cool, nearly every car manufacturer has released or is about to release some type of hybrid or fully electric model to the masses.

There are other technologies that haven’t quite made the leap to adoption, despite their obvious functionality like Google Glass or blue tooth earpieces. Both can be nerdy and definitely off putting. I never know if someone wearing a blue tooth ear piece is having a conversation with me or their Aunt Edna. As soon as there is a marriage of function and design that exceeds expectations, welcome Luxottica, we will see beautifully designed internet glasses that grant access to all that the worldwide web can offer while looking good at the same time. We are already seeing companies launching blue tooth ear pieces that look like trendy jewelry. Beauty and function can often times be the tipping point for an existing technology that has lagging adoption.

With nearly 90 mobile wallets from some of the largest players in finance and technology with no clear winner or mass adoption, mobile payments have experienced its fair share of attempts and failures. All of which have tried to get us to use our phones to pay for our purchases.

Interestingly enough, the technology included in the iPhone 6, Apple Watch and ApplePay is nothing new. NFC, tokenization, taking a picture of our credit card, smart watches, larger screens, mobile wallets, have all been done before to not much fanfare. McDonalds has accepted NFC payments since 2003, the technology is nothing new but can Apple make it cool with their design?

Apple does have several advantages over previous contenders in the mobile payments space. First off, they already have millions of credit cards on file through iTunes and Passbook; this gives them a massive running start with their very loyal customers. Second, there is an entire industry built around Apple’s operating system in the form of apps sold through iTunes. Since the announcement on Tuesday, there has been nearly as much, if not more speculation as to how the “appmosphere” is going to create and capitalize on Apple Watch and ApplePay than the buildup to what Apple was going to announce. The more apps imbed ApplePay the more widely adopted it will become and the higher the likelihood of success.

Third, ApplePay has far superior security than what we are using today. I know what you’re thinking, Jennifer Lawrence, but the truth is, NFC combined with tokenization and fingerprint authentication is far and away more secure than what we have today, which is a magnetic stripe in the back of a credit card. A technology so sophisticated that anyone can learn to hack into it by watching a 5 minute YouTube video. No to mention, when you hand your card to a waiter or cashier, all they have to do is copy the card number, expiration date and security code on the back and they can make a “card not present’ purchase. Moreover, Apple’s is considered an extremely trustworthy brand. Their customers already have made over billion transactions through iTunes without a single security breach. In addition, Apple enjoys near rabid loyal from their mostly affluent, early adopter customer base. In a market where consumers largely have distrust for mobile payments, Apple may be able to prevail given their hard earned reputation.

Lastly, Apple has a reputation for making things cool. They have the ability and reputation for creating exquisite design which is an extremely important driver of the adoption of new technologies. You see inside their retail stores, when you use their products and even in their future headquarters.

All of the above factors combined play into the argument that Apple will succeed in the making ApplePay the mostly widely adopted mobile payment platform to date.

Despite these advantages, Apple’s success isn’t a lock and they are assuming more risk than perhaps they ever have assumed before. Mobile Payments is area where Apple has no experience, no infrastructure to support payments nor any previous payments expertise. In order for the NFC technology to work, they have to rely on third party networks and POS terminals. Of which, both are out of the control of Apple and both have experienced numerous issues including; increasing costs to maintain, spotty acceptance and usability issues.

Acceptance is perhaps Apple’s biggest challenge. The retail industry as a whole is doing their best to free themselves from the exact companies that Apple has partnered with through ApplePay, the card operators. Most of the largest retailers in the country with collective revenues of over $1 trillion annually, are partners is the Merchant Customer Exchange or MCX. MCX’s mobile payments app, CurrentC launched September 3rd, uses NFC technology and allows consumers to earn rewards for using the app to pay for purchases at their member stores and excludes the card processers. This doesn’t mean that retailers that are members of MCX couldn’t also participate in ApplePay, but I’m sure they would prefer not to pay Apple, the card processor and everyone else along the processing food chain interchange income if they didn’t absolutely have to do so. The MCX possibly explains why Apple only has 220, 000 locations out of the 7-9 million merchants available in the US. Imagine the loyal Apple user being able use ApplePay at only 3% of retailers in the US. Of course, the MCX, nor the launch of their mobile app, is front page news.

The last issue standing in the way of ApplePay’s success is the simple lack of a value proposition. What is the benefit to consumers to actually use ApplePay? After all, swiping and signing isn’t really that big of a hassle, if it were, mobile wallets and NFC would have already been a huge success. When we look at the typically touted examples of success in mobile payments, Uber, Starbucks, Dunkin’ Doughnuts, Shopkick, etc., they are successful because they are adding value to the consumer. Uber created a fast and reliable way to get a taxi to pick you up. Starbucks' app allows the caffeine deprived to earn rewards and thus discounts on their expensive coffee purchases. These examples of a strong value propositions drive usage and therefore adoption. It can be argued that people don’t like or want to pay regardless of the method. Consumers want an improved experience, improved service or a better deal, and they are willing to change their payment behavior to get it. In other words, ApplePay is the tail wagging the dog.

Also, with most of US consumers experiencing a data breach of some sort over the past twelve months, we can safely say that security does not drive behavior or we would have seen the security value proposition example in list of success stories. Without a mention of iBeacon, discounts, coupons or rewards or other partnerships, there isn’t a clear value proposition to use ApplePay.

Regardless if ApplePay is a success or failure, the fact that mobile payments are making front page news and consumers are taking about and even excited about the potential of using mobile payments is an extremely positive move for the industry. If ApplePay can get a foothold in terms or adoption and usage to justify their existence, there will surely be future releases with increased functionality and security in the future which may help to address to value proposition issue.

The question is will ApplePay create the unique customer experience that Apple is in the business of creating to gain that foothold?

Tim Spenny is Vice President on GfK’s Financial Services team in North America. He can be reached at tim.spenny@gfk.com.