2015: The Year Mobile Payments Go Mainstream
Google urged consumers to make their phones their wallets in 2011. Softcard promised consumers it would make their phones “a smarter way to pay” when it began its testing phase in 2012. It is now the end of 2014, and for a majority of consumers, phones are many things but they are still not their wallets. With Apple’s announcement of its new payment service, Apple Pay, 2015 is poised to be the year this begins to change. Earlier attempts were unsuccessful in gaining traction due to limited availability, limited merchant acceptance, and limited value to consumers. Apple Pay addresses these shortcomings, and as a result, will likely finally push mobile payments into the mainstream. The success of Apple Pay will represent an incredible opportunity for merchants to provide consumers with a true mobile storefront application.
Apple Pay Announcement
The mobile payments landscape was dramatically altered in early September when Apple announced the new iPhone 6 & 6 Plus, Apple Watch, and most importantly, Apple Pay. This new payment service incorporates the lessons learned from the shortcomings of predecessors.
Unlike the early payment services, Apple Pay will be widely available. Apple controls forty-two percent of the US phone market, is the biggest phone manufacturer in the US, and is the second biggest worldwide. The release of the new iPhone 6 will likely strengthen Apple’s position. According to Apple, the launch of the iPhone 6 and the iPhone 6 Plus set a record for launch-weekend iPhone sales with 10 million units sold. This strong performance is likely to continue, which means that a significant portion of the US consumer base will have access to Apple Pay. Unlike earlier payment services that attempted to disrupt the payments ecosystem, Apple secured partnerships with three of the four major card issuers that handle 83% of the credit card purchase volume in the country.
A payment service cannot gain traction without sufficient merchant acceptance and this is another area where Apple Pay has learned from the failures of predecessors. Apple has secured significant merchant support for the launch of Apple Pay. These merchant launch partners include McDonald’s, Subway, Macy’s, Disney, Walgreens, Whole Foods, and Staples. These merchants have over 220,000 locations in the US where consumers will be able to use Apple Pay when it launches. And unlike the approach taken by Google, Apple Pay will not be positioned to collect valuable transaction data, eliminating another obstacle to merchant acceptance.
Apple pay will also be launching at a favorable point in the terminal upgrade cycle when merchants will be looking to upgrade their card readers ahead of the upcoming EMV “liability shift”. Set to occur in October of 2015, the liability shift will require merchants to upgrade to EMV capable terminals or face bearing the liability for fraudulent payment activity. These updated terminals will also likely include NFC capability, thereby further expanding the number of locations where merchants will be able to accept Apple Pay, because the new iPhones have NFC built in.
Value to Consumer
Early payment services were unable to gain significant traction with consumers. They were unable to explain to consumers why they should put up with a difficult user experience, a limited number of accepting locations, and concerns about security, for the sake of making payments with their phones. Apple is the perfect company to tackle this challenge. It has a consistent track record of successfully educating consumers about new devices and services and their benefits. Apple also has a well-deserved reputation for being able to deliver a best-in-class user experience. Furthermore, Apple has the ability to leverage the hundreds of millions of cards it already has on file, thanks to its incredibly popular iTunes store, making it easy for a consumer to add a card. When Apple tells consumers that they will be able to sign up and use Apple pay with ease and convenience, they will listen.
Ease-of-use and convenience aren’t the only benefits, however. Apple is also betting on security being a significant draw for consumer adoption. This is a safe bet. The high profile Target breach which resulted in the theft of 40 million consumer credit and debit card records, the recent Home Depot breach, and the multitudes of other security breaches have put the need for more secure payment methods into the public spotlight. Apple Pay is designed to meet this need by providing enhanced security features, the most important of which, is the use of tokenization. Instead of using the actual credit or debit card details in a transaction, single use tokens are created and assigned in a secure manner. These tokens can be used to process a payment without storing a consumer’s actual credit or debit card details on the phone or exposing them to the merchant. If a third party does gain access to these transaction details, they will be unable to use the tokens for any fraudulent transactions. Apple Pay further enhances security by using an iPhone’s TouchID fingerprint scanning capability as the method for confirming a transaction. Apple Pay also includes security features that allow a consumer to remotely put their iPhone into lost mode, which locks the device preventing use, or to erase their iPhone completely in the event that the device is lost or stolen.
Implications For Merchants
If the new mobile payment service from Apple is successful and gains significant traction, mobile payments will finally enter the mainstream of consumer behavior. As outlined above, some of the country’s biggest merchants have already committed to accepting mobile payments. These merchants include high frequency, low-dollar transaction merchants like McDonald’s and high-dollar, low frequency transaction merchants like Macy’s. They include merchants that target highly affluent consumers and merchants that target less affluent consumers. In short, consumers from most demographic groups will begin to expect having the ability to pay with their phones. This new consumer expectation represents an incredible opportunity for merchants to integrate mobile payment into their mobile strategy.
The act of paying is a fundamental component of every single transaction between merchant and consumer. Integrating Apple Pay into a mobile app gives merchants an unparalleled opportunity to tie payment to a mobile loyalty and rewards program, a mobile means of delivering offers and coupons, and mobile ordering. Merchants that can take advantage of this opportunity will finally be able to offer consumers a true mobile storefront.
With a mobile storefront application of this kind, a merchant will be able to gain valuable actionable insights into the behavior of their consumers. A fully integrated mobile storefront application will allow merchants to tie transaction level data to a specific customer profile and track the frequency, spend, and lifetime value of any individual customer or segment of customers. Merchants can take advantage of these insights to create manual or fully automated mobile marketing campaigns that include coupons and offers that are highly effective because they are highly relevant to the targeted consumers. With a mobile storefront application that takes advantage of a smartphone’s location services, a merchant can increase relevance even further by delivering location-based marketing messages. A merchant can increase customer retention by automatically delivering customer re-activation messages to customers that have not transacted in a certain period of time. These are just a few examples of opportunities available to merchants that integrate Apple Pay into their mobile strategy.