Apple Pay, Further Thoughts

I’d promised more thought on Apple Pay after I’d read and thought about it a bit more. That reading and thinking continues, but with an update overdue  I offer a few thoughts.  For  clarity, I’ll use the term “proximity payment” to mean paying at a physical point of sale; “remote payments” for buying through a mobile device, with no other hardware needed, and “in-App payments” are remote, but don’t use a browser.

Apple Pay is neither the vindication nor savior of NFC

Apple has traditionally controlled as much as it can of any area entered– this hurt them when Windows was ascendant but has allowed them to create singularly seamless customer experiences.  The iPhone started to change this, with its dependence on mobile networks, and Apple Pay has taken it the trend further.   Apple knows this and worked assiduously to reach agreements with parties in payments– something neither Google nor PayPal have been able to do.  That agreement shared the burden of getting Apple Pay off the ground, made the value proposition stronger, but also meant accommodating the other parties.  NFC is one of those accommodations.

Apple Pay’s launch with NFC gladdens the hearts of the networks, equipment manufacturers, and perhaps a few merchants who’d invested in it.  But Apple doesn’t really care how the device talks to the POS– I expect we’ll soon see something with Bluetooth LE and even sooner with 2-d barcodes.  Moreover, the fact that Apple is using NFC at the launch of  Apple Pay is far from enough incentive to move many unconvinced merchant  to invest NFC.

If you had a whole lot of terminals to replace, would you replace them all, and retrain your staff,  just because new iPhones can pay with NFC?   Particularly when you being urged at the same time to retrain you staff on the particulars of chip cards?

Apple Pay will not become a preferred way to pay at POS any time soon

Cherian Abraham’s recent piece made many points about Apple pay, some of which I still don’t understand, but one I get and agree with is that changing consumer payment behavior takes time.  Most iPhone users do not go to Macy’s often enough to change what they do when they want to pay– they’ll continue to reach for their cards.  McDonald’s could do the trick for iPhone 6 owners who eat regularly at McD’s, but if you don’t fall into that category paying with the phone will be just a novelty.

As I wrote in 2013, successful wallets to date have all been merchant-centric: buying a coffee and getting rewards, buying a meal and avoiding a queue to order, betting through the transit turnstile quickly.  I can’t think of any wallets that have succeeded by just replacing a  swipe with a tap.

So Apple Pay will make the chicken-egg challenge a bit easier, but won’t remove it.

Apple Pay’s in-App capability is a bigger deal than its proximity payments

Sure, tap and go gets the buzz, but it has the most baggage.  Most important, proximity payments must displace something that works really well today– swiping a card.  And as noted in the prior section, that won’t be easy.  But buying something on your phone– that doesn’t work at all well, except in a few cases, Amazon being the most familiar.

Now imagine an one-click checkout (which, if you read into Apple’s fine print, you’ll see they have licensed from Amazon) in pretty much any app.  You can browse and buy with ease.  And a merchant could set something up like you find in an Apple store, where you can wander, find what you like, pay via your phone, pick up the item then leave, without visiting a counter or register.  Now imagine you’re s merchant thinking about the next investment– you could buy a whole bunch of new POS systems with EMV and mobile, or you could invest in a app that allows purchase and cut back on the number of checkouts.

Tokenization plus in-App payment should scare issuers

Merchants pay a higher interchange fee for remote (“card not present” or CNP) payment than for purchase at the register (“card present” or CP).  The roots of this are the notion that a purchase by something giving you a piece of plastic is less risky than one made through a website.  So the website purchase cost the merchant a bit more, which go directly to the card issuing bank.

That might have made sense one time, but does less and less. And with the security Apple Pay has included– so that the actual payment number is never present on the mobile device– it make even less sense to charge more.  Combined with other pressure from restive merchant, Apple Pay will help eliminate the premium for CNP payments.  And that will decree issuer revenue.

Which makes it harder to understand why issuers are voluntarily giving Apple 15 bps for Apple Pay transactions. All I can think is that Apple’s reputation and issuer fear of being left out of Apple’s wallet made it impossible for issuers to resist joining once a single issuer had agreed.

This world changes rapidly.  More to come.






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