The introduction of Apple Pay in October 2014 was perhaps the most visible moment in the consumer payments industry in recent years. Nearly 300 U.S. banks now support Apple Pay, and the ever-growing list of stores that accept Apple Pay may soon include Best Buy and Target. But should you jump on the Apple Pay bandwagon? Let’s review.
How does it work?
Apple Pay provides a fully tokenized mobile payment method for both in-store and online transactions. No card data, including encrypted card data, is stored or transmitted. When users load a debit or credit card from a participating issuer onto their phone, the issuer verifies that the credit or debit card account is valid and a token is generated and sent back to the device. The token is securely stored on the iPhone and used in lieu of card data to complete transactions. In a store, Apple Pay works by contactless payment via an NFC-enabled terminal.
- User experience: Apple Pay offers a seamless and effortless mobile payment user experience. Both in store and in-app, Apple Pay loads automatically. All the customer has to do is confirm the transaction by holding the phone’s TouchID sensor.
- Security: Apple Pay provides consumers with a high level of protection against fraud by requiring both the token and a transaction-specific dynamic code generated by the device. The use of Apple’s TouchID fingerprint sensor to authorize each payment adds an additional layer of security that other payment products do not offer.
- Multi-channel availability: Unlike some other digital payment solutions, Apple Pay can be used both in-store and in-app.
- Competitive/innovative edge: As of June 2015, 288 financial institutions had completed the transition to Apple Pay, representing more than 80% of U.S. credit card purchase volume. More than 2,000 additional institutions have signed up and are in the process of transitioning.1
- Limited consumer reach: Apple’s iOS trails Android in U.S. smartphone market share (39% v. 56%2) , and just 15% of iPhone users own an Apple Pay-compatible device3, reducing the potential consumer base to less than 6%.
- Low consumer adoption: Only 6% of iPhone 6 owners report using Apple Pay, while 85% have never tried it.4
- Limited merchant adoption: Apple Pay cannot be used everywhere. Though merchant interest in using Apple Pay seems high, many have not yet taken the plunge.
- Problems with use: Apple Pay users have reported experiencing issues at the point of sale, finding the service slow, hard to understand and often totally non-functioning.5
- Fraud concerns: There have been few fraud issues with ApplePay, but the loopholes criminals have found so far have placed the onus on issuers. Criminals succeeded in uploading fake credit cards onto their device and using them for payment, requiring issuers, who are responsible for authorizing cards added onto Apple Pay, to require higher levels of security in the card verification process.
Apple Pay may have first-mover advantage for contactless payments, but there is competition from Android on the horizon.
- Google: Google’s Android Pay, announced in May, will work on phones equipped with NFC chips and KitKat or newer operating systems, allowing for broader adoption among Android users. Just like Apple Pay, it will be paired with fingerprint technology to authorize payment, and provide a seamless experience for the customer. Unlike Apple Pay, Android Pay will be cloud-based. All the major card networks have announced their intention to support Android Pay, as well as a number of financial institutions, such as US Bank, USAA, and PayPal.
- Samsung Pay: Samsung’s version of Apple Pay will launch in September 2015, but so far it is device-specific like Apple Pay and will be available only on new Galaxy S6 models. In addition, Samsung Pay will initially work only for in-store payments, though it will eventually expand to in-app purchases as well. While Samsung Pay also uses the NFC technology used by Apple Pay, it adds a new Magnetic Secure Transmission (MST) capability from startup LoopPay that will enable contactless payment at 80-90% of existing mag-stripe terminals, which could mean much broader merchant acceptance than Apple Pay or Android Pay.
The Apple Pay experience will continue to improve in future versions, but its low adoption among both merchants and consumers, in particular among Cashnet’s core customer segments, and the uncertainty surrounding potential competition, have led to our decision to take a wait-and-see approach on the issuing side. On the acquiring side, the potential of Apple Pay and of the other promising NFC payment types has led us to the conclusion that we will support NFC payments in our next generation POS hardware, which will be ready in a few months.
1 Apple Pay Participating Issuers, June 2, 2015; Apple Announcements at the Spring Forward Event, March 2, 2015, and at the Goldman Sachs Tech Conference February 10, 2015
2 Kantar WorldPanel, Smartphone OS Market Share, February 3, 2015
3 Chitika Insights, North American iPhone Version Distribution, January 2015
4 InfoScout, Apple Pay By The Numbers: Adoption And Behavior, March 18, 2015
5 Phoenix Marketing International, Apple Pay: The First Four Months, March 31, 2015