Just the other day as I was waiting at my local grocery check-out line, I watched a customer open her purse and go for her check-book as she got ready to pay the cashier. Fumbling through her purse, she found a pen and started to fill in the particulars on the check, all while chatting on a Samsung Edge phone. Deep inside me I heard the Oh No, Here we Go again.
Normally this would frustrate the best of us that are waiting in line, especially when it’s a Friday afternoon and you have got your six-pack dangling on one hand ready for the weekend. This time however, I decided to roll with it and time the transaction. A whooping 3 minutes and 28 seconds for a purchase of $17.38 during the peak hour in a retail store.
I’m sure that in those precious 3 minutes and 28 seconds, I could have easily opened up a cold one and chugged enough to breathe and proclaim “Happy Weekend!” .
This week, when I saw the headline “Apple Pay a Hit in China with 3 million users in just two days”, I was fondly reminded of the lady in line from Friday.
How did the 3 million Chinese iPhone customers know about my 4 minutes of misery and decide to sign-up for Apple Pay?
Thus began the journey to find out what the heck is actually going on with Apple Pay and its aspirations.
Contents
What is Apple Pay and How does it Work?
Apple Pay was introduced in September 2014 amidst much hype and coverage at the Apples iPhone 6 event .The idea behind the smart e-wallet offering is simple. When faced with a point of Sale transaction, you pull out your iPhone 6 and hold your iphone near the contactless reader with your finger on Touch ID and volla OR just use your Apple Watch by double clicking the side button and hold the display of the Apple Watch up to the contactless reader. A quick tap and you are done.
The whole concept relies on digital wallet technology. Encrypted credit card data is stored on the secure element chip of an iphone. To execute a payment, the credit card data is communicated from the digital wallet to the payment terminal by a near field communication (NFC) Chip. Only the iPhone 6 and Apple Watch currently contain the NFC compatible chips. The encrypted credit card data held on the secure Element is not uploaded to iCloud nor are your credit card details transmited to merchants. Apple uses tokenization to scramble the information so that it cannot be re-used for fraudulent purchases.
I thought that all these security buzz words such as NFC chip, tokenization, scrambling and encrypted wallet would make us feel secure and give us the comfort of waving our iPhone the next time we see the over worked cashier at our local grocery.
Not so fast!
Barriers to Switching
There are multiple barriers to switching when it comes to Apple Pay and other e-wallet technologies. A study showed that at the end of 2015, of the 128 million apple pay capable devices, only 10% had Apple Pay up and running.
When it comes to opening up one’s wallet, the first and the most significant barrier to adoption is the lack of trust. Consumers have raised privacy/security concerns when considering the switch to mobile payments.
Just after a month of Apple Pay launch, we saw the news around CurrentC hack in the mobile payment space. This is the system that CVC spearheaded to implement their own QR code based payment system. Why in the world would they do that when you have Apple Pay and Samsung Pay?
Stores are reluctant to pay the $200 – $500 per POS(point of sale) device to accept mobile payments. What about the Banks? Banks are worried that Apple may enter the online banking space. This was one of the reasons why Apple pay had to face a formidable challenge when trying to get a foothold in the Australian market.
There is also the argument around how much of the transaction value does the bank keep versus what apple makes. Apple’s contract with the banks make sure that no incremental costs are passed on to Apple Pay customers. This means that between the Banks and the merchants, some one has to cover the costs so that Apple can make also make a profit via this offering without passing incremental cost to the customers.
It is indeed a complex world of banks, credit card companies, Apple, Retailers and competitors trying to make money of the e-wallet transaction. This complexity inhibits the faster adoption of the technology by the retailers, although this is changing in recent months. You can find all the local list of retailers that support Apple Pay here and this list is beginning to grow.
The other barrier to entry is the hardware. Only iphone 6 models and the Apple watch currently support Apple Pay. The competitors to Apple in this space are catching on pretty fast as well. We have Samsung Pay as well as Android pay.
Apple Pay Vs Samsung Pay
As Apple is focused on resolving another security issue with the FBI, Samsung is pushing hard on its Samsung pay offering. Yesterday it announced a promotion offering free wireless charging pad to new Samsung pay users. Samsung is also promoting its offering via regular media commercials.
Unlike Apple, Samsung enabled its devices to use both the NSF technology as well as the MST (Magnetic secure transmission) technology. By introducing MST, it allows any retailer to accept Samsung pay without investing in new POS.
The MST service is already built into Samsung’s Galaxy S6, S6 Edge, Note 5 and S6 edge along with all the newer models. If your bank does not support Samsung Pay, you can also get a pre-paid debit card and use it with your Samsung Pay.
It is clear that Samsung is pushing hard to establish itself as a tough competitor to Apple Pay. Personally, I think the concept of NSF technology feels more secure than the MST. The question is, Can Apple design something that does not require retailers to upfront investments into their POS in order to support Apple Pay?
What about the 3 Million Chinese?
Although Apple is expected to face tough competition in the mobile payments arena from China’s home grown Alipay, It has made significant inroads by aligning itself with Key Chinese banks to support Apple Pay. Atleast 15 chinese banks had agreed to make their cards compatible with Apple Pay, including leading lenders Agricultural Bank of China, Bank of China, China Construction Bank and ICBC.
The move into China, the world’s biggest smartphone market will prove very important for how the new e-wallet technologies are adopted by consumers. Alipay service accounts for 70 percent of the current mobile payments market in China. And yes you can download the AliPay iOS app right from the Apple Store.
There are also other local players in the marketplace as well such as TenPay and Baidu with its mobile wallet app.
It will important to see how some of the Chinese merchants position their payment systems in order to be compatible with Apple Pay. The current 3 million Chinese that signed up would probably be the ones that shop at premium retail locations.
It is possible that Apple will position itself as a luxury brand in the world of e-payments. Although Tim Cook talked about the economic softness in the Chinese market during the last earnings call, the news so far this year is pretty encouraging when it comes to Apple Pay progress in China.
Summary
It is going to be very important to see how Apple positions its Apple Pay moving forward. There have not been too many direct Apple commercials on Apple Pay. Apple has been using its co-marketers to primarily promote the offering as seen in the CapitalOne ad here.
I will be curious to see if the NFC chipset is going to be available in the newer iPhone SE phones. Not including the Apple Pay tech in the newer phone models will only provide Samsung more opportunities to gain market share.
The e-wallet technology is bound to change how we shop in the future. We can only hope that when Apple introduces its new iPhone 7, there are additional features to make it easy and safe for people to switch into Apple Pay. Not only does this offering provide convenience to the customers but it also provides value to the merchants by speeding up their transaction time at the stores.
As far as the lady in the line is concerned, I’m sure one of these days, she is going to surprise me by waving her new Samsung device at the grocery store clerk so that I can save 4 minutes between picking up my 6 pack and chugging a cold one to start the weekend!
Enjoy Your Weekend!
Update: 7/28/2016
Apple Pay is now a part of the iPhone SE device. Furthermore, Apple plans on supporting Apple pay transactions via Safari on Mac moving forward. It is becoming clear that Apply Pay will become a key catalyst for Apple’s services revenue growth in the future.