Apple Pay: Will Consumers Ever Really Embrace Mobile Payments?


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Article ImageAccording to a Federal Reserve report, "Consumers and Mobile Financial Services 2014," 17% of U.S. smartphone users have made a point-of-sale payment using their mobile phone in the past 12 months. Of those, only 14% waved or tapped their mobile phone at a cash register to make a purchase.

The mobile payments industry has been plagued by false starts and unsubstantiated predictions. Back in 2008, Juniper Research projected the combined market for all types of mobile payments would reach more than $600 billion globally by 2013. However, by June 2013, Gartner, Inc. predicted the market to be around $235 billion, which was nowhere near the projection from 5 years earlier. Why haven't mobile payments seen the adoption rates predicted in years past?

There's no real benefit--During Apple CEO Tim Cook's September announcement of the new Apple Pay service that will bring mobile payments to the iPhone 6, iPhone 6 Plus, and Apple Watch, he showed a video of a consumer awkwardly struggling to remove a credit card from his wallet and pay for an item at the cash register. But we all know that paying with a credit card isn't very difficult at all. "Paying with a credit card is quick-it's efficient and actually secure, and from a consumer standpoint, even if there is any sort of a breech, we're not liable for it," says James Wester, research director for IDC (International Data Corp.) Financial Insights. "There's not this general feeling that the act of handing over a credit card is inconvenient in any way. There's no real reason why anybody would want to change."

The same is true on the merchant side. "The act of payments is not really broken. The economics of payments may be something that merchants don't like, and Apple Pay didn't do anything to change that. So if anything, what Apple Pay is doing is saying, ‘We're now going to offer another thing that is addressing a problem that nobody has.' For mobile payments to work, you have to provide value to everybody who's in the payment value chain and that includes the banks, the issuers, the merchants, and the consumer. At this point, no mobile payment program has really given value to all sides," Wester says.

Security concerns--Due to Apple's iCloud hacking scandal in August, which resulted in hundreds of nude pictures of celebrities being leaked online, it's no wonder consumers would balk when contemplating handing their financial information over to Apple. Despite this, Wester thinks we have nothing to worry about. "You have a small plastic card with 16 digits that don't change, and the moment it's out of your sight somebody can write them down, swipe your card, or clone it. It's not a very secure form of payment. On the other hand, you have this tiny little computer that can be locked, even with your fingerprint. It doesn't actually hold the credit card numbers themselves, it holds a token. It has uniquely identifiable information, and if lost, it can be wiped clean. You can also find it if you need to using Find My iPhone. The idea that a tiny little computer is somehow less secure than a piece of plastic is a little backwards." When paying via iPhone, "There's no way to clone a card. There's no way to take that token and enter it into an ecommerce site. It has no value outside of the phone, so there's nothing you can really do to steal it."

In regard to the iCloud hack, he adds, "The way that the information for a payment is stored and the way photos are stored in the cloud are two totally different ways of storing information, two totally different way of securing information, and two totally different types of information."

Privacy concerns--Consumers have had a growing concern over privacy amidst the 2013 National Security Agency (NSA) scandal. We're warned that Big Brother is always watching and companies such as Google are recording our every keystroke, but Apple made it clear that it wasn't interested in tracking us. During the Apple Pay announcement, Eddy Cue, Apple's SVP of internet software and services, said, "We are not in the business of collecting your data. So, when you go to a physical location and use Apple Pay, Apple doesn't know what you bought, where you bought it, or how much you paid for it. The transaction is between you, the merchant and your bank." The question is will consumers, with a growing level of skepticism, trust Apple?

According to Wester, consumers tend to flip-flop in this department, when it comes to Big Brother and Big Data: "Consumers say they worry about it but their behavior doesn't really show that they think about it or are protecting themselves against it. When [people are] tracked so an offer can be presented, if it's a good deal or an upsell opportunity for something they may need or a helpful suggestion, surprisingly consumers don't care. I think that's an issue we talk a lot about, but I don't know that it's actually as big an issue with consumers as we think it is."

As to whether Apple will successfully change the mobile payment game, Wester isn't so sure. "I do think adoption will increase if for no other reason than Apple is a company that is very good at user experience. Most of the mobile payment programs and applications that we've seen to date haven't had that compelling [of a] user experience. One that is more seamlessly integrated into the operating system itself so that there are fewer things that a person must do will make that purchase experience better. Do I think that it's going to succeed? The key will be to get a lot of merchants and consumers both on board and only time will tell."

According to Greg Garson, associate partner with High Start Group, "Apple's number one Achilles heel is around the ubiquity of the iPhone hardware-you have to have an iPhone 6 or 6 Plus to be able to use Apple Pay, with the best will in the world, that will be a fairly small user-base for quite some time."

Wester views Apple Pay as a catalyst for the entire mobile payments industry. "Apple has come in and provided that tipping point, this is the point at which people will use mobile payments, and I think that it then becomes more competitive," he explains. Perhaps this new level of competition will introduce key consumer incentives that will push mobile payments to finally realizing its full potential.