apple pay could finally ignite the tap-and-pay revolution€¦ · !1 november 20, 2014 fbic global...

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November 20, 2014

FBIC Global publication: apple pay could finally ignite the tap-and-pay revolution

Apple Pay Could Finally Ignite the Tap-and-Pay Revolution

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r – H e a d G l o b a l R e t a i l R e s e a r c h a n d I n t e l l i g e n c e F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m N e w Y o r k : 6 4 6 . 8 3 9 . 7 0 1 7

November 20, 2014

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November 20, 2014


Apple Pay Could Finally Ignite the Tap-and-Pay Revolution On October 20, Apple launched its Apple Pay network with great fanfare and typical bravado—implying that it was the pioneer in mobile payments. That claim was likely a big surprise to the real e-‐payment forerunners: Google Wallet, which was launched in 2011 but has not achieved commercial nor economic success. There are also SoftWallet, a smartphone app that manages discount coupons and frequent-‐customer information, and LoopPay, which claims to be the most accepted mobile wallet on the planet. Other countries have simple but convenient payment methods. For example, Hong Kong consumers can pay for transportation and small purchases with the Octopus RFID (radio-‐frequency identification) card, which can be refilled at convenience stores, vending machines, or online.

Initial signs point to Apple Pay gaining traction with consumers. There were more than one million activations within the first 72 hours. Whole Foods recorded 150,000 Apple Pay transactions at 384 stores in the first three weeks after the launch. During the same period, McDonald’s said that more than half of the mobile transactions at its 14,000 US restaurants were processed via Apply Pay. Toys “R” Us said that the number of mobile payments had increased at its stores.

The most formidable competitor to Apple Pay at present appears to be CurrentC, which was founded in 2012 by the Merchant Customer Exchange (MCX), a consortium of retailers, including Walmart, Target, CVS, Rite Aid and BestBuy, and is currently in pilot testing for launch in 2015. CurrentC’s contract demands that members reject all other electronic payment methods, and CVS and Rite Aid recently blocked the use of Apple Pay on their payment terminals, despite having compatible hardware. A huge drawback of CurrentC appears to be usability, since making a payment involves scanning a QR (quick response) barcode. More important, CurrentC does not work with credit cards, but rather only with prepaid store cards and debit cards tied to the user’s bank account. Interestingly, the Target app for iOS supports Apple Pay while its retail stores do not.

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November 20, 2014


Locations 220,000 110,000

Key Merchants

34 including: Macy’s, McDonald’s, Radio Shack, Staples (to come), Starbuck’s (to come), Subway, Whole Foods, Texaco, Walgreens (not exclusive)

58 including: 7-‐11, Best Buy, Circle-‐K, CVS, Dunkin’ Donuts, ExxonMobil, Kohl’s, Lowe’s, Rite Aid, Sears, Target, Walmart, Wendy’s (exclusive)

Technology NFC chip + fingerprint sensor QR codes

Ease of Use Tap and pay Scan a QR code and enter a PIN code

Payment Method Credit and debit cards Checking accounts and merchant accounts and gift cards

Security Method Tokenization Tokenization Current Status In operation Pilot testing for 2015 launch Loyalty Programs Under development Yes

We think that only diehard Apple fans will shun the retailers that block Apple Pay, since consumers can always pay with cash and debit-‐ and credit cards as before. Moreover, CurrentC’s management has publicly stated that the current period of exclusivity will only persist during the initial launch period. We think retailers will want to allow all major payment options, including Apple Pay if it becomes widely adopted. The payment industry was recently shaken by a recent hacking attempt on MCX’s beta servers, however, the hackers only obtained e-‐mail addresses and no customer information or credit-‐card data.

What’s compelling about Apple Pay is its use of a secure device number called a token that is stored in the “Secure Element” near-‐field controller (NFC) chip located inside recent-‐model iPhones, iPads, and the upcoming Apple Watch. When the user registers his or her credit cards, a token service provider provides Apple with a random number to represent the account, which is stored inside the secure chip. To raise the security level even further, the iDevice’s fingerprint sensor also verifies the user’s fingerprint to authorize the transaction. The brilliance of Apple Pay is in its simplicity: when the device is within range of a store’s NFC sensor, up pops a graphic of registered credit or debit cards, the consumer puts a finger on the sensor, and ding!, the payment has been made.

Time and again, Apple has launched what seemed to be a new technology that was ultimately co-‐opted and copied by rivals and ultimately became mainstream. Such was the case with the user interfaces of its smartphones and tablets. Apple Pay could very likely track this same trajectory. Where Apple leads, others are likely to follow. There is even evidence that since the launch of Apple Pay, usage of competing payment systems such as Google Wallet has increased, indicating growing interest in mobile payments in general. To that extent, it looks as though tap-‐and-‐pay’s day has come. But while Apple Pay could ignite the mobile payment revolution, other companies may be the main beneficiary.

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APPLE PAY—PROS WINNING OVER CONSUMERS

• The number-‐one selling point of Apple Pay is its simplicity. Once the card has been registered for Apple Pay, all the paying customer has to do is place the phone or tablet near the payment terminal, put a finger on the sensor, and the transaction is completed with positive audio feedback. Thus, making a payment is immersive, enjoyable, and nearly instantaneous.

• Apple’s fanatically loyal user base gives Apple Pay a head-‐start in gaining acceptance over other networks.

• Apple Pay piggybacks on the infrastructure that the credit-‐card companies and predecessors like Google Wallet have already deployed while building a buzz around the idea of tap-‐and-‐pay. Many of the 220,000 participating retail stores and restaurants (McDonald’s, Walgreens, Macy’s and Whole Foods, for instance) that Apple boasted were already on board to accept Apple Pay have been accepting contactless payments for years.

WINNING OVER RETAILERS

• Success will also hinge on getting merchants and banks to accept Apple Pay. The system that offers the strongest protection against customer-‐identify theft will win the day, since neither the device nor the retailer possess credit-‐card numbers.

• There is also a coming major technology transition in payments that could play to Apple Pay’s favor, at least as it applies to its US business. By October 2015, US merchants will be required to adopt the EMV (Europay, MasterCard, and Visa) system, which uses a “smart” chip on the card to store the owner’s payment information. Since a chip is more difficult to duplicate than a magnetic stripe, the EMV system is more secure (though definitely not hack-‐proof). Many retailers will have to upgrade anyway, so it makes sense to upgrade to a payment terminal that also accepts electronic payments.

• A year from now, merchants that don’t upgrade their terminals will be made to bear the responsibility for fraud if they are not equipped with EMV card readers, which is a major motivation to upgrade.

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STUFF FOR TECHIES

• EMV is already the widely supported standard in Europe, Canada and many other countries. The inconvenience of having to enter a PIN code could encourage more Americans to use their phones to pay, no matter what the payment system. Having to enter a PIN code could take a second or two longer than a quick tap-‐and-‐pay. That extra inconvenience might be enough to convince consumers to overcome their historical reluctance to pay by phone.

• The high level of security of the Apple Pay solution is also very compelling. Tokenization renders the underlying data useless in the event of a breach. Even if hackers are able to hack their way into a payment server, the data that they steal will not be useful to them. However, the e-‐payment industry is wary about the security of NFC-‐based payments. It’s too early to say whether tokenization will survive sophisticated hack attacks or not.

APPLE PAY—CONS

• The limiting factor to the spread of Apple Pay is that only newer-‐model iPhones, iPads and Apple Watches have the necessary NFC chip, in addition to Apple’s minority smartphone market share itself. According to industry researcher Kantar Worldpanel ComTech, iOS shipments accounted for 32.6% of smartphone shipments in the US, down from 35.9% a year ago. These most recent figures include very little contribution from the iPhone 6, which began shipping on September 19, late in the third quarter. A Taiwan-‐based analyst with Deutsche Bank estimates that Apple will manufacture 65-‐70 million iPhones in the fourth quarter of 2014, and China-‐based KGI estimates that Apple will ship about 10.9 million iPad Air 2 units and 2.5 million Mini 3 units in Q4, all of which have the NFC chip necessary to use Apple Pay.

• Another hindrance to adoption is the still relatively small network of NFC-‐enabled merchants. The Wall Street Journal notes that NFC readers are used by fewer than 10% of merchants, especially smaller Mom & Pop stores that have held off buying new terminals.

apple pay could finally ignite the tap-and-pay revolution€¦ · !1 november 20, 2014 fbic global...

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