Radio Free Mobile’s Richard Windsor recently posted a concise and insightful piece about Apple Pay. According to Windsor, Apple has aligned the financial payments industry, a feat that has eluded other mobile payments companies, but due to Apple’s proprietary myopia will forego a greater opportunity.
Apple has announced an admirable list of merchants, such as Subway, McDonald’s, Disney, Walgreen’s, and Macy's. Not a small feat, even with the mystique of Apple’s brand. More importantly, though, Apple has organized the most important players in the complex payment chain to make Apple Pay a reality. The company is working with American Express, Mastercard, and Visa, which combine to funnel 83% of the credit card purchase volume through the top banks that issue credit cards. According to Windsor:
"With all participants signing-up to support the system, there is a good chance that the user experience will be as easy and as seamless as promised."
Working with the credit card companies means that Apple has worked out a revenue share of the 2.5% to 4.0% of the transactions that the banks and credit card companies currently share. If Apple can somehow transfer the half-billion iTunes credit cards it has on file to users of all iPhone models, Apple’s share could be a significant amount of money. But Apple Pay only works on the iPhone 6.
Another point that Apple got right is security. The fingerprint reader on the iPhone 6 is the main authentication tool, but the secure elements inside the iPhone 6 and 6 Plus take it one step further. The combination makes exploiting an identity to create fraudulent transactions much more difficult than other mobile-based payment systems that rely only on mobile apps. Many Android smartphones have secure elements, but AT&T Mobility, T-Mobile USA, and Verizon Wireless have resisted the requests by other mobile payment companies to use it because they have their own payment consortium called Softcard. So these payment systems forego the enhanced security of the secure element.
Apple Pay uses Near Field Communications (NFC) to interact with the payment terminal. Presumably, it works with any of the widely deployed NFC-enabled Point of Sale (POS) terminals. If this is true, this is another point that Apple got right, seeing as a Berg Insight forecast once predicted that more than 86% of POS terminals will support NFC by 2017.
Although Apple has finally embraced NFC, which the payment industry has pushed for years, it is a proprietary system. It’s only available on the iPhone 6 and 6 Plus, not any other iPhone or Android smartphone. In Apple's fiscal year 2013, the company sold 150 million iPhones, a significant number, but compared to Android the scale doesn't present the possibility of earth-shattering worldwide disruption of the payments industry.
Windsor forecasts that:
"in 2016E, iPhones will make up 13% of all the smartphones across the world. Keeping Apple Pay to itself will allow Apple to maintain the exclusivity it needs for its profitability but it will be leaving 87% of the opportunity on the table for everyone else."
So since 87% of the market won’t be able to use Apple Pay, the rumors that Apple will drastically change the payments industry and push competitors out of business are simply rumors. Apple Pay could create a lot of disruption, but Apple would have to license its technology to Android ODMs.
Long an denier of NFC's value, Apple has finally given in because it is necessary to execute transactions on NFC-enabled POS terminals. Apple has legitimized NFC, and the more consumers conduct Apple Pay transactions, the more comfortable Android consumers will feel using Google and PayPal's wallets, so Apple will have a stimulating effect on mobile payments. To this point, Windsor says:
"This is also a big endorsement of NFC which has struggled for traction due to fragmentation and a bad user experience."
It is not a simple task for Google, PayPal, and other mobile payment wallets to gain momentum and grow quickly due to industry fragmentation. But success for Apple will stimulate consumer confidence in mobile payments, and perhaps the mobile payment industry can follow Apple's blueprint in precisely aligning the credit card companies, banks, and merchants.