Mobile & Online Payments

Apple Pay: game changer or missed opportunity?

Apple Pay: game changer or missed opportunity? Image: Bloomua /
Written by Uday Seth

Uday Seth reviews Apple Pay now that a year has passed since its launch, and looks ahead to how Apple could improve its position in mobile payments.

In October 2014, Apple fired the first major salvo in mobile payments with the introduction of Apple Pay – a mobile wallet technology built into Passbook that enables iPhone owners to pay for purchases with their phones at retail locations with near field communication (NFC) technology enabled point-of-sale devices. Visa, MasterCard and other card networks enable these mobile payments through tokenization, a technology that makes phone payments more secure than traditional swipe cards by replacing your 16-digit card number with a unique code tied to your device, meaning your card is no longer stored or visible to merchants.

Apple Pay represents a potential inflection point in the payments industry. Before Apple Pay, major technology companies such as Google and PayPal –  along with startups such as Dwolla and LevelUp – attempted to build mobile wallets for consumers to use in-store. But mobile wallets failed to gain meaningful traction, perhaps in part because the technology faced a classic chicken-and-egg problem: consumers didn’t adopt mobile payments because few merchants enabled them, and merchants didn’t enable mobile payments due to a lack of consumer demand.

Year one progress report

So, how has Apple Pay done so far? Have Apple’s 800 million iTunes accounts, marquee merchant relationships, marketing savvy and slick user experience given it a leg up in the mobile payments space?

Apple Pay hasn’t generated high levels of consumer engagement or transaction volume during its first year. Proprietary research from shows that only 16% of iPhone 6/6+ users have tried paying for an item with Apple Pay as of October 2015, up from a mere 13% in June 2015. A more telling stat is that only 5% of iPhone 6/6+ users that can pay with Apple Pay at an Apple-Pay-enabled store currently do so. It’s clear that Apple Pay hasn’t been the mobile payments catalyst that many in the industry were expecting.

The road to NFC adoption

So, what really going on? Why hasn’t Apple Pay caught on yet? One of the most commonly cited reasons for lack of engagement with Apple Pay is that consumers don’t know which stores offer it as a payment option. Point-of-sale systems aren’t standardized across different retailers, which contributes to fragmented NFC adoption.

Yet, this obstacle may be short-lived. The upgrade cycle for point-of-sale systems will accelerate due to a shift to chip and pin infrastructure mandated by major card networks for year-end 2015. This shift will make NFC technology more common across retailers. In 2014, 80% of new point-of-sale devices shipped in North America were NFC-enabled. According to Business Wire, approximately 59% of US point-of-sale systems will be chip (and contactless payment) enabled by the end of 2015. Additionally, the use of NFC-enabled point-of-sale devices is projected to grow more than 25% per year from 2015 to 2019.

It’s worth noting that enabling point-of-sale systems with NFC technology doesn’t necessarily mean retailers will utilize the new functionality. Apple Pay needs to deliver a more compelling value proposition for merchants (and consumers) through value-added service.

Adding value for merchants and consumers

Apple Pay helps merchants migrate transactions from cash to debit and (predominantly) credit. From a merchant’s perspective, this shift increases the cost of accepting payments, as cash transactions are much cheaper than credit card transactions (outside of cash administrative costs, which have been estimated to be roughly 1%). Apple Pay needs to do more than drive up the cost of accepting payments for merchants. Below are three opportunities for Apple Pay to add value.

  1. Accept private label cards and gift cards – Private label cards (think of J Crew or Banana Republic) are a huge value-lever for retailers. They drive high utilization rates and substantial engagement with consumers. For example, Kohl’s drives 40% of its in-store volume through private label cards, and other major retailers such as Nordstrom drive 40% of net sales through a private label card program. It’s a similar story with gift cards. According to First Data, consumers spend roughly $20 more than the face value of a gift card, and 31% of buyers end up purchasing more expensive items than those they intended to purchase. Apple Pay should continue to broaden its scope beyond credit and debit cards, integrate private label cards and gift cards into its wallet and scale these new services more broadly and more quickly.
  2. Use data to drive demand – Apple already has lots of user information from iTunes purchases, app purchases, Safari browsing history and user demographic information. Apple Pay should leverage this data to drive demand from merchants. For example, Apple Pay could embed offers within Passbook (now called Wallet) on behalf of its retailers. It could also target specific offers based on the user information it already has.
  3. Save time for consumers – From a consumer’s perspective, it’s still very easy and efficient to swipe debit and credit cards rather than use Apple Pay, but payments infrastructure developments may change this. In response to several major point-of-sale data breaches (most notably at Target and Home Depot), major card networks mandated a shift in the US from swipe to chip and pin payments systems by the end of 2015. Apple Pay’s less-than-one-second transaction time will be substantially faster than paying with chip-and-pin-enabled cards, making it a more convenient and frictionless choice for consumers.

What’s next?

Apple Pay hasn’t lived up to the hype laden on it by analysts and the media during its first year, but changes to payments infrastructure, including the impending migration to chip and pin payments systems and broader NFC adoption – as well as continued penetration of iPhone 6/6 – may make its second year more successful.

Mobile payments will continue to be a hotbed of competition, and disruptive startups and well-entrenched incumbents will shape the industry going forward. For example, Chase – one of the key enablers of Apple Pay – recently announced a partnership with the Merchant Customer Exchange (MCX) consortium to provide a mobile wallet. Apple Pay should aggressively seek out new ways to add value for merchants and consumers, and continue to differentiate itself within the fast-changing competitive landscape.

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here. Main image: Image: Bloomua/

About the author

Uday Seth

Uday Seth is an MBA Candidate at Wharton School of the University of Pennsylvania, and a contributor to Wharton FinTech.

Leave a Comment