Apple Pay: Taking Mobile Payments Mainstream (Company Case 10)

After
leaving his office in Manhattan, Tag stopped at a nearby Panera to grab a
Frontega Chicken Panini and Green Passion Power Smoothie as a quick dinner on
his way to see some friends in Soho. Upon ordering, he held his Apple Watch to
the contactless reader near the register, gently pressed his finger to the
TouchID fingerprint sensor on the small screen, and let Apple Pay do the rest.

Wanting
to get across town as soon as possible, Tag used his Uber app to summon an
UberX car. During the car ride, he remembered that he needed a couple of new
dress shirts. With a few quick clicks on his watch, he selected the shirts
through his Macy’s app. With a simple tap, he used Apple Pay to seamlessly
complete the transaction. As he neared his destination, Tag added a tip to the
bill for the ride through the Uber app, which he’d already configured to use
Apple Pay as the default. With one simple press of his finger to TouchID on his
watch, he exited the cab.

Three
purchases—offline, online, and, well, sort of in between—no wallet required. No
traditional wallet, that is. This new reality—one that many early adopters are
already living—is rapidly expanding toward what some experts predict will
become the future for everyone. Folks like Tag don’t even carry traditional
wallets anymore, only their mobile devices and perhaps an ID and a backup
credit card for retailers that don’t accept mobile payments—yet. After years of
predictions that mobile payments would replace cash and credit cards, there are
finally signs that it might actually be happening. And Apple is leading the
way.

Hardly New

The
ability to pay for transactions with a mobile device is hardly new. In fact,
the first technology for mobile payments was invented by Sony way back in 1989.
It was first put into use in Hong Kong’s subway system in 1997 and began taking
root in Japan in 2001. The tech-savvy Japanese warmed to the idea quickly, and
mobile wallet apps were being used on mobile phones throughout Japan by 2004.
Ever since, more than 245 million Japanese mobile phones have been equipped
with the capability to make mobile payments, and Japanese consumers use mobile
payments for everything from transportation to food and household purchases.

So
it seems odd that a similar system has not taken root in the United States,
although it hasn’t been for lack of trying. Companies have been experimenting
with different approaches for years. PayPal was the first to take advantage of
the smart- phone revolution by creating a payment app that gave just about
every smartphone the potential for mobile payments. About a year later, Google
entered the mobile payment game with the launch of Google Wallet. In the past
five years, numerous other companies, from small start-ups to electronics and
retailing giants, have tried to gain market acceptance in mobile payments. They
include the likes of Samsung, Square, and CurrentC, a mobile wallet app backed
by a consortium of U.S. retailers (with Walmart leading the way) that hope to
cut credit card companies and their fees out of the buying loop.

But
none of these players—individually or together—have made much of a dent in
replacing traditional credit cards and cash as a form of payment in the
multi-trillion-dollar U.S. retail market. Although the mobile payments concept
may seem like a no-brainer for convenience-loving American consumers, numerous
barriers on both the buyer and seller sides have kept the concept from gaining
momentum. With its recent launch of Apple Pay, Apple is clearly a market
follower. But it’s a feat that the innovative company has performed to
perfection time and again—take a new technology, make it better than any of the
initial offerings, then watch the market explode as the Apple version becomes
the runaway market leader.

Overcoming Negative Consumer Perceptions

As
with every new technology that involves paying for things, consumers have
concerns about the security of mobile payments. Paypal, Google, and the others
took significant measures to design secure systems. However, most consumers
just weren’t comfortable with the idea that their phone might be used as a
portal to their credit cards and bank accounts if it fell into the wrong hands.
Never mind that the same could be said of a wallet or handbag, far less secure
devices.

Recognizing
consumer reluctance to place digital versions of their financial devices in one
app, Apple took security to a higher level. Requiring a fingerprint makes the
process much more secure than the more common safeguard of entering a passcode.
And if a mobile device is ever lost or stolen, the owner can use its Find My
iPhone feature to immediately lock down Apple Pay or even wipe the device
completely clean.

Additionally,
every compatible Apple device is assigned a unique Device Account Number. This
is encrypted and securely stored in a dedicated security chip on the device. That
and a transaction-specific security code are the only numbers that Apple
transmits to merchants. In fact, the merchant doesn’t even need to know the customer’s
name. Credit and debit card numbers are stored only on the local device, not on
Apple servers. This makes Apple Pay even more secure and more private than
paying by credit card.

Beyond
consumer security concerns, previous adoption of mobile payment apps has been
slowed by perceptions of a clunky user experience. If convenience is the
biggest draw for consumers, then anything more arduous than the already convenient
swipe of a credit card simply won’t cut it. Setting up any of the existing
mobile payment apps takes time and effort. Using such apps at the point of
purchase is far from seamless, especially if the technology isn’t working quite
right. “I don’t want to be that guy holding up the line while we fumble around
to get it all to work,” says one business columnist, “just like I don’t want to
be the guy who holds up the line boarding an air- plane because his mobile
boarding pass can’t be read.” Mobile apps that hit the market prior to Apple
Pay required entering a passcode and—in some cases—hitting multiple buttons.
That took longer than the traditional swipe of the card, even if everything
worked as intended.

With
Apple Pay, users still need to configure the app. But Apple already has 800
million credit cards on file with its existing iTunes store. Not only can this
facilitate a set up that is already streamlined compared with existing apps,
it’s a sign that iTunes users may be more comfortable with using the app given
that they have already given their credit card information to Apple. And with
the TouchID sensor, Apple has the transaction down to a one-touch process.
That’s quicker than swiping a card and going through the typical menu, not to
mention quicker than inputting a passcode.

Establishing Points of Acceptance

For
mobile payments to penetrate the market, consumer acceptance is necessary. But
companies face a twofold challenge in making such a technology successful. Consumers
won’t adopt it if retailers don’t accept it, and retailers won’t invest the
resources necessary to accept it unless there is sufficient consumer demand.
And the lack of consumer demand is the biggest factor that has kept retailers
from jumping onto the mobile payments bandwagon. As a result, there are
currently too few retailers that accept mobile payments to convince people that
they can leave their credit cards at home.

But
thanks to Apple, that situation is changing rapidly. It may be because of Apple’s
clout or because of the company’s massive and loyal user base. But in less than
a year, Apple has signed up far more retailers than all the previous mobile payment
providers combined. “You need so many points of acceptance to make mobile
payments work,” says a mobile payments analyst for Forrester Research. “Apple
has made that happen, striking partnerships with top national brands across a
variety of categories that will give consumers plenty of opportunity to use the
service.” Apple has also signed up enough credit card issuing banks and credit
unions to cover 83 percent of charge volume. In fact, Apple Pay has gained
enough steam that Best Buy and Meijer will soon be accepting the payment app,
despite having signed exclusivity agreements as part of the CurrentC
consortium.

But
Apple still faces many challenges. For example, even though Apple Pay is now
technically accepted at more than 700,000 U.S. retail outlets, many of those
outlets don’t yet have the hardware installed that will recognize Apple’s app.
That fact can be discouraging to early adopters, hurting repeat usage. One
recent survey showed that 66 percent of iPhone 6 owners had signed up for Apple
Pay, but nearly half of them had visited a store listed as an Apple Pay
merchant only to find that the location wasn’t set up yet to process mobile
payments through the app. Additionally, although Apple’s penetration of the
market far exceeds that of the competition and continues to grow each month, the
mobile payments leader has a long way to go before reaching critical mass with
8 million retail outlets. And this doesn’t even take into account online and
in- app payments.

Still,
Apple remains confident. “We are more convinced than ever that 2015 will be the
year of Apple Pay,” says Tim Cook, Apple’s CEO. While there are still plenty of
doubters that mobile payments will replace plastic as the go-to method for
purchasing goods and services, there are also plenty of believers. And while
Apple is clearly ahead in this game, its success also bodes well for the
competition. As the concept catches on and technologies become more compatible,
demand among non-Apple users will increase as well.

There
is no shortage of options in the mobile payments field. And improvements designed
to make the apps more convenient are being made continually, including the
integration of loyalty cards and other promotional mechanisms. But even as
other companies’ offerings get better, expect Apple to be more competitive than
ever. After all, nothing is stopping it from creating Apple Pay for Android devices.

Questions for Discussion

As completely as possible, sketch the value delivery network for Apple Pay.With respect to Apple Pay, is Apple a producer, a consumer, or an intermediary? Explain.Identify all the reasons why Apple’s partnerships are essential to the success of Apple Pay.With respect to marketing channels, what are some threats to Apple Pay’s future?

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