October 3, 2014
The Payments industry has seen a paradigm shift in the last few months, at least on paper. Apple Pay was announced; PayPal declared its independence and Alibaba is now publicly traded. These moves were big enough for people to change their assessment of the direction the industry was moving in. It is hard to find a discussion in the payments space today that doesn’t mention Apple Pay.
A platform that works with any mobile carrier, has received paid participation from about 80% of the largest card issuing FIs, boasts of payment capabilities that will seamlessly integrate with offline and online shopping to deliver a unified experience, has managed participation of most major payment networks in the US, has integrated new security features that eliminate the reusability of account numbers, and has simplified the method of provisioning for the FIs: Apple Pay certainly looks very strong on paper. But are there some important missing features that make it somewhat less disruptive than many have declared it to be?
To add another layer to our analysis, here’s another important barrier that has prevented the payments industry from bringing about any disruptive changes. It is called the chicken and the egg barrier. In simple words, customers don’t accept new payment technologies or methods like mobile payments unless these methods are accepted by a fair number of merchants across different industries, and the merchants don’t upgrade their existing infrastructure to support different form factors unless there is enough push from the customer to accept mobile payments. To break this barrier, technology disruptors need to build a compelling value proposition for both parties to encourage change in behavior. Apple seems to have done this in the online payment space, but it leaves a lot to be desired in point of sale payments!
Some of the dimensions we find Apple to be short on:
The company has chosen NFC. While it is a big boost for companies banking on and supporting NFC over the years, the fact remains that the NFC based approach has been rejected by MCX, a joint initiative of the country’s largest merchants, who collectively account for more than 25% of the total card payments volume in the US.
Of the more than 12 million merchant outlets in the US (according to LTP estimates), only about 1.8% accept NFC payments. Besides, an increasing proportion of merchants use iPads as POS systems, and they won’t be able to accept NFC either.
According to Apple’s own admission, NFC is not the best approach for offline payments. In a patent filed by the company a few months ago (patent number 20140019367), the company talked about a payment infrastructure that leverages NFC only to start the communication and completing the payment using some other protocol, that is more suited than NFC for sharing of data related to payments, such as coupon offers, coupon data, etc. One can only guess that the other technologies alluded to there would have been BLE or Wi-Fi.
Apple has bet its money on a value proposition that had already been declared as a failure. Giants like Google, PayPal, Softcard, Billing Nation, Square and many others tried it, but it never achieved mass adoption. Just adding a new way to pay won’t necessarily appeal to the consumer. What was needed was bundling the offerings with value added services like coupon redemption, discounts and deals etc., for both merchants and end users. Apple does not seem to focus on these issues, at least not just yet. In fact, the merchant partner list of Apple comprises of the retailers and merchants that already had NFC payments up their sleeves.
We want more than what Apple will offer us with Apple Pay, don’t we?