October 14, 2015
The widely adopted Apple Pay is a controversial topic that has not been left aside whenever mobile payments solutions are discussed. Without a doubt, Apple Pay can be considered as a game changer that is pushing ahead contactless payments. However, there are different sides to the story depending on the party. The consumer perception of Apple Pay may differ from that of the banking industry that is actively deploying the solution since the moment it was launched. Along with all the advantages that Apple Pay offers to its users, there are costs of convenience absorbed by the banks. Banks are now facing the controversial question of consumer demand on one side and hidden rocks it has to cover on the other. That tendency creates love-hate relationships between the banking industry and a payment solution.
In order to have a holistic view of what drives those relationships and why banks are forced to get along with Apple Pay, let us start from the beginning: how it became possible for mobile payments solutions to take over other methods, and then turn to Apple Pay’s dilemma.
Over the past few years, the smartphone revolution brought to consumers a new way of shopping and payments. As mobile become an immense part of the consumers’ life, they are turning to their phones to get a majority of things done. There is a certain shift in expectations brought by the leaders of mobile technology and mobile payments. According to the Pew Research Center study US Smartphone Use in 2015, 64% of American adults own a smartphone. Below is a chart provided by Pew Research Center on the ways smartphone owners use their device.
As we can see, smartphones serve a wide range of needs. An impressive 57% of smartphone users using online banking drove banks online as well as shifted the industry’s focus from branches to improving the online experience. In order to stay relevant, businesses have to follow customers and improve the channels preferred by them.
A different study by VeriFone and Wakefield Research titled The Path of Payments 2015 suggests that more than half of the surveyed consumers feel the need for merchants to adopt mobile payments.
However, the mobile revolution brought not only an explosion of online life but also fostered a wave of technologies that utilize the mobility of our devices and new behavioral trends—mobile consumerism. The rise of mobile device usage led industries to cater to consumers via mobile applications and, hence, accept payments through mobile devices. Mobile payments options are now a crucial part of any business as a revenue-driving solution.
The Path of Payments 2015 also indicated that mobile wallets accounted for about 4% of the payments market for in-store US retail transactions.
However, the overall industry of mobile payments is projected to grow with remote payments accounting for the biggest part of all payments volume. CIO published the following chart describing the tendency:
Mobile payments are here to stay. Among the most popular payment methods, we often hear about Apple Pay, Samsung Pay, Google Wallet, Android Pay, CurrentC, etc. For now, we will focus on Apple Pay. Soon after Apple Pay was launched, the service accounted for 1% of digital payment dollars while Google Wallet accounted for 4%, according to an article by The Guardian citing ITG Investment Research.
Merchants, Consumers and Apple Pay
Launched in the US almost a year ago, Apple Pay supports credit and debit cards from the three major payment networks, American Express, MasterCard and Visa, issued by 532 US banks. Since then, leading payment solution providers and terminal suppliers such as Adyen, Authorize.Net, Bank of America Merchant Services, Braintree, CyberSource, Chase Paymentech, First Data, Heartland Payment Systems, iMobile3, NCR, Oracle’s Micros, Stripe, TSYS and VeriFone, among others, are working to bring merchants in stores and in apps the ability to easily, securely and privately accept payments using Apple Pay.
For the sake of understanding the scale, figures provided by The Guardian on the number of Apple Pay accounts opened since the launch by the end of 2014 are worth sharing. JP Morgan Chase said that more than one million customers had added debit and credit cards to Apple’s service, while Bank of America has previously said 800,000 people had added 1.1M cards by the end of 2014—almost certainly making it the predominant mobile payment method in the US, displacing Google Wallet.
With a significant potential of the mobile payments industry and growth projections, Apple Pay still remains as one of the rare types of payments made at the POS. According to the results of the research on 100 US retailers reported by The Guardian, while some of the top US retailers said they use and like the mobile payment system, fewer than a quarter of the retailers said they accept Apple Pay, and nearly two-thirds said they would not be accepting it this year. Out of 100 companies surveyed, only four reported plans to accept Apple Pay next year.
There are always pros and cons associated with any product or service; Apple Pay is no exception. The data provided by Statistical Portal demonstrated that among mobile device owners, the main reasons to use Apple Pay are enhanced security, ease of use, rewards, discounts and wide acceptance by merchants. The percentage varies among different types of mobile devices. However, the range is between 32% and 59%, which is still high.
Along with the reasons to use Apple Pay, there are also reasons consumers are not favoring this payment solution. Among the most common reasons people didn’t try Apple Pay is the unfamiliarity with the way it works (surprising? 32%), satisfaction with the current payment method (30%) and concerns about security (19%). It is also interesting that 11% have never heard of Apple Pay before the survey.
Speaking of security, which is the third main concern among the reasons not to use Apple Pay, we may now move to the banking industry, where that particular consumer concern has its monetary effect. In 2014, 40% of all financial fraud was a credit card fraud with 10% of Americans being victims of that particular type. Worldwide, the total amount of credit card fraud in dollars was $5.55 billion. In fact, in 10% of cases, the initial point of contact for fraud was a phone.
Banks and Apple Pay
The pros and cons consumer may see in Apple Pay are not necessarily the same for banks. The aspects and sides of the solutions banks are dealing with and implementing are different from those for the user.
One of the issues banks are facing with Apple Pay is security. Recently this year, The Guardian published an article named Apple Pay: a new frontier for scammers. The wave of fraudulent transactions through Apple Pay was surprising for banks that are rushing to stem the tide as stated in the article. Apparently, criminals in the US started using Apple Pay to purchase high-value goods (especially from Apple) using stolen identities and credit card details. As quoted in the article, mobile payments specialist who is a consultant to US finance groups, Cherian Abraham, said, At this point, every issuer (bank) in Apple Pay has seen significant ongoing provisioning fraud via customer account takeover. He also added that in some cases, fraudsters are calling the (bank’s) call center themselves to ‘alert them to a trip out of town’ so that fraud rules looking for transaction anomalies (such as a customer living in California and transacting in Miami) do not trip up (as) fraudulent transactions.
Forbes highlighted another reason; the credit card issuers (important note: those are banks responsible for paying that charge) are paying about 0.15% of an Apple Pay purchase as a guarantee by Apple that a tokenized and biometrically verified transaction is good. That cost is difficult to pass down to their customers, so the incentive for the credit card companies to promote Apple Pay is not significant. They are doing it, but grudgingly, as stated in the article.
One of the international examples of banking resisting Apple Pay is Australia. According to TechRadar, the issue is that the US banks generally make about $1 of profit for every $100 spent, so sharing 15 cents isn't that big a deal. In Australia, banks only make about 50c per $100, so giving up 30% of their profit to Apple is a sticking point. What makes things even more problematic is the fact that the Reserve Bank in Australia wants to drive down that 50 cents per $100 down to about 30 cents, which would further erode their profits.
A recent survey conducted earlier in 2015 by CAN Capital on 1,125 small businesses called Adapting to Technology leads to the next reason which may not be as strongly related to banks, but still affects them as account holders and financial service providers. Only 13% of small businesses accept mobile payments (including Apple Pay). A significant number—87% of small businesses—are not even accepting any mobile payments. Low adoption of mobile payments technology among small businesses is one of the inhibitors for the banks to promote the service.
Low adoption rate is related not only to the small businesses. According to Statistical Portal, shortly after Apple Pay’s launch, Apple Pay was being used only by 4% of the surveyed.
Surprisingly, 60% of respondents do not use mobile payment applications. Even though figures of different sources may vary, they indicate a lower rate of adoption for the Apple Pay when compared to other options, especially the 16% of users drawn to banking payment applications.
However, particular statistics of the current condition are not a reason for banks to bail on Apple Pay and mobile payments options. According to the same source, millennials (39%), Gen X (33%), baby boomers (19%) and matures (7%) are very interested in in-person mobile payments via tapping a receiver instead of traditional cash or payment cards as of February 2015.
The implication here is that even though the adoption of a particular service (such as Apple Pay) may be slow and low, there is a clear interest stemming from millennials and Gen X to use newer services instead of traditional payment options.
One of the reasons along with those mentioned is the fact that Wal-Mart and 18 of the other top retailers surveyed by The Guardian are part of a coalition challenging Apple Pay with a mobile wallet called CurrentC. Retailers participating in CurrentC will not be allowed to accept any other mobile wallet until 2016, according to a senior official at MCX, the company operating CurrentC. For that reason alone, 19 of the NRF’s top 100 retailers will not be able to accept Apple Pay before the end of the year, although three of them said they plan to accept Apple Pay by early 2016.
Regardless of the downsides and low adoption pace of Apple Pay, according to the FT, the attraction for banks in partnering with Apple is the potential for more card transactions, earning them more revenue, even if they have to give up a small percentage to the tech group. Jeremy Nicholds, Executive Director of Mobile at Visa Europe, said, Contactless mobile phone payments are a driver of incremental transactions, creating extra volume of revenue for banks, of which a share is passing through to Apple.
Along with other mobile payments options, Apple Pay is confidently marching to the market, winning more and more payments to manage. Whether merchants or card issuers want it or not, mobile payments are here to stay and evolve to eliminate the flaws of existing options. As mentioned before, there are always pros and cons related to the product or service. Moreover, they are different depending on the side—whether you are a consumer, a retailer or a financial services provider.
Modern customers are eager to try new options and adopt mobile payments at a more or less fast pace. Therefore, industries catering to the needs of a customer have to adapt to the channels preferred by them. However, the emerging market of mobile payments has its own issues forced onto banking and merchants. Even if the banking industry has to deal with higher risks and costs associated with mobile payment solution flaws, in order to stay relevant and provide convenient services, issuers have to follow the customer. Love-hate relationships between payments solutions providers and the conservative banking industry will always remain the same until there is a consensus on solving issues related to mobile payments.