October 2, 2014
Apple Pay has brought far-reaching implications for the global payments industry and people are talking now, more than ever before, about the poor payments environment (and infrastructure) that did not allow the payments industry to disrupt for so many years.
People are also talking about how Apple Pay has scared some other players out of the wallet and card markets. Some have even predicted that it has the potential to eliminate plastic card payments completely.
To assess the weight behind this statement, we need to evaluate the state of the payments industry before the arrival of Apple Pay:
To start with, it has been acknowledged globally that the adoption of NFC has been limited, to say the least. According to various estimates, not more than 5% of all merchant terminals in US are NFC enabled. Besides, a significant portion of the end users are not sure about the security with respect to NFC transactions. Indeed, for a big portion of smartphone users, tapping their phone at a merchant outlet to make a payment doesn’t sound like the safest thing to do.
Smartphone penetration itself should also be taken into account. While it is increasing at a significant pace, about one-third of mobile phone users are still not using smart phones. This puts a significant portion of the customer base outside the purview of mobile wallets or NFC payments.
Besides, it is also well acknowledged that Android phones have the majority share in the global smartphone market. Many of the smartphone users will also be reluctant to use smartphone apps for in-store purchase.
Also, while Apple is a strong brand, people might not be willing to trust them, when it comes to managing financial transactions. Customers, at least initially, will prefer banks and Paypal for mobile payments, as they trust them as facilitators of financial transactions.
There is no doubt that the Apple Pay announcement will increase the penetration of NFC terminals significantly in the months to come. The announcement coincides with the current phase of retailers’ investments in EMV terminals and this will encourage the merchants to include NFC in the upgrades. The security concerns will also be eased with Apple’s fingerprint identification and tokenization. But there is still a long way to go for Apple to be able to achieve economies of scale.
Apple has certainly brought credibility and hope to the NFC world, and the announcement justifies the faith shown by some players in NFC technology. Other NFC wallets like Google Wallet and Softcard (formerly Isis) will also see the ray of hope, and new entrants will build a highly competitive environment in the coming years. But it should also be kept in mind that NFC is a very old technology. It might just be overlooked in the favor of new and upcoming technologies that might take less time to achieve consumer acceptance!
For plastic cards, our view is that there is not much to fear. Digital payments will grow exponentially over the next few decades, but it will certainly not happen overnight.