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November 20, 2014

FBIC Global publication: apple pay could finally ignite the tap-and-pay revolution

Apple Pay Could Finally Ignite the Tap-and-Pay Revolution

 

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r – H e a d G l o b a l R e t a i l R e s e a r c h a n d I n t e l l i g e n c e F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m N e w Y o r k : 6 4 6 . 8 3 9 . 7 0 1 7

November 20, 2014

 

  1

November 20, 2014

FBIC Global publication: apple pay could finally ignite the tap-and-pay revolution

Apple Pay Could Finally Ignite the Tap-and-Pay Revolution On   October   20,   Apple   launched   its   Apple   Pay   network   with   great   fanfare   and   typical  bravado—implying  that   it  was  the  pioneer   in  mobile  payments.  That  claim  was   likely  a  big   surprise   to   the   real   e-‐payment   forerunners:  Google  Wallet,  which  was   launched   in  2011  but  has  not  achieved  commercial  nor  economic  success.  There  are  also  SoftWallet,  a  smartphone  app  that  manages  discount  coupons  and  frequent-‐customer  information,  and  LoopPay,  which  claims  to  be  the  most  accepted  mobile  wallet  on  the  planet.  Other  countries   have   simple   but   convenient   payment   methods.   For   example,   Hong   Kong  consumers  can  pay  for  transportation  and  small  purchases  with  the  Octopus  RFID  (radio-‐frequency   identification)   card,   which   can   be   refilled   at   convenience   stores,   vending  machines,  or  online.  

Initial  signs  point  to  Apple  Pay  gaining  traction  with  consumers.    There  were  more  than  one  million  activations  within  the  first  72  hours.    Whole  Foods  recorded  150,000  Apple  Pay  transactions  at  384  stores  in  the  first  three  weeks  after  the  launch.    During  the  same  period,  McDonald’s  said  that  more  than  half  of  the  mobile  transactions  at  its  14,000  US  restaurants  were  processed  via  Apply  Pay.    Toys  “R”  Us  said  that  the  number  of  mobile  payments  had  increased  at  its  stores.  

 

 

 

 

 

 

 

 

 

 

 

The  most  formidable  competitor  to  Apple  Pay  at  present  appears  to  be  CurrentC,  which  was   founded   in   2012   by   the   Merchant   Customer   Exchange   (MCX),   a   consortium   of  retailers,   including  Walmart,  Target,  CVS,  Rite  Aid  and  BestBuy,  and   is  currently   in  pilot  testing  for   launch  in  2015.    CurrentC’s  contract  demands  that  members  reject  all  other  electronic  payment  methods,  and  CVS  and  Rite  Aid  recently  blocked  the  use  of  Apple  Pay  on   their  payment   terminals,  despite  having  compatible  hardware.  A  huge  drawback  of  CurrentC  appears  to  be  usability,  since  making  a  payment  involves  scanning  a  QR  (quick  response)   barcode.   More   important,   CurrentC   does   not   work   with   credit   cards,   but  rather   only  with   prepaid   store   cards   and   debit   cards   tied   to   the   user’s   bank   account.    Interestingly,  the  Target  app  for  iOS  supports  Apple  Pay  while  its  retail  stores  do  not.  

 

 

 

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November 20, 2014

FBIC Global publication: apple pay could finally ignite the tap-and-pay revolution

 

     

Locations   220,000   110,000  

Key  Merchants  

34  including:  Macy’s,  McDonald’s,  Radio  Shack,  Staples  (to  come),  Starbuck’s  (to  come),  Subway,  Whole  Foods,  Texaco,  Walgreens  (not  exclusive)  

58  including:  7-‐11,  Best  Buy,  Circle-‐K,  CVS,  Dunkin’  Donuts,  ExxonMobil,  Kohl’s,  Lowe’s,  Rite  Aid,  Sears,  Target,  Walmart,  Wendy’s  (exclusive)  

Technology   NFC  chip  +  fingerprint  sensor   QR  codes  

Ease  of  Use   Tap  and  pay  Scan  a  QR  code  and  enter  a  PIN  code  

Payment  Method   Credit  and  debit  cards  Checking  accounts  and  merchant  accounts  and  gift  cards  

Security  Method   Tokenization   Tokenization  Current  Status   In  operation   Pilot  testing  for  2015  launch  Loyalty  Programs   Under  development   Yes  

 

We  think  that  only  diehard  Apple  fans  will  shun  the  retailers  that  block  Apple  Pay,  since  consumers  can  always  pay  with  cash  and  debit-‐  and  credit  cards  as  before.  Moreover,  CurrentC’s  management   has   publicly   stated   that   the   current   period   of   exclusivity  will  only   persist   during   the   initial   launch   period.  We   think   retailers   will   want   to   allow   all  major  payment  options,  including  Apple  Pay  if  it  becomes  widely  adopted.  The  payment  industry   was   recently   shaken   by   a   recent   hacking   attempt   on   MCX’s   beta   servers,  however,   the  hackers  only  obtained  e-‐mail  addresses  and  no  customer   information  or  credit-‐card  data.  

What’s  compelling  about  Apple  Pay  is  its  use  of  a  secure  device  number  called  a  token  that   is   stored   in   the   “Secure   Element”   near-‐field   controller   (NFC)   chip   located   inside  recent-‐model  iPhones,  iPads,  and  the  upcoming  Apple  Watch.    When  the  user  registers  his  or  her  credit  cards,  a  token  service  provider  provides  Apple  with  a  random  number  to   represent   the  account,  which   is   stored   inside   the   secure   chip.   To   raise   the   security  level  even  further,  the  iDevice’s  fingerprint  sensor  also  verifies  the  user’s  fingerprint  to  authorize   the   transaction.     The   brilliance   of   Apple   Pay   is   in   its   simplicity:   when   the  device  is  within  range  of  a  store’s  NFC  sensor,  up  pops  a  graphic  of  registered  credit  or  debit  cards,  the  consumer  puts  a  finger  on  the  sensor,  and  ding!,  the  payment  has  been  made.  

Time   and   again,   Apple   has   launched   what   seemed   to   be   a   new   technology   that   was  ultimately  co-‐opted  and  copied  by  rivals  and  ultimately  became  mainstream.  Such  was  the  case  with  the  user   interfaces  of   its  smartphones  and  tablets.  Apple  Pay  could  very  likely  track  this  same  trajectory.  Where  Apple  leads,  others  are  likely  to  follow.  There  is  even  evidence  that  since  the  launch  of  Apple  Pay,  usage  of  competing  payment  systems  such  as  Google  Wallet  has  increased,  indicating  growing  interest  in  mobile  payments  in  general.    To  that  extent,  it  looks  as  though  tap-‐and-‐pay’s  day  has  come.  But  while  Apple  Pay   could   ignite   the   mobile   payment   revolution,   other   companies   may   be   the   main  beneficiary.    

 

 

  3

November 20, 2014

FBIC Global publication: apple pay could finally ignite the tap-and-pay revolution

 

   APPLE  PAY—PROS                                                WINNING  OVER  CONSUMERS  

• The   number-‐one   selling   point   of   Apple   Pay   is   its   simplicity.     Once   the   card   has  been  registered  for  Apple  Pay,  all  the  paying  customer  has  to  do  is  place  the  phone  or  tablet  near  the  payment  terminal,  put  a  finger  on  the  sensor,  and  the  transaction  is  completed  with  positive  audio  feedback.    Thus,  making  a  payment  is   immersive,  enjoyable,  and  nearly  instantaneous.  

• Apple’s   fanatically   loyal   user   base   gives   Apple   Pay   a   head-‐start   in   gaining  acceptance  over  other  networks.    

• Apple   Pay   piggybacks   on   the   infrastructure   that   the   credit-‐card   companies   and  predecessors   like   Google   Wallet   have   already   deployed   while   building   a   buzz  around  the  idea  of  tap-‐and-‐pay.  Many  of  the  220,000  participating  retail  stores  and  restaurants   (McDonald’s,  Walgreens,  Macy’s   and  Whole   Foods,   for   instance)   that  Apple   boasted   were   already   on   board   to   accept   Apple   Pay   have   been   accepting  contactless  payments  for  years.  

                                                                     WINNING  OVER  RETAILERS  

 

 

 

 

 

 

 

 

 

 

 

• Success  will  also  hinge  on  getting  merchants  and  banks  to  accept  Apple  Pay.  The  system  that  offers  the  strongest  protection  against  customer-‐identify  theft  will  win  the  day,  since  neither  the  device  nor  the  retailer  possess  credit-‐card  numbers.      

• There  is  also  a  coming  major  technology  transition  in  payments  that  could  play  to  Apple   Pay’s   favor,   at   least   as   it   applies   to   its   US   business.   By   October   2015,   US  merchants   will   be   required   to   adopt   the   EMV   (Europay,   MasterCard,   and   Visa)  system,   which   uses   a   “smart”   chip   on   the   card   to   store   the   owner’s   payment  information.    Since  a  chip  is  more  difficult  to  duplicate  than  a  magnetic  stripe,  the  EMV  system  is  more  secure  (though  definitely  not  hack-‐proof).      Many  retailers  will  have  to  upgrade  anyway,  so  it  makes  sense  to  upgrade  to  a  payment  terminal  that  also  accepts  electronic  payments.  

• A  year   from  now,  merchants   that  don’t  upgrade  their   terminals  will  be  made  to  bear   the   responsibility   for   fraud   if   they  are  not  equipped  with  EMV  card  readers,  which  is  a  major  motivation  to  upgrade.    

 

  4

November 20, 2014

FBIC Global publication: apple pay could finally ignite the tap-and-pay revolution

 

STUFF  FOR  TECHIES  

• EMV  is  already  the  widely  supported  standard  in  Europe,  Canada  and  many  other  countries.  The  inconvenience  of  having  to  enter  a  PIN  code  could  encourage  more  Americans  to  use  their  phones  to  pay,  no  matter  what  the  payment  system.  Having  to  enter   a  PIN   code   could   take  a   second  or   two   longer   than  a  quick   tap-‐and-‐pay.  That   extra   inconvenience   might   be   enough   to   convince   consumers   to   overcome  their  historical  reluctance  to  pay  by  phone.  

• The   high   level   of   security   of   the   Apple   Pay   solution   is   also   very   compelling.  Tokenization  renders   the  underlying  data  useless   in   the  event  of  a  breach.  Even   if  hackers  are  able  to  hack  their  way  into  a  payment  server,  the  data  that  they  steal  will   not   be   useful   to   them.   However,   the   e-‐payment   industry   is   wary   about   the  security   of   NFC-‐based   payments.   It’s   too   early   to   say   whether   tokenization   will  survive  sophisticated  hack  attacks  or  not.    

 

   APPLE  PAY—CONS  

• The  limiting  factor  to  the  spread  of  Apple  Pay  is  that  only  newer-‐model  iPhones,  iPads   and   Apple   Watches   have   the   necessary   NFC   chip,   in   addition   to   Apple’s  minority   smartphone  market   share   itself.   According   to   industry   researcher  Kantar  Worldpanel   ComTech,   iOS   shipments   accounted   for   32.6%   of   smartphone  shipments   in   the   US,   down   from   35.9%   a   year   ago.     These   most   recent   figures  include   very   little   contribution   from   the   iPhone   6,   which   began   shipping   on  September   19,   late   in   the   third   quarter.     A   Taiwan-‐based   analyst   with   Deutsche  Bank   estimates   that   Apple   will   manufacture   65-‐70   million   iPhones   in   the   fourth  quarter   of   2014,   and   China-‐based   KGI   estimates   that   Apple   will   ship   about   10.9  million  iPad  Air  2  units  and  2.5  million  Mini  3  units  in  Q4,  all  of  which  have  the  NFC  chip  necessary  to  use  Apple  Pay.  

• Another  hindrance  to  adoption  is  the  still  relatively  small  network  of  NFC-‐enabled  merchants.  The  Wall  Street  Journal  notes  that  NFC  readers  are  used  by  fewer  than  10%  of  merchants,  especially  smaller  Mom  &  Pop  stores  that  have  held  off  buying  new  terminals.