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Apple Pay – Is the Revolution in Progress?

April 15, 2015
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You’d be hard pressed to find a product launch that generated as much buzz and excitement in the financial services industry as the announcement of Apple Pay™ last September. Heralded at the time by Apple CEO Tim Cook as the service that would replace the “fairly antiquated payment process” and “forever change the way all of us buy things”, Apple Pay set out to revolutionize the payments experience. 

Lofty goals, but not easy to dismiss as hyperbole when they’re coming from a company with a pretty good track record of introducing the masses to products and services they previously didn’t know they needed – think iPod®, iTunes®, iPhone and iPad®. So, five months after its October 20, 2014 launch, how has the revolution gone thus far? Let’s take a look.

The Apple effect lifts consumer awareness

Perhaps the most immediate impact of the Apple Pay announcement was bringing greater consumer awareness to mobile payments. While Apple did not invent the mobile wallet, mobile payments, NFC or tokenization, it did bring greater mainstream awareness to these concepts. In the eyes of the average consumer, Apple may as well have invented these capabilities. The Google search traffic around the time of the launch is a quantification of the buzz, with searches for “Apple Pay” reaching ten times that of “Google Wallet” at its peak.

While this could be perceived as bad news for Apple Pay competitors, it’s more likely good news for everyone with a vested interest in mobile payments. For example, Google Wallet transactions and new users dramatically increased in the month following the launch of Apple Pay, according to some reports.

What about actual usage of mobile payments?

Did all the buzz translate to increased usage of mobile payments? The initial findings from Raddon Financial Group’s most recent consumer research surveys suggest Apple Pay has had at least some influence on mobile payment adoption. Overall, 7 percent of consumers in the U.S. conducted an in-store mobile payment – up from 4 percent a year ago. Not surprisingly, millennials lead the way, with 15 percent using mobile payments at the point of sale.

Perhaps most telling are the shifts that have occurred in two areas. First, in-store mobile purchases are being made at locations beyond Starbucks and Dunkin’ Donuts. Of the 4 percent of consumers who made in-store mobile payments in March 2014, 74 percent purchased coffee, tea or snacks. Most likely, this can be attributed to the success of coffee retailers tying rewards programs to their mobile apps, allowing customers to preload funds to the app and then make their purchase by waving a QR code at the cash register – all while earning points toward that next free cup of joe. This may prove the way to a person’s heart – and mobile wallet – is to offer free coffee and donuts. Or more accurately, free perks and reward incentives can in fact influence consumer payments behavior.

It is noteworthy that one year later, among the 7 percent of consumers who made in-store mobile payments in February 2015, purchases expanded beyond coffee and tea. This is not to say fewer consumers are using the Starbucks app, but rather as the universe of mobile payers has grown, they are spreading their mobile payment wings to other merchants.

The second area where the influence of Apple Pay can clearly be seen is in mobile purchase activity by smartphone type. Of the 59 percent of U.S. consumers with a smartphone, 10 percent have an iPhone 6. Among iPhone 6 owners, nearly a third have made a mobile in-store purchase. Contrast this with those who have earlier versions of the iPhone without Apple Pay capabilities, where only 10 percent have made a mobile in-store purchase.

While Android™ users account for 51 percent of the smartphone market in the U.S., only 7 percent have made a mobile purchase. This is partly attributable to the fact that the Android platform is much more fragmented across a wider variety of devices with various degrees of functionality.

This data suggests Apple Pay has started to move the needle on both customer awareness and usage of mobile payments, but it also raises several additional questions:

  • Will consumers continue to use Apple Pay and other mobile payment options once the novelty wears off?
  • For those who have made an in-store purchase with their phone, was the experience better than other payment options?
  • What is their incentive to replace their previous way of paying for things? Was it faster, easier and more secure than swiping a credit or debit card?
  • Are they swayed by the notion of tokenization and the idea that a merchant would never have their card information to put them at risk of a data breach?
  • In short, will they use Apple Pay again?

Consumers will need to answer these questions as the channel continues to evolve. Card issuers, including the 64 banks and 82 credit unions now offering integration with Apple Pay, must remember that despite the recent growth, mobile payments are still a niche market. For all the hype, the 30 percent of iPhone 6 users who report using mobile payments represents less than 2 percent of the total U.S. population. As financial institutions are well aware, however, the perception of not being on the forefront of technology can be felt well beyond the early adopters. Financial institutions can’t risk becoming irrelevant in the eyes of consumers, particularly millennials.

Security remains top of mind

Card issuers should ensure their account verification procedures are secure enough to help prevent fraud issues like those experienced by a few early issuers. As with any new technology, the bad guys will seek to exploit the weakest point in the process. The Apple Pay purchase transaction itself appears to be more secure due to the tokenization process, where a unique number is used for each transaction in place of the actual card number.

As a result, the fraud sharks have focused their efforts further upstream, attempting to use stolen card information to create fraudulent Apple Pay accounts. One payments consultant cautioned fraud via this customer account takeover method has been as high as 6 percent for some of the early card issuers. This translated to a few sensationalist headlines by news outlets, which declared “fraud accounts for 6 percent of Apple Pay transactions, vs. 0.1% of transactions using a plastic card to swipe,” and put a bit of a chink in the Apple Pay security armor.

Regardless of whether or not the 6 percent figure is a fair representation of a sustained level of fraud, or more of a short-term incident experienced by a small number of early issuers, it is critical for new card issuers to understand the risks involved during the account authentication process and realize that like anything else, Apple Pay is not immune to fraud. It is incumbent upon card issuers and Apple to strengthen their authentication process to mitigate the fraud risk.

Assuming the fraud risk can be effectively managed, the success of Apple Pay and mobile payments will ultimately be decided by consumers. Apple may want a payments revolution, but consumers will still need a reason to support the cause. At this point it’s certainly more of an evolution than a revolution, but the good news for the industry is that now that mobile payments have the general public’s attention, they are demonstrating they may be willing to give this new payment method a shot.