A colleague attended a conference and reported that Chase is freaked out about Apple Pay, or at least seems to be. The Chase representative sees Apple Pay as a big threat to bank payment system products and was also worried about Apple Pay making it hard for banks to develop “relationships” with millennials, Chase is working on its own product called Chase Pay.
As you see below, our payments system expert Clive doesn’t buy it.
By Clive, an investment technology professional and Japanophile
As a brand-building exercise, Apple Pay is quite effective. All those small visual cues at EPoS machines and on store doorways are good advertising and quite inexpensive considering the reach. Apple is also now reporting declining revenues from its existing product set, so it is an idea straight out of any airport departure lounge management strategy book to look for new revenue streams.
But as a disruptive payment method or as some kind of magic entry mechanism to retail banking? No way. You might even, if you were not feeling especially charitable, describe as a bit desperate, and it certainly fits into a narrative that Apple is potentially now just another ex-growth tech company with a nose-bleed inducing valuation which will look at any vaguely synergistic place to splurge some of its cash pile in the hope of producing some much-needed top line number improvement. Whatever, Apple Pay faces numerous obstacles.
For a start, card tokenisation systems such as Apply Pay hide customer information from the merchant (this is an issue with all forms of tokenised card payments such as “contactless” NFC enabled cards so this is wider than just Apple Pay).
This is probably the main reason for slow merchant adoption of Apple Pay – as at June 2015 “less than one-fourth of the top retailers currently accept it, and almost two-thirds said they would not be accepting the payment method [in 2015]. Only four retailers said they plan to accept Apple Pay in ”.
In the U.S. Wal-Mart are holding out against any EPoS system that tokenises card data where they cannot see through the tokenisation back to capture the underlying customer-level information. Three of the big four UK supermarket chains are also doing likewise. If customer pressure forces the market to adopt tokenised EPoS systems near-universally, that could force the hands of the hold-outs like Wal-Mart into supporting services like Apple Pay. But then again, consumers simply are not that bothered at present. It is difficult to see what would start to change their minds.
And even of those who have used Apple Pay, they report that it did not offer anything which would keep them using it — of the relatively few who did use it (out of the eligible population of Apple phone owners), the majority didn’t use it again:
The Vast Majority Of iPhone6/6+ Users Aren’t Using Apple Pay
Though Apple is making gains in use and trial, the vast majority of those who could be using Apple Pay aren’t – 85 percent still have not made use of the app at all.
“Apple Pay is not yet salient. When it comes up, it has not registered with the [consumer] that they should use Apple Pay,” […]. “There’s something lacking there in the habit-forming action at checkout.”
By the numbers, the main reason – affirmed by 37 percent of respondents – is that they don’t have a reason to change; they like their current payment method. Almost a third – 31 percent – are not familiar with how the system works. Security is the third concern keeping people away from Apple Pay – 15 percent of respondents listed it as a serious concern, slightly more than the 11 percent who had simply never heard of Apple Pay before being given a survey on it. Inability also played a role among those who had never tried to pay the Apple way – 5 percent responded that they had tried to register with the service, but had been unable.”
Then we’ve got the even bigger load of questions about how Apple could somehow supplant the existing card schemes (VISA, MasterCard, AmEx etc.) to which the retort is “not in my lifetime it won’t”. Okay, perhaps not quite a lifetime, but it’s not going to happen inside of 10 years. For a start, the existing schemes are simply too well embedded. Everyone has a card from one of the established scheme providers (unless they really don’t want any sort of card at all). So all EPoS infrastructure must support the current schemes.
And the existing scheme providers offer a stable, mature product in terms of the sophistication of the silicon in the card side of the payment system and – through a variety of software vendors – excellent well-understood and supported platforms for processing card payments which the banks need to have in their back ends. If Apple wants to get the existing card schemes out of the equation, they are at least initially going to have to be backwards-compatible with them until such time as they can migrate enough legacy card users to a pure-Apple Pay solution. Banks won’t want to take a punt on untried Apple tech in their back end card payment processing. They might run a pure-Apple Pay system in parallel with the existing card schemes processing systems, but they won’t ditch the latter for the former.
It is however worth noting that, for payment systems, there is a divergence between the two big markets for non-cash payments, the U.S. and the EU. And this could result in a different fate for Apple Pay in the two geographical areas. The EU expressly forbids a card scheme (like VISA or MasterCard) acting as both a card scheme and a Merchant Services Provider (i.e. trying to lock in the retailers to their own specific EPoS hardware) or providing money transmission and banking services.
If the US competition regulators are similarly averse it is difficult to believe they’d look favourably on Apple trying to tie both end users and merchants into their own proprietary Apple Pay system.
But in the U.S. one of our sources has advised us that one of the large U.S. Too-Big-to-Fail banks seems to think that there is so much complexity and overcharging in the U.S. payment system that a service (such as Apple Pay) that cut out a lot of the providers could seriously undercut banks. And this is certainly a very valid point, a point which is much more valid in the U.S. than in the EU. In the U.S. the lack of effective enforcement of competition regulations has allowed gratuitous rent seekers to operate in the card payment systems with very few serious attempts to reign in the worst abuses. This means that the costs imposed on a per-transaction basis for non-cash, non-check payments are excessive, way beyond a fair return on investment.
If Apple wants to start something like “Apple Bank” then it could and it certainly has the capital to do it with. But the snag is, returning to our earlier point about patchy merchant adoption of Apple Pay and the reasons why merchants might not be about to relent into offering it, it would have to offer an existing card scheme payment product – if it made its retail account “Apple Pay only”, customers who had that account simply could not spend their money where they needed to. And the second it offered, say, an “Apple Bank VISA Card” it would be tantamount to admitting that Apple still needs one of the existing card schemes to offer a workable account product to retail customers.
So, no, we’re most likely going to be stuck with the existing card schemes for the foreseeable future and Apple Pay will have to as a result consign itself to piggy-backing off of them.
But one big unknown, and here is it tricky for old farts like us to get an accurate assessment of real millennial generation thinking (as opposed to what similarly old farts who would like to market to millennials and tell anyone who’ll listen what they think millennials want) is if, and to what degree, the under 20’s see legacy physical cards as hopelessly old hat.
Again, from our source, who is talking about the concerns of a large U.S. Too-Big-to-Fail bank:
They also seem worried about losing/degrading their relationship with millennials. Their big fear is millennials will regard cards as uncool and will only use phones. This may be consistent with lower credit card uptake among the young.
But our source then adds, quite rightly:
So why did they weaken the relationship by allowing them to deposit checks on their phones?
And, even more importantly:
However, they seem to miss that millennials have no money and won’t be buying houses before they are 40.
Given the high cost of entry to utilising the Apple Pay service (a recent iPhone is not a trivial expense), that alone would suggest it is destined to be a niche market. The more recent entry of Android Pay lowers the sticker shock of being able to adopt a non-traditional payment method as Android phones are a lot cheaper than Apple’s products. But that doesn’t help Apple Pay at all as Android Pay is a competitor service and will only fragment the market. And both of these suffer from the same constraint that some merchants are very loathed to provide any payment mechanism at all which is underpinned by card tokenisation.
Reader input would help our understanding of how millennials really relate to non-traditional payment services like Apple Pay, but based on our analysis, it bears more than passing resemblance to Myspace – a trendy tech fad that lacks the ability to distinguish itself through any particular Unique Selling Point.