Apple Pay: What it needs, and what it could mean

Apple finally announced plans to join the mobile payments bandwagon yesterday, and it will bring some powerful weapons as it looks to kick-start a market that has yet to show many signs of life. Apple Pay will work at 220,000 merchant locations including massive nationwide chains such as Macy’s, McDonald’s, Subway and Whole Foods. The system is supported by many of the largest credit companies and banks in the U.S., and Apple has reportedly enticed several of them to lower their transaction fees. (Some might argue that integration with the Apple Watch might be a major differentiator, but I’m still skeptical of the smartwatch market for at least the near future.)

Additionally, the combination of Touch ID, a Secure Element chip and Device Account Numbers for authorization should help assuage concerns regarding security of NFC-based transactions. And Apple Pay will work on websites as well as third-party apps including OpenTable and Uber, both of which plan to integrate the offering. (It’s worth noting here that many businesses that accept online payments from consumers should be scrambling to support Apple Pay.)

But while mobile payments at the point of sale have long been commonplace in Japan, Apple is lumbering into a U.S. market where Google, PayPal and some other heavyweights have consistently failed to gain any real traction. If Apple Pay is truly going to pry the space open, it will need two other key components:

  • A reason to use it. The novelty of using a phone for transactions at the point of sale clearly isn’t sufficiently compelling on its own, and Apple has yet to convincingly explain why it will be more attractive than using credit cards or cash. Integration with the increasingly popular Passbook app is a plus, but Apple didn’t even mention its iBeacon system and seems utterly uninterested in using Apple Pay to drive ad revenues. So vendors will likely have to dangle discounts and other valuable offers to entice their customers to use Apple Pay.
  • Marketing and education. Many iPhone owners are tech-savvy early adopters who will eagerly experiment with Apple Pay, but most users will need a little hand-holding. So Apple and its partners will have to market the system aggressively, including in-store signage and instructions on how to use it. Just as importantly, on-floor salespeople and other personnel must not only know how to use it but also be able to answer customers’ questions.

A small – but important – step

Despite all the hype and high-profile brand partners, though, Apple Pay won’t be a hugely disruptive force soon. The system lies atop the traditional credit card infrastructure and simply adds another player to the transaction chain rather than replacing any of them. It will work only with the new, NFC-enabled iPhones, limiting the addressable user base, and as GigaOm’s Kevin Fitchard noted Apple’s list of point-of-sale doesn’t include ubiquitous retailers Best Buy, Target, Walmart, or any of the other members of the consortium known as MCX working to bring its own mobile payments system to users nationwide. So no, Apple Pay isn’t going to kill your wallet.

Meanwhile, the competition in mobile payments continues to heat up despite the market’s uncertain prospects. Twitter this week introduced a “Buy Button” that enables users to make online (but not proximity) purchases on mobile devices, MCX trotted out the brand name CurrentC, PayPal touted a new service that enables mobile users to check out and pay for goods with a single touch, and the carrier-backed Softcard (which recently rebranded from Isis) said it hopes to secure a partnership with Apple to make its offering iPhone-compatible next year. Apple has big advantages in mobile payments thanks the ideal demographic of iPhone owners and a massive library of iTunes accounts that already store users’ credit card information. Those are just two of the reasons I continue to believe Apple can succeed where so many others continue to fail. And if Apple Pay thrives it will only throw open the door for the competition.