What do early results say about Apple Pay?

March 2, 2015 11:31 AM

“The next evolution of membership is here,” says the announcer on a new TV commercial from American Express Co. The commercial travels through time, showing Jesse Owens, Jim Henson, John Cleese, Martin Scorsese, Jackie Chan, Jerry Seinfeld and Tina Fey whipping out their American Express cards in commercials from decades past.

But then an average Joe checking out in a store pulls out his

iPhone 6, which features a depiction of an American Express card on the screen along with a fingerprint. He holds the device near the checkout terminal, touches the home button on his smartphone (a button equipped with fingerprint recognition technology), the terminal beeps, he puts his phone back in his pocket, leaving the store with goods in hand.

As recently as last summer, the concept of using a smartphone instead of cash or plastic to pay for goods in stores was foreign to most U.S. consumers—even though a number of companies, including Google Inc. and Softcard, had been testing the concept for years and the technology is widely used in some other countries, such as Australia. Mobile payments simply were not on the radar for U.S. consumers.

That changed last fall, when Apple Inc. launched the iPhone 6 and iPhone 6 Plus, along with a new payments system called Apple Pay preinstalled in the Apple Passbook mobile wallet. (The phones can communicate with payment terminals at very short distances using Near Field Communication, or NFC, wireless networking technology.)

With the new iPhones’ rapid adoption, Apple has done what no other company had previously been able to do: Bring the concept of paying for goods in stores with a smartphone into the mainstream. More consumers than ever before now know what a mobile payment is and many know that anyone with a new iPhone can do it. Average consumers may not, however, realize that folks with some Android phones can do it, too, or that there are functional systems other than Apple Pay. But if Apple Pay catches on, it’s likely to spark interest in those systems as well.

Apple has lit a fire under the long-stagnant mobile payments industry, says Thad Peterson, senior analyst at Aite Group LLC, a payments consulting firm whose specialties include mobile payments.

“Mobile payments in general and Apple Pay in particular will assume an increasingly important role in the payments ecosystem,” he says. “As NFC-equipped payment terminals and NFC-equipped smartphones proliferate this year and beyond, the visibility of mobile payments and the volume of in-store mobile transactions will increase substantially. And an ‘Apple Pay for Android’ likely will emerge this year, which will further accelerate adoption and usage of mobile payments. Apple Pay is a big deal.”

But the question is: Since Apple Pay’s launch, is anyone using it? The answer is yes. Many iPhone 6 or iPhone 6 Plus owners have given it a try, and most of those say they’ll use it again, early results show. Further, most consumers who have used Apple Pay are happy with the new payment method, and find it very convenient, studies show.

What’s more, retailers that accept Apple Pay tell Internet Retailer that, so far, they’re also happy with the system. And many more chain retailers plan to begin accepting Apple Pay this year. To be sure, there are a great many iPhone 6 and 6 Plus users who have not tried it, for a variety of reasons. Still, it’s only been a little more than four months.

As of late January, about 750 banks and credit unions had signed on to offer Apple Pay to their customers, Apple CEO Tim Cook said in a Jan. 27 earnings call with analysts, before noting that in just three months after launch Apple Pay made up more than $2 out of $3 spent on purchases using contactless payments across the three major U.S. card networks. “In merchants who already accept Apple Pay, the rates are even higher,” he said. For example, Apple Pay represents nearly 80% of its mobile payments transactions at Panera Bread, he said, and since Whole Foods Market Inc. added Apple Pay, the grocer has seen its mobile payments increase more than 400%.

Research broker Investment Technology Group Inc., which recently conducted its own Apple Pay study, finds the payment system is off to a good start.

Roughly 60% of new Apple Pay customers used Apple Pay on multiple days through November, while just 20% of new PayPal customers used the PayPal mobile payments service on multiple days during the same period, the ITG study shows. (PayPal is a business unit of eBay Inc., though eBay plans to spin off PayPal later this year.) Apple Pay customers used the service roughly 1.4 times per week and used Apple Pay at the same merchant for future transactions roughly 66% of the time, ITG finds. Upon adoption of Apple Pay, the average consumer uses the service for approximately 5.3% of all future card transactions and 2.3% of all future card dollars spent, the ITG data shows.

“We believe Apple Pay has the ability to significantly transform the mobile payments space,” says Steven Weinstein, managing director and senior Internet analyst at ITG.

Even though Apple Pay held 1.7% share of digital payment transactions and 1.0% share of digital payment dollars in November, according to ITG data, Weinstein believes Apple Pay could pose a major threat to PayPal in the future. “Apple Pay, with its streamlined approach to both offline and online purchases, offers a compelling mobile payments solution,” he says. “Given PayPal’s infrastructure barriers—a challenging relationship with payment counterparties and a lack of biometric capability—it would be difficult for the company to adapt to match Apple’s ease of payment.”

Weinstein references online purchases because Apple Pay is not just an in-store play. Apple Pay also can be used to pay in participating mobile commerce apps. Retailers can integrate Apple Pay into their Apple iOS mobile apps (iPhone and iPad), which then present Apple device users a Buy with Apple Pay button that enables them to check out with a single touch. This is a major development for mobile commerce because complicated checkout has always been a hurdle to consumers actually making purchases on their phones. Mobile commerce experts say Apple likely will turn Apple Pay into a PayPal-like checkout system for online payments that will extend beyond mobile apps to all web sites.

Back in-store, 9.1% of 449 iPhone 6 and iPhone 6 Plus owners surveyed who shopped at Apple Pay-enabled stores on Thanksgiving weekend last year (40 days after launch) completed a transaction in-store using Apple Pay, according to a study by research firm InfoScout. Most report being pleased with the experience (see survey results on page 44).

Retailers are the other side of the Apple Pay story. In order for consumers to use Apple Pay, retailers have to accept it. Apple launched Apple Pay with a number of high-profile retail and restaurant chains, including Aéropostale Inc., Petco Animal Supplies Inc., and Walgreen Co.

More chains have since joined the fold. And by year’s end, 38% of large U.S. chain retailers plan to accept Apple Pay, according to a report from Boston Retail Partners, a retail technology consulting firm that surveyed merchants. And 45% of retailers say they will have NFC-enabled point-of-sale terminals in place by October.

October 2015 is very significant to the future of Apple Pay and all NFC-enabled mobile payments because that is the deadline in the United States for what’s known as the EMV mandate. EMV stands for Europay, MasterCard and Visa. EMV-compliant cards and payment terminals use embedded chips as part of the data exchange process. Long story short: Compared with conventional magnetic-stripe cards, chip-based payment cards are more secure and better able to prevent fraud (see story, page 18).

But retailers need terminals that can read EMV-compliant cards. To push merchants to invest in new devices, Visa and MasterCard will change their rules in October so that a retailer that does not have chip-card-reading terminals will bear the responsibility for fraud when a consumer pays with a card that has a chip as well as a magnetic stripe—even if the card-issuing bank approves the transaction.

That mandate, which retailers have been aware of for four years, likely means many major retail chains will have EMV-compliant terminals by fall. And, fortunately for Apple Pay and similar mobile payments schemes, most EMV-compliant terminals also come equipped with NFC technology; and most retailers replacing old terminals in advance of the EMV mandate are making sure, the terminals can also accept NFC, mobile payments experts say.

“Consumers then will have to learn how to pay with chip-and-signature or chip-and-PIN solutions, so this will disrupt ingrained behaviors,” says Van L. Baker, research vice president, mobility, at Gartner Inc. “This disruption may open the door for mobile payments to get more traction with consumers.”

Retailers and restaurants accepting Apple Pay today are closely guarding hard data related to the payments system. (“Early days” is the common refrain.) But many report being happy with the results and say that Apple Pay use has been trending up. Some even let an actual hard number slip out now and then.

“Since Apple Pay went live in late October in 300 of our 800 stores, we’ve seen a 548% increase in NFC transactions—that growth is almost exclusively coming from Apple Pay,” says Simon Nankervis, executive vice president of global communication business at American Eagle Outfitters Inc., which also accepts the NFC-enabled Google Wallet. “Every month we’ve seen the number of Apple Pay transactions go up.”

Nankervis says the retailer has not seen a marked shift in average order value or items per transaction for customers who pay in-store with Apple Pay. “When we first went live with Apple Pay, the transaction and basket sizes actually were smaller than average,” he says. “But what we saw was as people got comfortable with the new payments method, those sizes quickly went back to normal. First-time and second-time users were excited and perhaps experimenting. After that it became no different from paying with a plastic card.”

Whole Foods says it completed 150,000 Apple Pay transactions in the first 17 days following the launch of the payment method. That puts Apple Pay transactions at nearly 1% of total sales during the period, experts say.

Similarly, Walgreen Co., which has offered Apple Pay at all 8,200 of its Walgreens and Duane Reade locations since launch, says the number of NFC transactions at Walgreens has doubled since Apple Pay’s launch. Walgreens also accepts Google Wallet and Softcard NFC mobile payments.

“We have seen continued growth in the use of Apple Pay,” says Deepika Pandey, the retailer’s group vice president of digital marketing and customer experience. “Customer feedback is overwhelmingly positive. They are pleased we are offering a choice around mobile payments options.”

Pandey adds that while Walgreens had to make associates aware Apple Pay was coming, the system didn’t require formal training.

“With Apple Pay there is very little the cashier has to do—it is more about the consumer-facing side,” she says.

Sephora USA Inc. launched Apple Pay in its Sephora to Go mobile app for in-app purchases on October 30, followed by five store locations in San Francisco and one in New York on November 21. The chain retailer will finish rolling out Apple Pay to all its 370 stores by the end of March. Apple Pay is the first mobile payments system Sephora accepts.

“The percentage of Apple Pay transactions is increasing, and we are happy to have the payment option for our clients,” says Bridget Dolan, the retailer’s vice president of digital marketing. The system has proved lucrative; the retailer has found that Apple Pay transactions are, on average, 25% larger than transactions paid for using other payment forms.

Sephora requires cashiers to take a simple training program because Apple designed the register functionality for Apple Pay to be intuitive, Dolan says.

Though not a retailer, American Express was a launch partner with Apple Pay, and the credit card company too says it is encouraged by the results to date. Early data shows that most American Express cardholders who use Apple Pay once, use it again. “That shows it’s promising,” says Tony Prentice, vice president of product development at American Express.

So what’s the outlook for Apple Pay based on the early results? And will Apple Pay drive increased use of mobile payments overall? The retailers in the trenches and mobile payments experts agree that Apple seems to be the long-awaited catalyst that will push wider adoption of mobile payments, and that Apple itself is in an excellent position to be the leader, especially since the mobile giant timed the launch of Apple Pay to coincide with this year’s EMV mandate.

But few are providing hard numbers on how many consumers are paying with Apple Pay. And they caution that mobile payments in the United States will likely take time to gain traction.

“Until a few months ago, paying with a smartphone at the register seemed no easier than swiping a credit card,” says Dolan of Sephora. “But with the NFC experience plus Apple’s Touch ID plus the ease of Apple Passbook, the entire experience is slicker and easier. Many consumers shop with their smartphones in their hand. In our stores, clients use them to take selfies and text looks to friends, scan products, and check their Sephora wish lists and past purchases. But their wallets are buried in their handbags. Apple Pay fixes that for them.”

Walgreens expects use and volume of mobile payments to continue to grow and says Apple Pay will be a big part of that growth.

“It’s hard to say when mobile payments will hit 20% of in-store transactions, for example,” says Pandey of Walgreens. “But the fact that a big player like Apple has gotten into mobile payments is exactly what the industry needs. And there will be a halo effect that benefits other players.”

However, some experts say convenience is not enough to change the longstanding behavior of consumers whipping out credit cards.

“No one is in a better position to influence behavior at the point of sale than the merchant—banks and Apple and Google can sign people up, but for most consumers their payment behavior is almost automatic,” says Rick Oglesby, senior analyst at Double Diamond Group LLC, a payments consulting firm whose specialties include mobile payments. “Consumers need to be specifically prompted at the point of sale to change that behavior. Convenience isn’t enough.”

Further, there needs to be enough value in mobile payments for merchants that merchants actively promote them, Oglesby says.

“Whether it’s via offers, embedded loyalty programs or something else, merchants need to be onboard if mobile payments are going to get big,” he says. “Support so far doesn’t include MCX merchants.”

Speaking of value for merchants. MCX, or Merchant Customer Exchange, is an as-yet untested mobile payments system being developed and promoted by merchants as opposed to banks or technology firms. The goal is to reduce the credit and debit card fees merchants pay card-issuing banks. MCX includes such major players as Wal-Mart Stores Inc., Best Buy Co. Inc., Sears Holdings Corp., Gap Inc. and 7-Eleven Inc. Needless to say, if mobile payments are to succeed, consumers will need to be able to use their smartphones at Wal-Mart and 7-Eleven. The current MCX payment methodology—an app dubbed CurrentC that relies on scanning QR codes rather than using NFC—has been knocked by critics as too complicated for consumers. But the backers have invested little in the system and could easily switch to NFC.

Another possible player on the horizon has yet to congeal. There are rumors that Google will acquire Softcard and combine its Google Wallet with the Softcard mobile payments system.

“If Google buys Softcard then it likely will promote mobile payments aggressively and this will likely benefit both Google and Apple in the mobile payments market,” says Gartner’s Baker.

Mobile payments will take time to emerge, with the real opportunity in the United States tied to the looming EMV mandate, which is the change in banking practices where merchants must assume responsibility for fraud, Baker says.

Nankervis at American Eagle Outfitters agrees with that prediction, but adds that Apple is going to have a lot to do with the success of mobile payments in the United States, and already has.

“Apple launching Apple Pay is a significant leap forward in technology, occurring right when we as retailers must assume liability for fraudulent transactions,” Nankervis says. “As a result, Apple will be a significant player as mobile payments evolve. Apple is at the forefront of what is happening in payments and its timing is impeccable.”
@IRmcommerce | @MobileInsiderBS




Top Solution Providers