The mobile payment market is one worth fighting for. According to the IDC, mobile-payment transactions will triple from $235 billion in 2013, to roughly $720 billion by 2017. NFC-enabled payments, a subset of mobile, are set to almost double this year to $8.2 billion, albeit a rounding error, to the projected $4.7 trillion US retail sales.
Digital mobile wallets, which allow point of sale (POS) payments, present a huge opportunity for the few likely winners. Yet, despite their best efforts, Google GOOG, PayPal EBAY, Amazon AMZN, Pay By Touch, Softcard (formerly Isis Wallet) and the MCX consortium have not crossed the chasm yet.
Now, Apple (AAPL) has entered the mobile payment market with Apple Pay, with advantages the others lack. It has 800 million credit cards on file with iTunes, a biometric one-touch ID, and the Apple Watch embedded with a Near Field Communications (NFC) reader to enable wireless transactions.
Apple Pay launched on October 20th with 220,000 doors, including large names like Staples SPLS, Macy’s and Bloomingdales M, Nordstrom JWN, Walgreen’s WAG, Nike NKE, McDonald’s MCD, Whole Foods WFM, Subway, and Disney DIS theme parks. As a result, Apple reported that it processed one million credit card transactions in its first 72 hours.
While Apple Pay offers an attractive combination of hardware and software, large-scale acceptance is probably years away. In the context of nine million US merchants, Apple Pay is not widely accepted yet, and faces challenges to its growth. Gartner reports that NFC comprises only 2.5% of mobile payments. Fewer than 10% of US retailers have installed NFC terminals, which cost $300 to $500 per unit. Some, notably Best Buy (BBY), had installed them, but “pulled the plug” because of the high cost and low usage.
Apple is hoping that the first quarter 2015 debut of the Apple Watch will turbocharge the adoption of Apple Pay. Its promotions will highlight how easy it will be to swipe the wrist over a sensor and complete a transaction. Apple also hopes sales of its new iPhone6 and iPhone6Plus will benefit since the Apple Watch must be tethered to a new iPhone.
Since Apple is not charging users, merchants, or developers for transactions, banks are footing the bill. Apple collects a 15 basis point fee for each Apple Pay transaction a fraction of the 2% average credit card processing cost for retail businesses and 2.5% for ecommerce. Apple is working with three major credit card companies: Visa V, MasterCard MA, and American Express AXP, as well as major banks: JP Morgan Chase JPM, Citigroup C, Wells Fargo WFC and Bank of America BAC. Apple hopes to take a recurring cut of the $30 billion that credit card issuers generate annually from interchange fees.
Apple Pay’s strongest value to credit cards issuers and banks may be security. Credit card fraud rose by 45% last year to $16 billion globally, and by 29% to $7.1 billion domestically. Verizon’s VZ 2014 Data Breach Report showed that 31% of retail credit card breaches occur at POS.. Apple Pay will tackle security with both NFC and biometrics, as well as “tokenization,” a technology that replaces cardholder account numbers and expiration dates with a unique series of numbers to validate identity.
Apple’s ambitions to transform payments will disrupt competitors, especially PayPal, the internet’s largest digital payment network. When Apple issued its initial list of “highly recommended” Apple Pay partner platforms, it included Authorize.Net, Chase Paymentech, CyberSource, First Data, TSYS, and Stripe. PayPal was notably absent, reportedly due to its partnership with Samsung (SSNLF) on a competing payment solution.
Apple faces a potentially powerful rival in MCX (Merchant Customer Exchange). The Walmart WMT led group of retailers is attempting to eliminate credit card fees with a QR code-based POS system called CurrentC. Long in development, MCX is attracting large retailers who use NFC, such as CVS CVS and Rite-Aid RAD, who have withdrawn their unofficial support for Apple’s platform and are rumored to be negotiating exclusive deals with MCX. In October, MCX CEO Dekkers Davidson clarified that “we’re agnostic about technology, [and] if we need we can pivot to NFC” should retailers prefer it.
In China, the news flow on payment systems is gathering momentum. In October, Apple announced that it is in talks with Alibaba (BABA) about a possible joint-venture with Alipay, supported by UnionPay. In November, without the participation of Google, UnionPay announced that it would subsidize device makers to include NFC, enabling yet a new payment system, Android Pay. In this case, China wants to see some competition in the mobile payment market.
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