Apple Pay: Living up to the Hype?

Explores network effects in Apple Pay and why adoption to date has been lower than expected.

For all the hype about Apple Pay, I for one have been pretty disappointed in the adoption curve thus far. To give you an idea, the most recent data shows that, despite Apple having 800M+ iTunes accounts with credit cards on file, the number of eligible Apple Pay users who have tried the service dropped from 15% to 13% during the period from March to June 2015. This suggests that as more people buy the iPhone 6, a lower percentage of them are actually using Apple Pay. But why?


The fact is that a third of iPhone 6 users cite satisfaction with their current payment methods as the primary reason they eschew Apple Pay, and another third simply don’t understand how the software works. A sizable 19% are concerned with security as well. Compounding the problem is the fact that Apple Pay isn’t yet widely accepted by merchants. Although hitting the one million retail location mark over the summer, most of these Apple Pay-compatible locations represent only a handful of major US retailers, with another contingent of major retailers trying to roll out a competing mobile wallet platform called CurrentC.


That in mind, an interesting counter-point is that a whopping 80% of Apple Watch users HAVE tried Apple Pay, and 96% of Watch users want to use it at more locations, with 62% saying they’d visit supporting retailers more often.


So, what’s wrong with Apple Pay’s value or operating model that is ultimately slowing adoption? I’ll consider a couple of hypotheses here:


  • Nothing’s really wrong – these things take time. A reasonable explanation is that people just haven’t caught on yet and therefore usage and adoption numbers are low. It’s compelling in the sense that we could just be out of the iPhone 6 “early adopter” phase, and the later adopters who are now buying 6’s are accepting the hardware technology, but have yet to explore the new software functionalities offered.


  • Merchants don’t have enough critical mass. The network effect of enabling and creating value for users could be suffering in the sense that many merchants either aren’t capable of, or unwilling to, accept Apple Pay. Merchants don’t capture value from Apple Pay, at least directly. An Apple Pay transaction is essentially the same as a credit card swipe for them, albeit in some cases at a very minimal added installation cost. Merchants are relying on either a) increased store traffic if they install or b) positioned differently, decreased store traffic if they don’t Perhaps neither reason is currently providing enough impetus, however this could be changing – of new payment terminals currently being shipped, 75% are equipped with NFC (near-field communication, the underlying technology enabling Apple Pay), indicating there could be more prevalence in the future.


  • Consumers don’t see enough value created. I reiterate the statistics mentioned above – a third of users are satisfied enough with their current payment method and see no reason to change, and another third simply don’t know how it works (and judging by their choices, don’t care enough to find out). The realistic ability to leave a physical wallet and credit card at home is undoubtedly a LONG way off, so in that sense it’s hard to justify using Apple Pay for many consumers. Furthermore, a cursory glance at blog reviews of Apple Pay shows that the consumer experience is sub-par. Many “power-users” say the feature only works for them 70-80% of the time, and when it doesn’t the store cashier has no idea how to fix the problem.

I think the Apple Watch figures actually support this hypothesis, as paying with one’s watch rather than cell phone could plausibly increase value enough to change the adoption curve significantly. (Alternatively, the Watch is simply still in early adopter phase with users more willing to try new features.) However, Apple isn’t oblivious to these possibilities – and in fact is actively combating them. In a somewhat uncharacteristic move, Apple chose open standards and APIs for Apple Pay – potentially allowing companies like Venmo to innovate with the technology and create direct network effects among users.


Ultimately, I think consumers will force merchants to adopt Apple Pay or be left behind, though I don’t have a sense for how long that could take. However, I don’t think it will happen from B2C Apple Pay on iPhone 6. Instead, we may actually see adoption driven by the Apple Watch and C2C transactions from partners like Venmo.


What do you think? Agree/disagree with these hypotheses? Are there other possible explanations?


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Student comments on Apple Pay: Living up to the Hype?

  1. Thanks for the interesting thoughts! I too wish that the user experience and adoption were both higher. Why do you think that Apple doesn’t take the Square approach and provide a hardware + software experience for Apple Pay? Presumably, they’d be able to create a much better (branded) experience for the user and the store. And they certainly have the money to give away this hardware for free to many of the merchants out there (which they could potentially recoup through transaction fees, as Square does).

    I think another potential reason is that many people are so conditioned to pulling out their purse/wallet when paying that they simply forget that Apple Pay is really an option. And as you mention, the experience isn’t that much better that it pulls enough people back time and time again. One thought on this: why not try harder to hook users back into the experience before they actually check out? I think the use of push notifications could go a long way here — if I were reminded when I walked into an Apple Pay enabled retailer that I could pay with Apple Pay there, then it would be more top of mind when I actually did check out.

    This is where the software + hardware play comes back as well … imagine the retail clerk knowing that the customer standing in front of them was Apple Pay enabled, and instead of asking for their credit card when checkout was complete they asked “Would you like to proceed with Apple Pay today?” In this scenario, the user’s proximity notified the store they were present, then the final, security-focused step would be to actually use the NFC tap to complete the purchase.

    Also to be considered is the number of other things that we have to continue carrying our wallets around for that probably aren’t going away soon. Driver’s license. Insurance card. Metro cards. Cash for the venues that still require that as a form of payment. Interestingly, in some European countries pushing for a cash-less society, the push is actually coming from the government. As long as we leave it up to the market to decide, we can’t completely eliminate cash (for tax & merchant fee incentive reasons).

    Hopefully one day…until then, I think it’s more likely that my iPhone will completely replace my keys before it completely replaces my wallet.

  2. I consulted for a mobile payments start-up for 2 years. We quickly learned that changing consumer behavior is hard especially when you have a product that requires a couple components to be in place to work. First and foremost, you need an NFC enabled payments terminal. Currently only ~50% of terminals are NFC enabled. Thus, even if a consumer manages to adopt the behavior to use their phone to pay – sometimes they simply can’t which is a deterrent to adoption. Beyond this, your phone has to be NFC enabled. The iPhone 6 was the first phone Apple made with NFC. In all honesty, I think that most consumers just have no idea that their phone has this functionality. You’d be amazed how I’ve stunned friends and family members using my Apple Pay in a taxi cab or at the drug store. As NFC technology becomes more pervasive (70% of terminals are supposed to enabled by 2017), I think we will start to see much more widespread adoption of Apple Pay.

    Source: Computer World

  3. You raise some great points in your post on the consumer adoption hurdles to Apple Pay. As you say, in a two-sided network like this, it is crucial to have a large number of merchants on your platform as well as consumers. I believe Apple Pay is facing significant hurdles in bringing merchants onboard and expanding into new countries because of how they have chosen to capture value. Apple has negotiated with U.S. banks to classify Apple Pay payments as “card present” which command lower interchange fees than “card not present” transactions that have a higher risk of fraud. In addition. Apple asks for a cut of the interchange fees (that usually go to the credit card companies and processors) believed to be at 15 cents per $100. Apple therefore has a vested interest to maintain the high swipe fees (typically 3%) that are charged to merchants unlike competitors like Square (2.7%) and LevelUp (1.95%). Apple faces challenges expanding internationally with its business model as interchange fees are often lower in countries other than the United States – it is currently facing pushback from Australian banks who do not want to pay a percentage of their interchange fees to Apple, even if the payment app is more secure than other modes. It will be interesting to see if and how Apple adapts its business model going forward.

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