November 10th, 2014 by

Is Apple Pay Designed to Fail (consumers)?


With a nod to Bill Simons’ recent reminder that click-bait works, the answer is no.  But that doesn’t mean that Apple Pay is designed to deliver discernable benefits to consumers any time soon.  

The payment industry, even confining our view to the one country in which Apple Pay is officially operating, is vast.  The numbers are so big that the key metrics—cards, cardholders, merchant locations, transaction counts and volume—must be seen to be believed:

Screen Shot 2014-11-11 at 6.18.21 AM

Source: Reported in or based on, Nilson #1034 (February 2014) 

Apple Pay has been touted as a huge success, but against the vast expanse of the U.S. payment industry, this success is a rounding error.  In the first 72 hours after the service was released to the public, iPhone 6 users activated 1,000,000 cards, and per Apple, those cards can be used at the physical point of sale in 220,000 locations.  Measured against the rate at which other NFC wallets launched, that’s a good start, but these numbers translate to less than .1% of total cards in force and 2.2% of merchant locations.  Apple Pay will remain a rounding error even when it crosses the 50 million mark.  At that point, whenever it comes, Apple Pay will account for less than .5% of the total number of cards in force at the end of 2013.

The experience of using Apple Pay is also un-Apple like in at least one respect.  As Apple reminds us whenever it releases a new version of its flagship product, the iPhone represents the epitome of technology and design.  Each new edition not only surpasses all prior versions in performance metrics but also the degree to which various components work together.  In some ways, Apple’s continued success is proof that packaging—literally the way the components fit together—matters. 

Relative to the experience of using an Apple product generally, Apple Pay feels rough around the edges.  Some aspects of the service are beautifully executed.  The process of loading a card into the product is easy.  Of course, Apple has been allowing users to associate payment card numbers with their Apple IDs for years, and the product reflects the benefit of that experience.  Likewise, in-app purchases work quite well.  Again, Apple has years of experience in managing purchases both in its apps as well as the apps of others.

The experience of using the phone at the point of sale is much less elegant.  My daughter has the only iPhone in the family, and when Apple released its payment service into the wild, I gave her a homework assignment.  I asked her to load a debit card into Apple Pay, to use the card at Walgreen’s, and if prompted by the terminal to make a choice between “credit” and “debit,” to select “debit.”  I was curious whether after Apple Pay identified her as the person authorized to use the phone and the associated card through the finger pressed firmly on the device’s home button whether the terminal would prompt her to enter a PIN.  And, sure enough, it did.  (For the signature debit version of this experience, click here.)

This points to an enigmatic quality of Apple Pay at least relative to the other services that we associate with the company.  With iTunes, the App Store, and even the Apple Store, Apple controls the user experience from beginning to end.  Although those services interact with services that Apple doesn’t control, e.g., obtaining a credit authorization, Apple provides the only window into the experience.  

The experience of using Apple Pay at the point of sale is different.  When a consumer uses Apple Pay at the point of sale, they trigger a process that no single party controls.  What happens once the information is transmitted by Apple Pay to the terminal is a function of countless decisions made by the merchant, the merchant’s processor, the merchant’s bank, the card networks, the consumer’s bank, and potentially others as well (e.g., the government, which gets at least some credit for the fact that my daughter was prompted to identity herself to the terminal after having been required to identify herself to her iPhone).  In this regard, Apple Pay seems less like a finished product than a large-scale pilot.  

But Apple can and, one assumes, will enhance the product based on what it learns from its use.  The card networks have long relied on claims of increased fraud to justify the imposition of rules that benefit them and their issuers at the expense of card not present merchants and others.  Indeed, the entire design of Apple Pay reflects the distinctions drawn by the card networks between card present transactions and card not present transactions.  Although somewhat cumbersome, it gives Apple the ability to test the claims that support these distinctions, e.g., (a) whether there is any difference in unauthorized use between physical POS transactions using Apple Pay v. an in-app payments, and (b) whether there is any difference in unauthorized use between Apple payments (physical POS or in-app) relative to the millions of transactions initiated with older versions of iPhones. 

There is no telling what Apple will do with what it learns.  Apple has demonstrated an appetite for taking on oligopolies.  Some of those interactions appear to have gone well for consumers (e.g., Apple’s success in wrangling terms from suppliers of components for its products).  In other instances, those interactions have turned out poorly (e.g., the eBook experience).  The early signals here point both ways.  One the one hand, Apple has succeeded in getting financial institutions to subsidize Apple’s foray into payments.  On the other hand, Apple has, to this point, refused to admit payment companies more intent on disrupting established ways of doing business (e.g., Discover and PayPal).  And the executive responsible for managing Apple Pay, Eddie Cue, is the same person responsible for iBooks.  

Nevertheless, I am optimistic that in this instance, Apple will wrangle the oligopoly rather the other way around.  But this suggests that I should temper the conclusion that I offered at the beginning.  Rather than a flat “no,” I should probably say “I hope not.”

Tom Brown

Tom Brown

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