Wait, when did we all start using Apple Pay?

 

Nothing broke on the day in 2014 Apple presented a new service called Apple Pay. If the quality of destruction was measured by the speed at which it happened, the flashy innovation from an industry titan would have been considered a disappointment. The idea it would make the wallet obsolete sounded ridiculous when the pace of Apple Pay adoption underperformed expectations. Wall Street analysts and iPhone users alike were sceptical for the next few years. The experience of using a credit card didn’t seem like a problem that required a solution from Apple.

It’s a bet that now appears to be paying off in a very strange way for our hit-driven economy: slowly. Apple has been picked apart for so many lessons it could start its own business school, but what the case of Apple Pay shows is that patience is a competitive edge for companies that know how to wield it.

Patience often sounds like a dirty word to our tech overlords – Steve Jobs wasn’t exactly Job – but only time can break certain habits of human behaviour. Trillions of dollars in market cap buys that kind of time. Not every company has the luxury of playing the long game, but it was an indulgence the world’s richest corporation could afford.

The percentage of iPhones with Apple Pay activated was 10 per cent in 2016 and 20 per cent in 2017, according to research from Loup Ventures, as most people seemed perfectly happy with their plastic cards and leather wallets. Adoption nearly doubled again in 2018. It hit 50 per cent by 2020. Now it’s around 75 per cent and inching closer to ubiquity.

Of course, not every account that gets activated remains in active use.

So what changed? We did. Apple’s executives remained confident about the future even when the present wasn’t so rosy because they could look at the rest of the world’s acceptance of contactless payments and see the US was lagging years behind.

It would take work to build the technological infrastructure for iPhone users to start using Apple Pay. It would also take waiting for the public to get comfortable with change. The company’s data suggested customers were pleased with Apple Pay once they tried it.

“People love Apple Pay,” Loup Ventures analyst Gene Munster said in a recent interview. Apple just needed more customers to use it. And its pestering worked. The company says 90 per cent of retailers across the US now take Apple Pay. The number accepting contactless payments when it was introduced was 3 per cent.

The more places that accept Apple Pay, the more value it provides, and the more people upload their credit and debit cards to the Wallet app. They can use Apple Pay to order stuff online, send money to friends and buy things in a physical store by holding it near a contactless reader. The fees Apple collects from banks whose cardholders use Apple Pay amount to less than 1 per cent of overall revenue, according to Munster’s estimates, but Apple generates so much profit from iPhone sales that even billions of dollars would be a rounding error. Apple Pay exists to improve the iPhone experience.

The activation rate of Apple Pay has begun to resemble the classic trajectory of tech adoption, which suggests what is now a tiny slice of Apple’s pie can get much bigger, along with the overall market for contactless payments. Such tap-to-pay spending accounts for nearly 20 per cent of Visa’s face-to-face transactions in the US, but the rates in big cities have climbed above 25 per cent, with the Bay Area at 30 per cent and New York 45 per cent. Apple Pay is also the top payment app for teenagers, according to investment firm Piper Sandler. As teens and cities go, so goes the nation.

Apple’s rhetoric was ahead of reality for most of Apple Pay’s existence. Chief executive Tim Cook once predicted 2015 would be “the year of Apple Pay”. In 2016, he declared it would kill cash. In 2018, he conceded mobile payments hadn’t taken off as he expected. “Does it matter if we get there in two years, three years, five years?” Apple senior vice-president Eddy Cue said five years ago. “Ultimately, no.”

Apple hasn’t confused patience with stubbornness. It moved quickly to discontinue the HomePod speaker three years after it hit the market, for example, and no amount of patience would have saved the iPod.

But in this case time was on Apple’s side. It said revenue from Apple Pay doubled in 2019, and Cook sounded triumphant early this year. “The growth of Apple Pay has just been stunning,” he said on a January earnings call.

Apple says the ultimate goal is giving users “the option to replace their physical wallet with a secure, private and easy to use mobile wallet”. Apple Pay has become the scaffolding for the company to build a much larger business. Apple dipped a toe in finance in 2019 by collaborating with Goldman Sachs on the Apple Card and plunged deeper by announcing a “buy now, pay later” option expected later this year.

Its ambitions have the attention of analysts, the concern of rivals and the scrutiny of regulators. European antitrust authorities recently accused the company of abusing its market power to favour Apple Pay; Apple has said it’s co-operating with the investigation.

Apple eventually wants your virtual wallet to contain everything from your driver’s licence to insurance cards, but the company has learned the process of replacing physical objects doesn’t happen overnight. It barely happens over decades.

“There’s a legitimate chicken-and-egg problem in payments,” said Bernstein analyst Harshita Rawat. “Consumer habits are very hard to change, and merchant acceptance takes many, many, many years.”

The consumer habit that will take longest to change also happens to be the one with the greatest rewards. The biggest pool of money in the US mobile payments business is the cash register, said Gerard du Toit, a Bain & Company partner, and Apple is narrowingly leading a crowded pack with the highest share of digital payments in physical stores.

But its rival isn’t just Cash App and PayPal or Google and Samsung. It’s the convenience of credit cards. And those are still winning.

Apple executives argue the enhanced security of Apple Pay helps make for a superior consumer experience, but there is not yet a compelling reason to pick a phone over plastic. Unlike scanning a mobile boarding pass, which took off in barely any time because it eliminated the hassle of printing, Apple Pay doesn’t reduce much friction.

I spent the past few weeks leaving cards in my pocket and tapping my phone wherever I could. But there are still plenty of places I couldn’t. Restaurants have been slow to embrace the technology required for Apple Pay. Gas stations have been reluctant to spend on upgrading their pumps. Walmart, which favours its own mobile payment option, remains the most notable holdout among retailers.

People would rather leave home without their wallets than without their phones, according to Bain surveys, but that fantasy is only realistic if mobile payments become as reliable as credit cards. Even if 90 per cent of merchants take Apple Pay, the remaining 10 per cent has an outsize effect.

It seems likely Apple will get there – maybe not immediately, but eventually.

Success for Apple Pay looks different now than eight years ago. Eight years from now, it will be unrecognisable again.

Apple can wait. It takes patience to reap the benefits of patience.

 

DOW JONES

Watchdog keeps an eye on market might of tech titan

By David Swan

Australians have been among the fastest to embrace contactless payment using debit and credit cards, compared with many other developed countries over the past decade. However, mirroring the US, we’ve been slower to embrace digital wallets – until now. Apple Pay is by far Australia’s dominant digital payments platform.

Research from the Commonwealth Bank shows as much as 80 per cent of customers’ digital transactions are made through iPhones and Apple Watches, as our use of digital wallets doubled in the 18 months to May 2021.

CBA is arguing for Apple to be regulated as a payment system, with Apple making tens of millions of dollars a year from fees from banks as a percentage of every transaction made through its products. The Australian Competition & Consumer Commission is looking into the tech giant’s dominance, but would not comment on the investigation.

Samsung Pay and Google Pay are two alternative apps in the market, available on Samsung and Android devices respectively, but pale in comparison to the popularity of Apple Pay locally.

Late last year CBA chief executive Matt Comyn publicly criticised Apple for locking down the tech that allows it to use tap-and-go machines. “When we see tap-and-pay at a POS terminal, 80 per cent is going through Apple Pay with multiple issuers but a single Apple Pay digital wallet. So Apple have a very significant market position,” he said. The bank has also said in a submission to the ACCC payments inquiry that the popularity of digital payments has exploded since the pandemic.

But Apple has said CBA exaggerated the tech giant’s market share, which was under 10 per cent of all credit and debit card payment across Australia. Apple did say there was a “high usage of Apple Pay among CBA customers (which) only demonstrates how strongly consumers prefer the convenience, security and privacy provided by Apple.”