Some are arguing that Apple Pay should have launched in Canada first. While I don’t think that would have gotten Apple the kind of splash they were looking for, the idea has a lot of merit in both a practical and consumer sense. In fact, they could also do very well in Poland and the U.K., not to mention many other places around the world. I recently chatted with some of our Double Diamond Group colleagues around the world to get their perspective, and to look deeper into why Canada, Poland, Australia, the U.K. and markets in Asia would have made sense and why they don’t.
Canada, Australia, Poland and the U.K. are four countries with huge and already established contactless infrastructure. Why? In the case of Canada and Poland, contactless payments, card payments that use the same technology as near field communications (NFC), rolled out at the same time as Chip and PIN. The upgrade at retail happened rapidly and smoothly, with huge support from the card networks-namely MasterCard and Visa. If you have ever used Chip and PIN, it takes a bit of time to read the card, enter your PIN, and confirm the transaction. Contactless, which happens in less than a second is much faster, and it’s an easy sell to the consumer versus Chip and PIN (unlike mag-stripe).
In the U.S., Apple has huge market share – according to recent data from comScore, 173 million people in the U.S. owned smartphones (71.8 percent mobile market penetration) during the three months ending in July 2014, and Apple ranked as the top OEM with 42.4 percent of U.S. smartphone subscribers. Add to that recent data from Investment banking company Piper Jaffray that surveyed 200 teenagers across 41 states, which found that 73 percent surveyed said their next phone would be an iPhone.
What about Australia?
Australia has extensive contactless infrastructure and is known for early payments technology adoption, so is New Zealand. In fact, some companies are increasingly looking to Australia as a testing ground before rolling out to other countries. The country has also had cards and payment terminals full EMV compliant for several years. In 2008 Commonwealth Bank (CBA), the largest issuer and acquirer, a predominantly MasterCard bank, started issuing PayPass cards and the POS terminal base followed in the coming years. This push by CBA plus a high contactless limit (A$100 or about US$88) for both Visa Paywave and MasterCard PayPass were the catalysts for take-up in 2010 and 2011. Then, the real traction came in 2012 when the two largest grocery and fuel retailers both upgraded their POS systems to accept contactless.
Perhaps it would have made sense for Apple to try Australia to launch Apple Pay due to its established and successful contactless infrastructure, but it might not have had the “sizzle” that the U.S. launch had.
Contactless in the U.K.
In the case of the U.K., Chip and PIN (EMV style) is over a decade old and was the first country to reach critical mass (yes, ahead of France even though they invented chip). The famous “Liability Shift” occurred on January 1, 2005, which means the terminals that rolled out a decade ago, are old, and cardholders have long been conditioned to the Chip and PIN process. Since contactless EMV arrived more than five years ago with major support from Visa and MasterCard, deployment of readers has caught-up with the POS replacement cycle, meaning that integrated contact and contactless POS devices have become the norm. Whilst consumers were slow to adopt contactless at the start (to some degree because of the mixed security messages they received from the banks) consumers have finally started to adopt contactless but not to the degree expected. This may be due to the minimal speed advantage – the U.K. networks are now optimized for extremely fast Chip and PIN transactions – and the contactless limit is low, so when exceeded, it causes confusion for both customer and merchant. A limit-less mobile and contactless solution would undoubtedly improve usage and critical mass. It could be achieved quickly with Apple’s high smartphone market share and with the dense population of compatible readers at merchants.
In the U.K., the carriers have gone cool on payments as they became embroiled in a long drawn-out argument with the banks over pricing where the banks refused to pay them any transactional fee. They may see the app as giving some lift or stickiness in the market, but the prospect of any long-term monetary benefit seems unlikely. Currently the high demand for the new Apple phone is enough to draw the carrier’s attention regardless of Apple Pay.
In the U.S., issuing banks have signed-up for Apple Pay, and are actually paying Apple. I find it unlikely that the U.K. issuers will accept paying ongoing fees to Apple. Clearly there are some marketing advantages to being first to launch the high visibility Apple Pay wallet with an exclusive card brand; but after all the flag waving subsides and the wallet is open to all brands we are back to the old arguments about transaction cost versus issuance cost. Whilst Apple Pay may have a slight advantage due to reduced transaction risk, I don’t see this will feature very highly on Issuers negotiating agendas.
So maybe the U.K. is a great place to launch Apple Pay but it is simply not a good commercial prospect for Apple.
London Underground Could Propel Contactless Consumer Adoption
Although Apple Pay chose to launch in the U.S., the use case and value of mobile and contactless are being realised very soon on the London Underground. Transport for London (TfL) announced last month that it would begin rolling out contactless payments, including mobile, for transit payments, which could potentially increase consumer adoption of contactless payments. TfL already accepts contactless on buses and estimates it receives around 700 contactless transactions a day. With annual ridership around 1.23 billion, transport could be the “killer app” for contactless payments in the U.K.
Why the U.S. Market?
Apple already benefits greatly from an app-centric mobile commerce environment, and it seeks to preserve and build upon this ecosystem. Apple Pay is extremely well positioned to quickly expand Apple’s already large share of the in-app payments market, NFC infrastructure is not needed for that, yet the adoption of NFC technology is the ticket to getting support from financial institutions and payment networks, which will accelerate Apple’s rise to in-app payment dominance.
Once Apple dominates in-app payments, it can freely add alternative payment mechanisms to its in-app payment capabilities, where acceptance infrastructure is not a problem. It could add PayPal, ACH, online debit, PayNet/MCX, cyber currencies or others that could quickly make in-app payments more competitive and less expensive for merchants than network driven, card present transactions. From that foundation, Apple would be extremely well positioned to make a strong play for in-person payments under a framework where Apple is in control of the front-to-back consumer and merchant experience.
It’s therefore quite possible that Apple views NFC as merely a means to gain support from issuers and networks. Penetration of point of sale payments is a long-term, not a short-term, objective.
Asian Markets are at Different Stages
In Asia Pacific, Australia has clearly taken the lead in contactless payments and growth has been rapid over the past several years. While contactless is not as common here in Singapore, volumes have also grown so that it has perhaps the second highest percentage of contactless POS transactions in the region, and contactless accounts for more than 20 percent of POS transactions for some brands. Whether the mobile phone at the POS would reach the same levels as well is up for debate, though, as an NFC pilot has recently been largely superseded by app-based mobile payment solutions such as Dash and Paylah. Even if NFC were more common, Singapore has a small population and launching Apple Pay here would have less impact.
In other markets in Asia the growth of contactless for POS has been far slower, outside of transit solutions in Hong Kong, Japan, Korea and Thailand that have done well. Even though a few markets have the contactless infrastructure in place, cardholders have shown relatively less interest in using contactless cards or in using NFC for mobile payments. While simply the appeal of Apple phones in some markets could provide a boost over time, using those markets to launch Apple Pay could well not have provided the headlines Apple would prefer.
Why Apple Likely Chose to Launch in the U.S.
Although Canada and other markets make sense due to established infrastructure and overall higher acceptance of contactless payment technologies, there are some substantial hurdles for Apple in those markets.
A big one is market share; in Canada Android has more penetration, and in Australia Android is a very strong brand alongside iOS, so Apple’s reach and brand power compared to the U.S. is not nearly as high.
Second, banks and carriers have a dog in the hunt, and it remains to be seen if Apple has the same market power in those countries as they have in the U.S. In fact, during its October event last week, Apple announced it has signed up 500 new banks throughout the U.S. that will rollout Apple Pay later this year and into 2015.
The bigger element at play with Apple Pay and contactless payment technologies overall is that they are truly global with nuances region by region. I am more optimistic than ever about mobile payments and realize that it is far beyond a single market rollout, and that each market will embrace Apple Pay and other mobile payment technologies at its own pace.