cashless commerce

Will Apple Finally Be Able to Replace Your Wallet?

Tim Cook hopes so. Photo: David Paul Morris/Bloomberg/Getty Images

Most of the hype around Apple’s event today was centered on the iPhone 6 and the Apple Watch. But a piece of quieter, potentially bigger news was the introduction of Apple Pay, Apple’s new way to make purchases at the store without reaching for your wallet.

With Apple Pay, Apple is joining a long list of companies that have tried to fuse mobile technology and payments. PayPal, Square, Amazon, Google, and Starbucks have all tried to get in on the mobile payments game. It’s no secret why – Americans bought $4.5 trillion worth of stuff last year, the vast majority of which was purchased by swiping credit cards and handing over cash in stores. If Apple can shift even a tiny fraction of those purchases over to its payments platform, it would give it enormous power in the marketplace.

Apple has been thinking about payments for years; as early as 2012, the Wall Street Journal reported, the company was laying the groundwork for a mobile payments platform. But Apple Pay is at once more limited and more ambitious than many industry watchers expected. It works simply – to make a purchase, just tap your iPhone (or Apple Watch) against a touchless payment terminal while holding your thumb over the Touch ID sensor, and a near-field communication chip communicates with the terminal using a one-time security code generated for the specific transaction. Many large retail chains already have NFC-enabled terminals, so Apple’s system will work at places like McDonald’s, Target, and Whole Foods without requiring those stores to install new hardware at each cash register. Your payment information will be stored on a chip Apple is calling the Secure Element, and won’t be visible to the merchant. E-commerce companies will also be able to use Apple Pay, too, by using it to facilitate credit-card transactions within their iOS apps.

Still, industry insiders weren’t wowed. “One word [for Apple Pay] would be ‘incremental’,” Cherian Abraham, mobile commerce and payments lead at Experian, told me after Tuesday’s announcement. “It certainly wasn’t the Apple payment experience folks had envisioned,” Abraham said, since it didn’t include extra bells and whistles beyond the basic payment function. “The only difference Apple really showed is that they have the clout, as the ecosystem owner, to push some of these things through themselves.”

If Apple wants mobile payments to be ubiquitous, it will have to change merchant behavior. As companies like Square have learned the hard way, it’s tough to convince every sandwich shop and boutique clothing store to add your app to their existing setup, which likely already contains a handful of gadgets (cash register, credit card machine, OpenTable terminal, etc.), all with their own learning curves and design quirks. To a bodega owner or a restaurateur, Apple’s system could look like just one more hassle.

Bradley Leimer, the vice president of digital strategy at Mechanics Bank, agrees. “We’ve seen this movie play out before, and it hasn’t had a good ending yet,” he said. The big question for Apple Pay, he said, is: “Is it going to be a big enough percentage of retailers that have this enabled by the end of the year for behavior to really change?”

Payments is a very hard business,” added Anuj Nayar, a former Apple employee who is now senior director of global initiatives at PayPal. “It’s not about good-looking tech. It’s about having deep relationships.”

Ben Thompson of Stratechery summed up the scale of Apple’s challenge:

If you think getting a social network off the ground is hard, when the only obstacle is getting people to enter in an email address and password, imagine having to simultaneously distribute a means of accepting payments to merchants and a means of making payment to consumers, all at the same time.

To make mobile payments work, Apple won’t just have to win over retailers. It will have to win over customers, too. There are already dozens of ways to pay for things with your phone, but the vast majority of consumers still use cash and credit cards. In part, that’s because reaching for a wallet is an ingrained habit that’s hard to break. And partly, it’s because we don’t completely trust these new mobile payment systems yet. That’s understandable – when your credit card is stolen or defrauded, you know exactly who to call. But when a store using Apple Pay double-charges your Visa for lunch, do you call Apple? Visa? Someone else? Not to mention security concerns and technical challenges associated with going all-digital. (If you’re not carrying a wallet, what happens when your phone runs out of battery?)

Apple has a fan base that is very loyal,” Nayar said. “But is [Apple Pay] going to be so attractive to the consumer that it’s going to change their shopping habits?”

But Apple has an advantage Square and other payments start-ups don’t have: millions of loyal fans who are already locked into its software ecosystem, many of whom will try paying for coffee with their Apple Watches and, perhaps, get hooked. Soon, it may feel clunky and uncool to pay for something with a credit card swipe, just as Uber’s cashless system made it annoying to dig through your wallet for bills after a taxi ride.

Ultimately, Apple wants people to ditch their credit cards altogether. To do that, the company have to make mobile payment systems as ubiquitous as credit card readers are now. That will take a big sales effort on Apple’s part, as well as incentives for merchants to make the switch to terminals that can accept wireless payments. (It helps that U.S. retailers are required to switch to European-style chip-and-PIN terminals by October of next year, meaning that many are already swapping out their old cash registers for something newer.) It will also mean that, since Apple isn’t yet making its own merchant hardware yet, it will need to work closely with the companies that make these terminals.

The success of Apple Pay will depend on parties outside of Apple’s ecosystem,” says Abraham. “That’s where the risk is.”

Most experts agree that if anyone can make mobile payments happen, it’s Apple. No company is more experienced at changing consumer behaviors, and the popularity of the Apple Watch may make mobile payments so ubiquitous that a network effect may take hold. In other words: if Apple customers begin ditching their credit cards en masse, stores will have no choice but to accommodate them by accepting Apple Pay at their registers.

The play, in the end, is what Apple did with music,” says Leimer. “They came in and said, ‘Look, people consume music differently than what you’re trying to give them. You need to change your pricing structure.’ That’s exactly what’s going to happen with payments. Everyone’s been waiting for Apple to set a standard.”

Now, with Apple Pay on the way, Leimer said, “it’s simply a matter of time before things move Apple’s way.”

Will Apple Finally Replace Your Wallet?