Plastic credit cards will become as rare as the paper check if Apple has its way.
On, Tuesday, September 9th, Apple Pay was announced by the company as a digital payment system that allows purchases at retail store to be paid for by using phones instead of cash or credit cards. The service will work with both iPhones and Apple’s new watch, and is backed by a bunch of major retailers, as well as most main banks and credit card issuers, such as MasterCard, Visa and American Express.
This form of contactless payment is nothing new. McDonald’s, Starbucks, Google, PayPal and Square all offer their own services, but a small percentage of customers actually use them. A handful of experts believe that Apple Pay could be the service to lead to the digital wallet becoming a widespread method of payment, since millions of iPhones are already owned with advanced security features.
Mark May, a Citi Investment Research analyst, predicts that the combined total of mobile payments may grow from $1 billion in 2013 to $54.8 billion by the year 2017. The digitalization of payments makes a favorable image for the future of shopping; one can walk away with a new blouse by simply tapping her phone against a checkout screen.
Although the launch of Apple Pay was flashy, Apple has an uphill battle turning that vision into a reality. Apple along with other providers of the digital wallet have the job of convincing shoppers that the transactions are secure, especially since the recent security breaches at Target and Home Depot. At the same time the company must convince retailers that it is worth it to invest in the new point-of-sale systems.
There are many merchants in the U.S. that are not on board with the digitalization idea. Approximately 220,000 stores are currently set up to accept Apple Pay. Of the 3.6 million U.S. retail locations, that is only 5.5 percent, according to the National Retail Federation. Many of the biggest retailers in the U.S. are not participating in Apple Pay, like Best Buy and Wal-Mart.
The major issue retailers have is the cost. Each point-of-sale device costs hundreds of dollars and hours of training workers, because it uses ‘near-field’ communication technology. Also, there is little demand for the systems, as of now. However, this may well change with Apple in the arena, says
Gartner analyst Avivah Litan.
"There's no doubt young people want to use phones to make payments, but they have to have a place to pay," says Litan. Her prediction is that the bigger retailers will see how well Apple partners before they adopt the mobile payment services.
"If it goes well at other retailers, Wal-Mart and other companies may break down and start taking it," Litan says.
Contactless point-of-sale systems are widely used in other countries like the U.K. and Canada; and as a result payments of that sort are much more common. For example, in Canada, around 20 percent of transactions processed by MasterCard at registers are done through contactless payment, according to MasterCard.
"What you learn from that is when consumers start 'tapping' two or three times, they never go back to their old behavior at that merchant. ... It's just a much better experience," says Ed McLaughlin, chief emerging payments officer at MasterCard.
Security is one of the major strengths of Apple Pay. Its system uses the company's Touch ID fingerprint technology, a secure chip, and payments that require a one-time security code.
This type of security is similar to the chip-and-pin credit card system used in Europe, and prevents the type of breaches that occurred at Target and Home Depot. Litan says that it could be a compelling reason for retailers to adopt Apple Pay.
"If you get enough people using the service, it would cut down on retailers' security costs, and that's why over time it may really take off," she says.
However, many people do not feel that swiping a credit or debit card is much of an inconvenience to begin with. The head of next generation commerce at PayPal, Bill Ready, points out that near-field communication has been around for 10 years without gaining popularity. His vision of the mobile payment future is more akin to an "e-commerce style transaction happening in the physical world," he says, citing the example of car-sharing service Uber, which works with PayPal to processes riders' payments by way of a mobile phone app.
"Uber addressed a real pain point, in that hailing a taxi and payment for a taxi is cumbersome," he says. "We're focused on those types of things more than killing the card swipe."
Despite the difference in visions, most experts agree that the move toward the digitization of payment will continue.
"Someone is going to figure out how to make mobile payments easy and cheap and then we're talking a real shift in consumer behavior," says Gartner's Litan.