Apple seeks to make mobile payments mainstream like it did for digital music and smartphones

mobilepaymentstoday.com/

Jim Maholic, vice president of industry consulting, Hitachi Consulting

Apple does what Apple does. And we should quit acting surprised. Apple has a successful history of entering markets where some part of the user experience is inefficient.

A quick glance back at the iPod and iTunes makes that clear. The digital music business existed before Apple got into it. But digital music distribution wasn't fully baked nor seamlessly integrated until iTunes made the process painless.  Apple made it painless because it did the hard work of convincing the suppliers of music – namely the artists and labels – to embrace iTunes as part of Apple’s vision of the seamless process. 

Then there's the iPhone. 

Certainly there were cellphones, even smartphones before the iPhone. But working with carriers and app developers, Apple cultivated a value chain beyond just having a raw smartphone. We're all beginning to realize that the secret sauce at Apple seems to be this: Simplifying the value chain and building cooperation and collaboration from suppliers to Apple to end customers.

Apple finds a way to reduce the friction inherent in complicated processes and consolidate multiple points of contact to deliver nearly intuitive actions with very few intermediaries between the customer and his or her satisfaction. And in the process, Apple attracts a lot of customers and suppliers. Which brings us to mobile payments.  

Apple doesn't need to be the biggest, just the best

Apple is not the dominant player in the smartphone space. If you look at smartphone sales, they shouldn't be the dominant player in mobile payments.

Android sales continue to significantly outpace iOS device sales. According to IDC research, global Android smartphone unit sales for 2014 were 1.059 billion units compared with 192.7 million Apple smartphones shipped globally, giving Android an 81.5 percent global market share of smartphone sales for 2014. And Android's market dominance has existed since 2010. So here's what's interesting to observe, at least in the mobile payment space: Android smartphones command a 4-to-1 advantage over Apple smartphones in terms of unit sales. 

When Apple introduced Apple Pay in the fall of 2014, Google Wallet (the leading Android mobile wallet app) already had 10 million activations. Yet, according to Tim Cook, Apple's 1 million activations in the first 72 hours made Apple Pay the largest mobile payment offering. One million is certainly not ten million. But Cook was likely referring to something that we all know, which is that downloads and activations are not the same as active users. Countless users download apps due to a timely need (Uber, TripAdvisor, OpenTable) and never touch them again. Cook's bold statement in the fall has just been followed by a series of similarly bold statements during Apple’s most recent Jan 2015 earnings call.

During that call, Cook stated, "Apple Pay makes up more than $2 out of $3 spent of purchases using contactless payment across the three major U.S. card networks."  He went on to say, "Panera Bread tells us Apple Pay represents nearly 80 percent of their mobile payment transactions, and since the launch of Apple Pay, Whole Foods Market has seen mobile payments increase by more than 400 percent." So, it looks like Apple is doing what Apple does, yet again. 

Apple Watch and mobile payments

Apple has done the hard work of enlisting credit card companies, banks and retailers to make another human process easier. And they aren't done. Apple Watch will launch next month.

Apple Watch will expand Apple Pay's footprint on day one, bringing mobile payments to iPhone 5, 5s and 5c users. By most estimates, Apple sold nearly 100 million iPhone 5 units (all variations) in the U.S. alone prior to the launch of the iPhone 6. In the aforementioned earnings call, Cook stated that only a fraction of iPhone 5 users upgraded to the new iPhone 6. This means the launch of Apple Watch will potentially enable millions of iPhone 5 users to use Apple’s mobile payment system.

Android players are not sitting still. Attempting to strengthen their respective mobile payment capabilities and broaden their portfolio of offerings, Google just acquired Softcard and Samsung acquired LoopPay. And we can expect many more acquisitions as the big players find small, clever companies that augment their own growing mobile payment arsenals. While Apple Pay grows, Android is not just treading water. 

Time will tell if Apple will be dominant in mobile payments or make the technology mainstream. Regardless, retailers should expect exciting innovations in the months to come as mobile-payment titans duke it out for mindshare and market share.