Paying It Forward: Will Apple Pay fuel the mobile wallet game?

From the pages of In Business magazine.

When Microsoft shipped its first version of Windows in 1985, company CEO Bill Gates said it was “unique software designed for the serious PC user.”

Well, that likely rankled Steve Jobs and his burgeoning cult of Apple users, who had been pointing and clicking with abandon on their Macintosh computers for nearly two years before Windows flashed its first bright blue error screen.

Everyone knows the history: Windows, the Johnny-come-lately in the graphical user interface game, came to dominate the market, making Gates the richest man in the world and eventually turning Apple Inc. into an also-ran that barely clung to life before Jobs returned and transformed the company with a host of dazzling, user-friendly devices.

“I think Apple in general creates a bigger buzz. It’s kind of like comparing Google+ to Facebook.” — Kati Whitledge, founder, Be Inspired Salon

Today, Apple is a corporate giant, and with the release of its new mobile wallet Apple Pay, the shoe is decidedly on the other foot.
Apple didn’t invent the mobile wallet, but it’s kinda, sorta acting like it did — while implying that Apple Pay is the greatest invention since the wheel, sliced bread and, well, the iPod.

But it’s Apple, and Apple has clout. And that alone could transform the way consumers shop and how retailers — big-box behemoths and small businesses alike — process their payments.
Take the pulse of local retailers, and you’ll see how true that is.

While Google Wallet was released way back in 2011 and Softcard (which recently rebranded after its original name, Isis Mobile Wallet, became more synonymous with terrorism than family Christmas shopping excursions) launched in 2010, the mobile wallet concept really got a boost with Apple’s recent announcement.

Still, it remains to be seen whether the idea will take off, and local retailers seem to be of two somewhat contradictory opinions regarding this potential sea change in the way they process retail transactions: 1) so far, consumers aren’t clamoring for the opportunity to use Apple Pay and other mobile wallets and 2) with Apple’s entry into the mobile payment arena, the game may have changed for good.

“I think Apple in general creates a bigger buzz,” said Kati Whitledge, the founder of Madison’s Be Inspired Salon. “It’s kind of like comparing Google+ to Facebook. As much as people want Google+ to be something, it’s not going to replace Facebook. Until something better comes out that trumps both of them, it’s all about what creates the biggest buzz, and if we look at Apple users in general, it’s just so far beyond. It just trumps the game.”

According to Kim Fredrickson, controller at the University Book Store, Apple’s mobile wallet has likely changed public perception of such devices enough to make retailers stand up and take notice.

“This one is probably going to take off,” said Fredrickson. “I believe this is the time that we need to react and get our systems in place to be able to accept it. I never felt that way with any of the previous methods that were out there, so I do feel like this is the one that’s going to stick. … The fact is, I actually noticed it and researched it and said, ‘Oh, we’re going to have to get on this bandwagon.’”

The curious part? Neither Whitledge nor Fredrickson have so far seen a groundswell of consumer demand for Apple Pay in their Madison stores, and for a system that’s been heralded as a potential game-changer, it still faces numerous barriers to widespread acceptance.

Only have iPhones for you

First of all, you have to have an iPhone 6 to use Apple Pay. Secondly, a very small percentage of retailers — 222,000 mostly brand-name stores out of millions of total retailers nationwide — currently accept the system. Finally, there’s still some question about whether consumers want to pay with their phones at all.

“All of the studies I’ve read over the past year or so have suggested that better than 50% of the consumer population is not interested in making purchases off their cell phones,” said Dan DeBraal, a business service consultant with Wind River Financial, a Madison payment processing solutions company. “They like banking from their cell phones but not necessarily making purchases off their cell phones.

“So this concept of being able to buy something through your Android cell phone through what they call near field communications, or NFC, has been around for a number of years, but it just hasn’t really taken off. Now the argument is, ‘Well, Apple followers are really loyal and they really like to use Apple functionality, so this is the catalyst that’s going to turn the tide.’”

Whether consumers are eager to take advantage of the convenience of mobile wallets — which require users to merely pass their phones in front of any NFC-enabled register — and whether Apple’s name and reputation really can provide a tipping point for the industry remains to be seen.

But if massive data breaches like the ones that have affected Target, Home Depot, and other retailers continue to erode the confidence of consumers, mobile wallets, which boast a number of security advantages, could begin to gain further traction.

Apple Pay, for example, is activated through the iPhone 6’s Touch ID — which detects individual users’ fingerprints — and relies on a tokenization system that creates a unique, non-reusable code for each transaction. In addition, Apple Pay uses an encrypted “device account number” instead of your actual credit and debit card numbers, so your real numbers are never transmitted or shared with retailers.

But another security upgrade could have an even greater impact on the use of Apple Pay, Softcard, Google Wallet, and other mobile wallets.

All three of those systems rely on retailers having NFC-enabled registers, and to date, most small retailers are still not equipped with NFC capability.

That will likely change, however, in October 2015, when all retailers will be strongly encouraged to install point-of-sale systems that can accept safer EMV (otherwise known as chip-and-PIN) credit cards, which the credit card industry hopes will supplant older, less-secure magnetic-stripe cards.

Credit card issuers are creating some incentives to convince retailers to switch over to EMV-compliant systems, including a reduction in liability for data breaches, and that’s likely to significantly boost the viability of mobile wallets.

In other words, a big chunk of those millions of retailers that still can’t take Apple Pay, Google Wallet, and Softcard will suddenly be in the game.

“As we move to the 2015 change in chip card availability, most of these merchants are going to have to change the hardware they’re using today, and when they do change that, they will get NFC capability with that new hardware,” said DeBraal. “So the merchants are going to have that capability whether they know it or not if they’re buying some of the new hardware that we have, and then it’s just a matter of educating them.”

Payment plans

If October 2015 sounds like a long time for mobile wallet providers to wait, there’s other bad news to consider — as well as plenty to be encouraged about.
According to Mason Tikkanen, a vice president with Motus Financial, a Madison merchant services company, it’s extremely unlikely that the majority of small retailers will be switched over to EMV registers by October 2015 because they’re simply not big targets.

“From the industry’s perspective, for merchants who do adopt EMV, there is some promise to reduce or minimize breach fines,” said Tikkanen, “but the probability of a data breach happening at the small to medium-sized business level is extremely remote. Their standalone equipment, whether it’s EMV or not, the probability of it being compromised in that way is wildly remote.”



In fact, says Tikkanen, the number of merchants ready for EMV cards — and by extension mobile wallets — will likely be far short of 50% by this time next year.

“I would be surprised if this rollout wasn’t similar to the PCI compliance rollout back in 2006, where by the end of the first year they may have had 15% to 25% of people enrolled, converted, and ready for it,” said Tikkanen. “If it’s more than that, great. If it’s not, they’ve got plenty of time in between the financial impact reduction, the liability reduction, and whenever Visa or MasterCard might mandate an upgrade, but it’s not even on the radar yet.”

That said, Tikkanen is bullish on Apple Pay’s prospects. He notes that the rate of iPhone use among younger consumers, who have a lot of sway over retailers and a lot of power to steer public sentiment, is high, and early adopters’ ability to iron out the wrinkles will help overcome any early resistance. To his way of thinking, this isn’t something that’s in danger of dying on the vine if it doesn’t capture the imagination of consumers right out of the gate.

“In the short run, as a fairly early adopter myself, mentally I’m kind of prepared for some businesses to be ready for this and most of them not, and that’s totally fine,” said Tikkanen. “From a rollout standpoint, I don’t think that’s going to be catastrophic for Apple in any real way. The momentum they have already is probably incentive enough for them to continue to promote and market the concept.”

Promising start

That momentum is considerable. In just its first week, Apple Pay surpassed 1 million users, almost immediately establishing itself as the most popular mobile wallet on the market. While it’s true that Apple Pay was initially accepted by just 222,000 retailers, they’re generally big, household names, and they include plenty of companies that operate locally, such as Walgreens, Macy’s, Subway, Office Depot, Whole Foods and, of course, the Apple Store.

Not on that list are CVS and Rite Aid, which in October blocked use of Apple Pay because of their membership in the Merchant Customer Exchange (MCX) consortium, which has been developing a rival mobile payment system called CurrentC since 2012. Meanwhile, other members of the consortium, like Best Buy, Walmart, and 7-Eleven, which have NFC-enabled registers and could therefore take Apple Pay and other mobile wallets, are balking as well.

That’s a big chunk of the retail market that Apple is (at least so far) unable to exploit, but it’s unlikely to be a back-breaker. For one thing, there appears to be a lot of room for competing mobile wallets, and unlike the VHS/Betamax war of the early ’80s, in which success depended on a critical mass of consumers signaling their allegiance to a particular device, most mobile wallets depend on the same technology — near field communication — and therefore have a chance to grow happily alongside each other. So whether or not Walmart accepts Apple Pay, Google Wallet, and other systems, there will still be a huge slice of the retailer pie available to NFC-reliant mobile systems.

In addition, CurrentC, which will be launched next year, is a little late to the party, and some are skeptical about whether the system, which debits people’s checking accounts in order to bypass credit card fees, and which relies on the far-from-user-friendly (and somewhat outdated) QR code system, will be able to compete.

“It may slow down the adoption of NFC, but I can’t see how in the long run some of these major retailers are going to survive if they don’t open up to those consumers that are loyal and want to make purchases on their own devices,” said DeBraal. “I have reservations about what they’ve been trying to do, and from a personal standpoint, do I want Rite Aid or Walmart to have my checking account number? I’m not really sure I’m comfortable with that dynamic.”

But while the big boys battle it out, small merchants are a bit more likely to take a wait-and-see approach. Neither Whitledge’s nor Fredrickson’s registers are compatible with Apple Pay, Google Wallet, or Softcard yet, but both merchants are looking forward to the day when their point-of-sale systems are updated and ready to take mobile wallet payments.

Does that leave them and other local retailers behind the curve — and will that affect their ability to compete, particularly during the critical holiday shopping season? Probably not, according to Rick Lenz, CEO of Motus Financial and the vice president of Dane Buy Local’s board of directors.

“Local retailers will still have the ability to take your card,” said Lenz. “Are you really going to leave your wallet at home when you’re out? The answer is no.”
DeBraal agrees that local merchants will still have some time to get up to speed before they’re potentially put at an economic disadvantage, but they may not have forever.

“I think they’re in a good spot,” said DeBraal. “I think maybe two or three years from now they’ll be behind the curve. … In the meantime, I’ll still be able to reach into my real wallet and pull out my real piece of plastic. So I think there’s some time for the consumer to change their way of doing things and go to a backup plan, but what’s going to slowly put the small merchant behind the eight-ball is if they’re not at least moving in that direction in the next 12 to 18 months.”

Of course, how fast consumers adopt mobile wallet systems will ultimately determine how much urgency there will be for retailers — big and small — to upgrade their systems. DeBraal says he hasn’t seen any merchants feeling panicked about their inability to take mobile wallets as the Christmas shopping season heats up, and retailers in general are reluctant to make any changes to their point-of-sale systems during their busiest times. But if momentum does start to build for mobile wallets during the holidays or after, retailers may have to respond.

“The consumer drives the payment at the point of sale, not the merchant, so if the consumer wants it, the merchant is going to want to respond,” said DeBraal.

Brave new world?

Whether consumers buy in remains to be seen. But if Apple really does have the clout needed to surmount consumers’ apparent lack of enthusiasm for buying subs and prescription drugs with their smartphones, the retail world could begin to radically transform — and small businesses will be part of that transformation.
And as a consumer as well as a business owner, Whitledge sees nearly unlimited potential for mobile wallets.

“Absolutely, especially for the younger crowd,” said Whitledge. “As a business owner, let’s say I’m at a business networking event. Most women don’t want to lug around a big purse when they’re networking, but no one will leave home without their phone. So it would be awesome if you need to pay for parking or pay for a beverage, or whatever it is, to have my business cards with me and my cell phone. It just makes it a lot easier.

“So for the nightlife aspects, I would think businesses like bars and restaurants would think that would be a no-brainer. I just think it’s awesome from the less-is-more aspect, and I think this is just the beginning.”



Which Wallet?

Apple Pay has been the big headline-grabber, but it’s not the only mobile wallet on the market.

Perhaps the biggest hurdle for Apple Pay is that you have to be an Apple user to take advantage of it — more specifically, you need to own an iPhone 6 or an iPhone 6 Plus.
That severely limits its reach, particularly since Android devices continue to outsell iPhones, both in the U.S. and globally.

Two of Apple Pay’s top competitors are Google Wallet and Softcard. All three devices require phones and registers equipped with near field communication technology. Google Wallet, which launched in 2011, works on all Android phones (Gingerbread v2.3+) and iPhones (iOS v6.0+), but it apparently hasn’t attracted a lot of attention until recently. Now, however, it appears to be benefiting from Apple Pay’s launch. A report in Ars Technica, an online tech publication, noted that weekly Google Wallet transactions were up 50% in the wake of Apple Pay’s debut.
Meanwhile, Softcard, which recently changed its name from Isis Mobile Wallet for obvious reasons, is backed by AT&T, T-Mobile, and Verizon. It launched in November of 2010.

Consumer Reports took a fresh look at the top mobile wallets on the market after Apple Pay debuted in October. The magazine concluded that Apple Pay is not only late to the party but also has a bit less to celebrate. Its overall average scores for the top mobile wallets were: Apple Pay, 2.9; Softcard, 2.9; and Google Wallet, 3.1.

Consumer Reports used a host of criteria to average its scores, including ease of setup, the number of cards that can be loaded onto each wallet, the number of retail locations where you can use each wallet, the number of phones that support the technology, consumer protections, and security.

Actually, the overall winner was LoopPay (3.8), a lesser-known service that requires iPhone and Android users to download an app and buy a special fob or phone case. After they do, however, they’re able to make purchases at 10 million retail locations, or 90% of the stores in the U.S. As of this writing, Apple Pay was accepted at just 3% of all stores.

LoopPay’s secret? Instead of using near field communication, it uses its own trademarked technology, Magnetic Secure Transmission, to turn existing payment terminals into contactless readers.

But as Apple users, who often lamented Microsoft’s market dominance following its launch of Windows in the mid-’80s, might tell you, the best and most user-friendly device isn’t always the one that wins.

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