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Wednesday, 5 August 2015

Apple Pay - the first novel payment system that actually works for users?

I used Apple Pay last week for the first time. It’s really excellent and a huge contrast to other mobile payment solutions I’ve used or looked at. I thought it worth a little analysis of what’s going on with Apple Pay because there are some interesting lessons here.

To start things off, it’s worth recapping why other mobile payments solutions have struggled to succeed. I’ve previously been quite dismissive of those solutions because they all have at least one of the following drawbacks:

  1. They aren’t secure. e.g. Barclays bPay thing is very convenient, but relies on a £20 limit on transaction value as there's is no way to authenticate a transaction. I can’t accept the idea of so little security on a banking transaction, regardless of the imposed limits. bPay is just a digital version of cash - if you lose the physical bPay device, you quite possibly lose all the money loaded onto it.
  2. They are actually less convenient than our normal European chip+pin solutions. Unlocking a phone, finding and launching an app and entering a secondary security code is a surprisingly common series of steps. Or loading money from your bank account into a special new “mobile wallet”, that comes with yet another passcode to remember. These approaches are less convenient than a plastic card. And the £20 transaction limit on UK contactless payments pretty much limits its use to coffee+sandwich only - hardly convenient.
  3. There’s no critical mass of acceptance at retailers. If I can’t actually use a new payment method to buy the things I need, it’s pretty useless. There’s a profusion of interesting “fintech” payment solutions - but you have to really try hard to find a retailer that accepts them and there’s no realistic prospect of that changing.

I think that Apple Pay looks like it might be a winner - because it ranks well on all three of my problem fronts:

  1. It’s secure - you can’t pay without authenticating with TouchID. And TouchID is almost certainly more secure than a 4-digit PIN code that anyone can steal by looking over your shoulder.
  2. It’s convenient - just hold the phone whilst touching TouchID. No codes to enter, no buttons to press, no apps to find. It’s about as simple as it’s possible to be. Because TouchID means the Apple Pay transaction is secure, some UK retailers are already removing the countries £20 contactless limit for Apple Pay.
  3. It’s gaining critical mass. Apple Pay works at the growing number of standard contactless points that are being rolled out across retailers. Because UK banks had already invested in NFC contactless features in debit/credit cards, Apple Pay exploits that industry standard point-of-sale infrastructure. And in the USA the launch timing was perfect, as industry rushed to renew point-of-sale infrastructure in order to increase security in the light of scandals like the Target hack.

It’s still early days for Apple Pay (especially in my native UK where it’s only just launched), but it’s the only novel payment solution I’ve seen that has a chance of meeting my three criteria. It has to be secure, it has to be simpler than chip+pin and it has to have a demonstrable likelihood of critical mass acceptance by retailers.

I don’t care about how novel it is or isn’t, if it saves retailers a few fractions of a penny or how it might disrupt the world. The only thing that will make a new payment mechanism successful, is if the experience is better for users. If it’s not, people won’t use it and everything else is irrelevant.

Of course Apple Pay will always be a relatively niche solution because it’s maximum market size is a subset of iPhone users. But American Express seems to have survived for many years on a similar basis.

The way that Apple Pay is integrated deeply into iOS is a critical part of the overall user experience. Others could use the TouchID API to build fingerprint authentication into their payment solutions, but that would still require the user to unlock the phone and find/launch the appropriate app before starting the payment process. In contrast, the that Apple Pay is integrated deeply into the iPhone and iOS requires none of this, just needing the phone to be placed near the payment terminal.

This experience could only be created by an organisation who has the ability to influence not just the banking ecosystem (Apple had to galvanise the banking industry into delivering on the promise of Tokenisation as part of the Apple Pay solution), but also the phone hardware and operating system design.

Lets look at what was needed to bring Apple Pay to fruition (this is far from a complete list, I am sure):

  • Bring TouchID to market, ensuring the availability of a seamless authentication solution
  • Wait to ensure a critical-mass of TouchID-enabled phones being used by customers, so that when Apple Pay launches there’s enough people with TouchID-enabled phones to use it
  • Influence Visa and Mastercard to implement Tokenisation
  • Get the retail banks on board to implement their end of the solution - at the time of writing I can count over 380 banks currently supporting Apple Pay, so no mean feat
  • Strike deals with payment processors like Stripe to ensure that Apple Pay can also be used for in-app payments
  • Integrate Apple Pay deeply into iOS so the end-to-end user experience is simpler than anything else
  • In the USA, sign up a broad array of retail partners who will implement the required point-of-sale infrastructure to support Apple Pay
  • In the UK, start influencing retailers who’ve already implemented contactless payments to remove the £20 limit for Apple Pay transactions
  • And since it’s Apple, do most of this in secret

Let us not forget that Apple had to purchase Authentec for $356m in order to obtain the underlying technology needed to create TouchID in the first place. On top of that were the presumably significant investment costs to perfect and bring to market that nascent technology. If we then add in the costs of creating Apple Pay, it’s easy to see that it might have cost well in excess of $0.5bn to make Apple Pay happen. I don’t think that is the sort of money that banks are typically investing in their innovation programmes.

Apple Pay is the fruition of a very ambitious goal, the creation of new innovations like Tokenisation and TouchID across several industries and a very complex set of coordinated deliveries over several years. I think it’s fair to say that Apple isn’t playing at this.

For those that ask “why could the banks not have created their own successful mobile payment solution?”, the answer is simple. They can’t. Without the ability to influence the way the mobile OS and hardware interact with payments, it’s not possible to engineer the required user experience. This is why we’ve seen a proliferation of small-scale “experiments” that people like me sneered at, rather than anything significant.

Companies like Apple are also able to justify huge investments that banks would really struggle with. They can do that because they see mobile payments not as an end in itself, but as just another jigsaw-piece in the success of their wider mobile platform. And a company like Apple sees this on a global scale, whereas nearly all banks are regional players when it comes to retail payments.

The cost for traditional industries who wish to become serious digital players is higher than I think many acknowledge. Take Facebook’s urgent need to make the transition from desktop browser to mobile app - acquiring Instagram for $1bn and WhatsApp for $19bn. Or BMW, Mercedes and Volkswagon purchasing Nokia’s HERE mapping division for $2.8bn. Or Adidas purchasing runtastic for $240m. Whether purchasing mature and successful businesses (Instagram, WhatsApp, HERE) or raw technology (Authentec), the costs and business risks involved are often significant.

I find Apple’s ability to control not just its components of the solution, but also to influence and lead the required wider consortium, perhaps the most interesting lesson here. Vast arrays of retailers and banks, together with Mastercard and Visa, all needed to be influenced and coordinated to make Apple Pay happen. Banks would typically go about this kind of thing with armies of highly paid consultants and a heavy-weight “project office”. I don’t think that is how Apple did it - I’ve certainly not heard of those consultant armies. Intriguing.

Overall, it seems that creating success in mobile payments needs high ambition, deep pockets and an ability to influence all parts of the ecosystem involved - with that in mind, Apple Pay is a rather remarkable achievement. I’m not sure I see how banks can do this kind of thing on their own - which is an extraordinary statement about the role of the banking and technology industries.

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