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Apple Pay: What The Early Numbers Are Telling Us

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Everyone seems to want to know if Apple Pay is going to be the game-changer its rollout seemed to promise. Certainly participating banks are all in, offering promotions for customers who use the technology. New banks are announcing they’re ready to participate daily. People who get their hands on an iPhone 6 seem eager to sign up for the service if they can. So that means it should take the world by storm soon, right? Well, not exactly.

It’s no accident that numbers on actual Apple Pay usage are hard to come by. As a percentage of total sales it has to be inconsequential.

[Update: According to a report released today by ITG Market Research, Apple Pay has gained a 1.7% market share as of six weeks after its release.]

There are a couple of things that need to change before Apple Pay sweeps across the landscape. Those changes will occur over the course of 2015, and likely bring Apple Pay to real prominence by early 2016.

The iPhone replacement cycle tends to run between eighteen months and two years. Very few people want to pay full price for the devices. Instead, they wait for their carrier contract renewal dates, when you can get them for free (as I did) or for pretty short money, $199 or less.

  • The iPhone 5 was introduced in September 2012. Owners of these phones have likely made the majority of purchases until now.
  • The iPhone 5S was introduced in September 2013. Owners of those phones will likely not be eligible for upgrade until March-September 2015 (depending on contract length).

This tells us that we won’t see full penetration among iPhone users until late 2015. I don’t expect to see a rush of people switching from Android phones, either. By now, the world seems to have divided into Android and iOS lovers (with a smattering of Windows fans in the mix). And the iPhone 6, while an incremental improvement over the 5S is just not game-changing enough to force a switch.

So that covers the potential user population. It’s going to grow in several steps between Christmas 2014 and Christmas 2015.

Then there’s the other problem – getting retailers equipped to actually accept the transactions. “Equipping” a retailer entails replacing all the company’s signature capture / swipe pads in its stores with a Near-Field Communications (NFC) reader.

As a general rule, with certain significant exceptions, retailers will wait to swap out store hardware for a few months. They have to replace their swipe pads to implement new security measures, called EMV, and are required to do so by the end of 2015. The “up charge” to add an NFC reader into those devices is roughly $40. There’s no way retailers are going to go through the time and effort of replacing all their devices twice, especially given the current low possible volume of transactions.

There are certainly some exceptions to those rules. Staples recently moved to accept Apple Pay. The company has also just experienced a massive data breach. The two events cannot be separated. By most accounts, the security provided by Apple Pay is far better than traditional magnetic stripe credit cards, or Google Wallet, which is available to Android users and still exposes an actual credit card number to the retailer. [Update:  Several passionate commenters have pointed out that Google Wallet does not expose the shoppers' actual credit card to the retailer. A full explanation of Google Wallet's "virtual card" and its relative security at the swipe terminal, etc. will be forthcoming in another article.]

Further, in general, if retailers were already supporting Google Wallet, adding Apple Pay support was a software, rather than a hardware change. In fact, CVS and Rite-Aid had to turn off their system capability to read NFC chips shortly after Apple Pay was introduced, to avoid being out of compliance with their agreement with the Merchant Currency Exchange (MCX).

And that brings us to the last inhibiting factor: the number of retailers that have signed up to be part of MCX and use its mobile payment technology, CurrentC.

A look at MCX’s website reveals a pretty powerful group of retailers. And if you compare that list with NRF’s top 100 U.S. retailers, a lot of very large retailers are automatically eliminated from the Apple Pay mix. There’s Walmart, leading the initiative and the largest retailer in the world. Some others include Target (#4), CVS Caremark (#7), Lowe’s (#8) and Best Buy (#12) to name a few. Plus, Exxon Mobil in the gas station space and the sixth largest company in the world has also joined the consortium.

That eliminates over a trillion dollars in potential annual sales dollars from Apple Pay’s control.

CurrentC is scheduled to roll out early to mid-2015. If consumers flock to it, it will stick. If they don’t, while Walmart may stand firm, others may choose to opt out of the consortium and move over to Apple Pay. But again, that won’t be clear for several months now, and Walmart in particular, is not known for giving up in the face of objections and/or seeming defeat.

In other words, Apple Pay potential, at least short term is a pretty small piece of the pie; a percentage of consumers who are inclined to use it, a percentage of retailers who are willing to accept it, and a percentage of devices that are capable of executing it.

That doesn’t sound like a thunderstorm of Apple Pay in 2015. By this time next year, we may be telling a very different story, but for now, the clouds are just beginning to roll in.