Apple Pay’s 10-Year Journey and Its Next Decade of Decisions

PYMNTS Intelligence published its annual report on the usage and adoption of Apple Pay yesterday (October 21). That report marked the ten-year milestone of Apple Pay’s launch, which was the mobile wallet shot heard round the world.

Apple Pay wasn’t the world’s first digital wallet — and it wasn’t even the first mobile wallet developed by Big Tech (remember Google Wallet in 2011?) — but it was the first wallet connected to an indispensable piece of hardware, from a brand that users loved and considered their lifeline to the digital economy.

The promise at launch was to use the iPhone and Apple Pay combo to replace cards entirely at the physical point of sale — at least, that’s what Tim Cook promised. It seemed like a lofty ambition in 2014 since not many iPhone users had the right phones to activate Apple Pay then, many merchants lacked contactless terminals to accept it, and few issuers were willing to provision cards for it (and pay Apple a fee to do it).

According to PYMNTS Intelligence, in the U.S., Apple Pay usage and adoption have grown over the last 10 years since most of those initial barriers are in the rearview. Apple makes it nearly impossible to activate an iPhone without installing Apple Pay, more issuers enable cards to be provisioned to the wallet, just about all merchants have contactless terminals now, and tap-to-phone payments expand acceptance beyond fixed terminals in stores.

Globally, there are reportedly now 744 million active Apple Pay users, more than double in 2017.

Apple Pay at 10

According to the PYMNTS Intelligence report, in the U.S., the result has been strong Apple Pay growth as a percentage of retail sales volume. Between 2014 and 2021, Apple Pay growth sort of flatlined. Between 2022 and 2024, Apple Pay grew rapidly. Its growth over those two years was 41%.

At the ten-year mark, Apple Pay has a 5.6% share of retail sales. Increased merchant acceptance drove 58% of that lift. In other words, Apple Pay users could — and did — use it to pay for their purchases at more stores. Most of those purchases came from gas and C-stores, grocery stores and restaurants.

Where Apple Pay hasn’t fared as well is getting more iPhone users on Team Apple Pay. More than 90% of iPhone users who could tap their phone instead of a card when shopping in a store still don’t. Less than 20% of Apple Pay’s growth over the last decade has come from new users. We also see that instore use and adoption has started to plateau.

Growing More Users

Apple Pay’s challenge, as with any new way to pay, is to expand beyond the early adopters to the mainstream consumers — who still think cards work just fine. Apple Pay has a massive 54% share of the in-store mobile wallet usage (the other 46% is captured by PayPal, Google, Cash App, Walmart, Samsung, and Venmo), but it’s still a pretty small pond. Physical cards remain its most formidable competitor. At least for right now.

Monetizing Apple Pay matters a lot to Apple. It’s a cornerstone element of the high-margin Services revenue bucket that is  a hedge to what has become a less predictable iPhone revenue and profits backstop.

Today, 46% of Apple’s revenue comes from the iPhone, with the U.S. as its biggest market. Europe at 26% represents a distant second; China at 17% a distant third. Across the business, Apple averages a net margin of about 46.26% as of Q3 2024, down slightly. The drag on profits has come from the hardware side of the business which has seen margins slip to 35%.

Services, though, is where the magic happens. At 28.2% of revenue, as of Q3 2024, Services account for nearly three quarters (74%) of Apple’s profits.

Services revenue has seen strong growth over the years, most recently reporting a 14% rise year over year. Specifically, Services is the bundle of revenue from the App Store developer fees, AppleCare, Apple Pay, Apple One/Apple’s subscription business like Music and TV, its ad business and the search exclusivity payment from Google. Apple Services has more than a billion subscribers to its services. Its retail ad platform generated $7.5 billion in revenue so far, almost as much as all of Foot Locker’s revenue in 2023.

A Slippery Grip on Handsets

Yet, Apple can’t assume that its grip on the handset market in the U.S. and globally is secure, despite an early strong showing in China for iPhone 16 sales. Apple’s share of smartphones in the U.S. has remained relatively flat since 2020 — which is part of the reason Apple stopped reporting the number of devices sold.

Without handset sales, there isn’t Apple Services revenue. And without its current App Store business model, its profit engine is at risk.

Opening its NFC chip to rivals will create competition at the point of sale for iPhone users who will have the option to use a different wallet to pay for purchases in the store. That has the potential to divert wallet volume, and the revenues from it, away from Apple Pay.

At the same time, Apple Pay’s reach is only as deep as its share of handsets in the market, consumers that use it and merchants that accept it. In the U.S., that’s roughly half of the smartphone installed base; globally it’s far less.  And as we’ve seen, getting more existing iPhone users to use Apple Pay in the U.S. is the big nut to crack. Along with convincing the world’s biggest physical retailer, Walmart, to join Team Apple Pay, which is where 9.4% of retail spend in the U.S. happens.

For Cupertino, the soul-searching for their infamous “one more thing” must address the four fundamental threats to Apple’s iPhone-centric business model. That’s where the combination of regulator pressure and GenAI have the potential to become the biggest disruption to the smartphone ecosystem since Apple’s launch of the iPhone in 2007. And its App Store a year later.

Threat Number One: GenAI as Device and Operating System Disruptor

Next month will mark two years since OpenAI made ChatGPT accessible to the world. Each month when PYMNTS Intelligence asks a panel of C-suite enterprise executives to identify leaders in GenAI and LLMs, Apple doesn’t make the short list. This despite Apple’s early embrace of voice-assisted AI with the introduction of Siri in 2011 and after reportedly spending $20 billion in AI development costs over the last five years. Insiders say that Apple is at least two years behind in its development and commercialization of GenAI.

We’ll finally see Apple Intelligence on October 28, more than a year and a half since the launch of powerful LLMs by Google, Amazon, Meta and Microsoft, and about a month after the launch of the iPhone 16 handset. Apple is said to have spent $1 billion developing Apple Intelligence. With it, Apple hopes to persuade fan boys and girls to upgrade to its latest model.

Apple’s last-to-market entry with GenAI faces high expectations for what it must deliver. More than 200 million people have already downloaded and are using GenAI apps on their mobile devices. According to Statista, more than 4 million people in the U.S. downloaded ChatGPT in September 2024 alone. Those users are already getting, using and integrating GenAI into their everyday experiences, including voice-activated features and prompts to write better-sounding emails.

That means that Apple’s version of GenAI will have to be a real knock-your-socks-off experience beyond the much hyped Genmoji feature to get users to shell out $1,100 for a new phone or even to show the world that Apple is a player in GenAI. Despite the investments so far, some still say that Siri isn’t any smarter than she is now and lags GPT in accuracy. [Cue the Genmoji sad face.]

Then there is the potential of the yet unknown Gen-AI powered device that lots of entrepreneurs are surely thinking about.

Jony Ive and OpenAI’s Sam Altman have raised $1 billion to fund the development of a device and operating system that they say will be as disruptive to the personal computing space as the iPhone was in 2007. Ive ought to know — he was among the iPhone’s early masterminds.

Although there’s no time yet slated for its release, it looms as a longer-term potential threat to Apple, along with all the under-the-radar ventures that are almost certainly trying to disrupt the smartphone model.

Those risks are especially concerning given that iPhone upgrade cycles, always an Apple tailwind, average about three years. And Apple’s success beyond its core hardware products (iPhone, MacBook, Air Pods, and the Apple Watch) has been fleeting. The Home Pod was a dud, and Vision Pro is a cool headset in search of an audience beyond fanboys. Apple’s self-driving car, Project Titan, was driven to the junk yard in February after a decade of work and $10 billion of investment.

That sort of makes the iPhone Apple’s biggest, and most enduring, one-hit wonder.

It’s also been 17 years since we’ve seen a new form factor and operating system appear in the everyday smartphone/smart device category. Based on interviews with Altman and Ive, it seems their device won’t be a phone but something different, connected and GenAI powered. It’s entirely possible that Apple’s early adopter fanboys (and girls) could be persuaded to find a new favorite.

In the more immediate term, GenAI phones by Google, Samsung, Xiaomi and Huawei are hitting the smartphone market. IDC forecasts that the sales of GenAI powered smartphones will increase 364% year over year in 2024, and 73% in 2025. These are all Android devices, presumably powered by Google AI. Google is light years ahead of Apple in AI and its application to use cases with a demonstrable impact on business and society. The Nobel Foundation thinks so too, awarding two 2024 Nobel prizes to now or recent Google employees for their AI achievements.

Bottom line: Consumers with curiosity right now have different hardware options to connect them to ecosystems that are accessed using GenAI tools and operating systems. And for the moment, they aren’t iPhones.

Threat Number Two: App Store Business Model Pressure

The Epic Apple antitrust case was the starting gun for the unraveling of Apple’s hold on its App Store business model, the primary driver of Apple’s Services revenue and its profits.

Apple was forced by EU regulators this year to open its App ecosystem to rival processors. It was also found in violation of the Digital Markets Act in June 2024 over fees that are “beyond what is absolutely necessary,” and fined $1.8 billion. Apple now allows developers free rein to process payments outside of the App Store, but not because they decided it was the nice thing to do.

According to Reuters, in August, Apple also reduced its developer commissions, putting in place a structure that includes an initial 5% acquisition fee for new users and a 10% store services fee for any sales made by app users on any platform within a year of the app installation.

In the U.S., Apple made the magnanimous concession to reduce developer commissions from 30% to 27% in year one while also allowing developers to process payments outside of the App Store. Now there is a dynamic in play where the judge in the Apple/Epic case could force Apple to lower its fees and be more open. And a larger, more serious antitrust case is just getting started, where the DOJ — following its huge win against Google Search — is targeting Apple and its App Store business model.

It’s not possible for developers to sidestep Apple App Store fees now, but that could change quickly and likely will globally.

Threat Number Three: Searching to Keep the Google Search Exclusivity Windfall

Then there’s not often cited, but massive, threat to margin and revenue from the potential loss of the exclusive Google search revenue deal.

As part of the Google antitrust proceedings, court documents disclosed that Google’s payment of $20 billion in 2022 to Apple to power search on Safari accounted for 36% of Safari’s revenue. More importantly, it accounted for 17.5% of Apple’s operating income, based on 2022 results. And largely pure profit to Apple.

Depending on the final ruling on remedies by the court in the DOJ lawsuit, that payment could be gone forever, or severely reduced. That’s a lot of revenue, and margin, to replace when the case is finally settled.

Threat Number Four: Cracking Open the Chip

Opening Apple’s NFC chip to rivals is now possible with the release of iOS 18.1. Now any wallet that is an app on the iPhone can be used to pay at the physical point of sale.

That creates new competition for Apple Pay at the in-store point of sale. There are early signs that PayPal, with its cross-platform digital wallet as an app on the iPhone, may be getting some in-store traction. Anyone with an iPhone and a PayPal app can now pay at the point of sale and online — just about anywhere they shop now — using it. PayPal counts 278 million users in the U.S. who have PayPal wallets now that they can use on and offline to shop and pay.

According to PYMNTS Intelligence, we already see the share of consumers with any phone using PayPal to pay at the physical point of sale increase by 31% year over year. Once a distant second, the gap between Apple Pay and PayPal in-store is only 18%. We’ll see if that gap shrinks further over the next 12 months.

In addition to creating wallet competition in-store, access to the iPhone NFC SE creates an advantage for apps and wallets that are cross-platform and cross-channel. This is particularly important for the growing number of Click-and-Mortar™ shoppers who want the same experience shopping in-store as they do online. That includes shopping history and order history, regardless of whether a purchase was made in a store, in an app or on a web site. That’s a barrier for Apple Pay right now, and these shoppers now account for more in-store shopping and mobile wallet use.

PYMNTS Intelligence found that between 2020 and 2023, the share of U.S. consumers shopping in-store grew by 28%, largely due to a rise in the share of Click-and-Mortar™ shoppers. From 2022 to 2024, the share of consumers who use mobile wallets for in-store transactions rose 33%, indicating mobile wallet use in-store is going up with Click-and-Mortar™ shopping. Providers with apps that cross platforms pose an even greater threat to Apple Pay, particularly from the digital-first Click-and-Mortar Shopper whose ranks are the parents, high income and younger consumers who spend a lot today and will continue to spend in the future.

And growing competition for Apple and Apple Pay, whose payment options are limited outside of the Apple ecosystem.

Filling the Cracks

As Apple looks ahead to 2025 and the rest of the decade, the big drivers of Apple’s revenue and profit engine face intense pressure. That has implications for what Apple may want — or need — Apple Pay to deliver.

In China, its presence is likely short-lived given intense competition from good smartphone makers that have optimized for the WeChat ecosystem and political pressures favoring domestic manufacturers. At the same time, the population of younger consumers there is shrinking, and the economy is in free fall. Both reduce the pool of potential Chinese iPhone customers.

In Apple’s second-largest market, the EU, where the regulators have Apple and Apple Pay squarely in their sights, the current crackdown seems more like a warm-up act than the grand finale. In the U.S., political, regulatory and legislative pressure will continue to force change voluntarily or via mandates. Apple’s business model will continue to be the subject of intense and ongoing scrutiny, along with every other Big Tech business model.

At the same time, Apple’s competition is using new technology to reimagine the relationship that consumers have with devices and the digital economy. GenAI is both a massive source of innovation and disruption. For Apple, at least so far, it has been the latter and not the former.

When it comes to payments, one of the remarkable innovations that emerged from Apple Pay is the tokenization of credentials, which streamlines the payments and commerce experience for online and in-app transactions. But Apple with Apple Pay doesn’t have a lock on that tech.

As tokenization evolves beyond secure and stored account credentials to digital identity and shopper preferences, form factors and the commerce experience will evolve, too. Tokenized credentials become digital commerce passports and form-factor agnostic. Like the iPhone in 2007, we won’t really know it until we see it. And just like what happened to the ubiquitous Blackberry that no one ever said they could live without, if the experience is amazing enough, it won’t take long for fanboys to become fans of the next big thing. And for new business models to emerge that encourage adoption and usage.

The Next 10 Years

For Apple, over the next five to 10 years, the test will be whether it can really walk the talk as a Services-first business that just happens to produce handsets that people like and use. It seems an unlikely pivot for a business that is all about closed ecosystems and getting more and more people to live within them. And to  monetize that engagement while there.

What is likely is that Apple will look to where the big pools of transacting happen on their platform and decide to monetize the apps that drive it.

For example, Apple could expand its App Store fee to services platforms like Uber, DoorDash and Airbnb. Or decide that any sales made from shopping apps, of which there are almost 80,000, are subject to an App Store fee, too.

Apple could also decide to double down on Apple Pay as the Services monetization engine. It  could decide that any app stored inside the Apple Pay wallet gets monetized when onboarded, accessed, and/or used. It could decide to take a small cut of sales made by any merchant that an Apple Pay user initiates from the Apple Wallet. It could white-label the Discover Network and make Apple Pay a payments new rail.

Regardless, Apple’s options and decisions will be closely watched by courts, regulators and legislators who increasingly see Apple as uncooperative in following their decisions.

A final thought.

Tim Cook was quoted in a Wall Street Journal article yesterday saying that Apple’s mission isn’t to “be first, but best.”

Except the iPhone really was the first and the best.

Apple AI (Siri) was one of the first and now one of the worst, and its EV wasn’t first and is now dead. Whether “first not best” is the Apple mission today or just how things have turned out is subject to debate.

But it seems the anthesis of what made Apple great and delivered innovations like the iPod, iTunes and the iPhone that changed the world and the consumer’s access to the digital economy. And that made everyone rush headfirst into the market to replicate.