Can Apple Pay be successful?

I was pitching a new mobile wallet to banks a few years back and meeting with many of the leading banks in Europe, Asia Pacific and North America. Initial responses were not encouraging.

Two memorable and typical responses were:

“we have been doing this for years now to no effect and are all just so fatigued we don’t want anything more to do with them”

and

“no one is using mobile wallets and the ones that are (sic) are using Apple Pay”.

(both these companies did end up supporting the mobile wallet I was pitching for reasons I will go into another time).

Almost 5 years on from the launch of Apple Pay with many of the most powerful brands in the world having invested many billions of dollars in work hours, technology and marketing, should we collectively call time on mobile wallets?

What seems clear from the limited data that is available is that the number of customers that are regularly and consistently using mobile wallets is very very low. If only 3% of Smartphone users used Apple Pay the last time they paid the likelihood is less than 1% used in the previous two times. That’s not a lot to show for the effort.

This is not a situation that is unique to the US which has struggled to achieve any momentum in contactless payments to date. The most successful markets in the world for contactless including Australia, Singapore and the UK have not seen this success migrate into mobile wallet usage, rather customer loyalty seems resolutely connected to card based NFC payments.

There are two notable outliers here, the most successful mobile wallet for in-store use in the US is Starbucks accounting for over 30% of their transactions. The most successful online wallet is of course PayPal. Much has been written on the success of these elsewhere so I won’t go into these in any detail. Suffice to say that both had a clear customer value proposition that were significantly better than the payments methods they were designed to replace and had strong channel partners (Starbucks itself and Ebay). None of which holds true in the mobile wallet space.

What went wrong with mobile wallets?

There are three main reasons I believe for the failure of mobile wallets to date:

1. It’s not a better customer experience
2. Payments is a utility not a consumer product
3. The primary channel to market has been alienated

It’s not a better customer experience

The average consumer is not looking for a new way to pay. They are habituated to whatever it is their market requires whether its chip and pin, swipe and sign, chip and sign etc. and as long as it works, they do it. To change this behaviour requires overcoming a substantial barrier to inertia and it must offer a substantially better experience for it to stick.

The core value proposition for a payment is that it needs to be quick and easy — secure is a hygiene factor and a given. In markets with contactless card usage, a contactless transaction will take around 8 seconds beginning to end from the cashier initiating the payment to the customer receipt and it’s a very consistent experience between and within merchants. The payment experience between and even within different mobile wallets can be very different depending on which wallet you choose, operating system, device version and app version.

In my personal experience Apple Pay offers a pretty standardised and automatic experience overall compared to many of the alternatives. The payment authentication wakens the phone automatically and the fingerprint or facial authentication is fast and intuitive. It’s just not as easy or fast as taping a card to pay for low value transaction which doesn’t require authentication, even allowing for the need to remove it from a wallet.

If it’s not offering a markedly better experience I don’t think the majority of people will have a reason to use it habitually.

It seems weird that the customer experience compares so poorly with tap and go cards. Why would friction be built into what was meant to be a better way to pay? The reason for this lies in the inherent conservatism of the networks who set the rules and the environment in which these rules are made and enforced, and where these customer experiences were first designed.

We are still on Version 1 in terms of the core payment experience for all the major wallets. These were all designed in the US during 2013–14 at time when card based contactless payments were soaring elsewhere in the world but not in the US.

Why is America so behind the rest of the worlds on contactless payments?

So ubiquitous is contactless in Australia that when hapless visitors from the US visit there is inevitable confusion as…

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The US was almost unique in developed economies and did not have the card tap and go customer experience against which to design the mobile experience. They were working essentially in a user experience vacuum.

The networks conservatism led to authentication requirements such as the consent button for wearables and authentication for all transactions that built in friction to the user experience. Some of these have been relaxed or removed since but the wallets have not continued to enhance and improve the CX from 2013.

2. Payments is a utility not a consumer product

Consumer products are typically high interest for consumers, big shiny launches of the newest phones, hysterical lines at stores to be the first one to get the latest thing, CEO’s and Celebrity endorsements, rich media coverage and comparisons. It’s all soooo exciting!

Ever seen the same for the latest electricity, gas, water or sewage plant, innovation or announcement? It’s probably a lot more important than the latest phone, just not as interesting. As long as it works we prefer not to think about it.

Payments sits firmly in the utility camp. But when three of the biggest consumer product brands in the world launched their mobile wallets they did it the only way they knew how and launched them if they were a consumer product. This was very expensive but ultimately, did not lead to the expected consumer response. You can’t make payments sexy with a TV ad.

The card contactless experience has shown that consumers, at least initially, need to be incentivized to try new payment technologies. Ideally this needs to be done at the point of payment — which is about the only time most people think about payments. About a foot from the till — that is when you realized you left your wallet or purse at home. It take 3–5 good transactions to habituate to contactless when it’s better than the alternative. One bad experience is enough to turn the consumer away. Once critical mass is achieved at around 8–15% of face to face transactions, growth is naturally exponential.

Trying to convince consumers that payments are interesting is a hard if not impossible task.

3. The primary channel to market has been alienated

Retail banks are potentially an incredibly powerful channel to market. In the US alone they spend over $7bn annually in combined consumer rewards, benefits, incentives and marketing. The top ten banks in the US combined serve several hundred million consumers.

The greatest fear of the established retail banks is disintermediation by Fintech companies and the accompanying commoditization. Yet every bank Apple Pay or Google Pay or any other wallet implementation is completely undifferentiated from the bank’s perspective. They are reduced to simply one in a list of cards. The mobile wallets have done the very thing that the banks fear the most. The result of which is that the banks investment and support for the wallets is at best ambiguous.

Does it even matter?

Whether or not it’s important that mobile wallets succeed needs to be assessed from the perspective of each of the key stakeholder groups — Consumers, Merchants, Issuers and the companies owning the digital wallets.

For Consumers smartphones have become the central organizing and communications medium of their lives. Millennials spend over 5 hours a day on their smartphone. Mobile commerce and online/in-app payments continue to grow exponentially. But the vast majority of commerce remains in physical stores and face to face with cashiers. In this environment, as far as payments are concerned, smartphones remains unused. It’s possibly unique in this respect. Why are in store payments the last bastion against smartphones? Is it because it’s impossible to improve on the current payment experience? I doubt anyone would agree with that statement. Rather it feels like the industry has not given consumers a good enough reason for them to make the shift.

Merchants want increased footfall, frequency of visits, increased basket size and as little friction as possible at the point of payment. Future generations will struggle to believe it was entirely normal to spend time queuing to pay in a shop. Amazon Go and others are creating that future now but for vast majority of us, we continue to spend too much time queuing to pay. Smartphones can solve that in multiple ways and indeed extend to do far more for the merchant besides just paying. But for that to happen the smartphone has to become a central part of all commerce experiences, including in store.

Issuers need increased engagement to defend against commoditization and maintain the customer relationship over a potentially very long customer lifetime, the average customer in the US stays with their bank over 16 years. Whilst credit cards contribute a relatively small amount to overall profitability, they are the most frequently used of the banks products and a critical link to the consumer and their life. Issuers are in a fight for relevance and mind share on smartphones. For smartphones to not play a role in the everyday spend of a consumer is giving up on the very space issuers should have a significant voice in.

Mobile/Digital Wallet owners cover a broad spectrum from device OEM’s (Apple, Samsung, Google, Huawei, Fitbit, Garmin), OS platforms (Apple, Google), merchants (Walmart, Amazon, Starbucks) and issuers (Chase, PayPal etc.). Motivations vary, but all benefit from being the channel through which consumers spend their money whether it’s capturing consumer data, eyeballs or the opportunity to bring more utility and engagement to the platform — be it hardware of software.

All stakeholders would seem to stand to benefit a great deal from smartphones being at the center of all a consumers payment and commerce not just the online minority.

All of the apparent weaknesses of the mobile wallet’s go to market strategy could have been addressed since the initial launches in 2014. So how have the key mobile wallets responded to the poor performance to date?

The pivot to online and in-app

The main branded mobile wallets seem to have reacted to the lack of traction in the in-store contactless market by pivoting to focus on online and in-app as an alternative channel. Both Apple Pay and Google Pay have spent considerable resources in the last few years in building their online and in app presence. The withdrawal of Visa Checkout and MasterCard’s Masterpass since 2018 has left this market less competitive, at least in terms of brands attempting to compete with PayPal.

Online and in-app payments are a very different market from in-store — in the physical merchant when the decision is made to accept NFC all wallets are accepted. The competitive battle is less important than the battle for consumer relevance which starts with customer experience. This is a complex interplay between device hardware (NFC antenna positioning, strength etc.), POS hardware, multiple operational issues across POS placement, signage, cashier training and incentives and marketing.

In in-app and online, the battle is first with the merchant community as acceptance has to be secured with each and every merchant individually and then with the customer — for iOS and Android respectively. This has become significantly easier with payment gateways like Braintree embedding multiple wallets into their SDK but still requires the merchant to decide to support them. Once acceptance is achieved the customer experience is standardized and highly consistent. Google has gone one step further in creating Google Express which seeks to aggregate multiple online stores and works very well in my personal experience.

Whilst the online and in-app market continues to grow at a massive pace, and mobile is at the heart of this change, physical in-store payments still account for the vast majority of payments. Ignoring in-store leaves a significant gap in consumers spending and financial life which could be enhanced through the smartphone but currently is not. This gap may eventually be filled by Amazon Go type experiences which dispense with POS altogether but this is going to take a long time and we don’t want to make the same mistake as previously in assuming a new technology will leapfrog the present, in the same way as the US payment industry did with mobile and card based NFC.

A human centered design approach to mobile wallet 2.0

It took almost 10 years for the industry to figure out how to make card based NFC a success, and the basis for that success was fixing the payment customer experience.

We are only halfway to that point in mobile wallets, maybe it’s time for a mobile wallet 2.0. The soaring use of smartphones for both in-store and online payments in China should give us confidence that consumers will use their smartphones for all payments when conditions are right. Its equally clear these conditions have not been met elsewhere and the smartphone remains uniquely excluded for in store payments for the rest of us.

Mobile Wallet 1.0 — almost all major current mobile wallets are still in their first iteration from a CX perspective. First generation wallets were the result of a largely technically driven design process whilst the consumer device and payments industry figured out how to work together and collaborate on things like tokenization and the network rules. Most of this work was done over 5 years ago and all within a few miles radius of Cupertino in one of the world’s least developed mobile markets. The primary design criteria was not whether the experience was better than card, let alone tap and go cards. There was an unrealistic expectation that the novelty of phone based payments would be sufficient to forgive an inadequate CX, and this assumption was proved wrong.

Mobile Wallet 2.0 — now the technical and commercial frameworks are mature we need to apply a human centered design process on the CX on an end to end basis from the cashier to the app as a single ecosystem. This will require an unprecedented degree of collaboration between the various stakeholders. I think the payment networks could and should take a central role in this and act as a proxy representing the issuer community.

I believe a truly differentiated and customer centric solution will require a fundamental reset in how mobile wallets are designed and managed. We have to create an experience that is significantly better than paying is today.

The walls between the wallet owners and the issuers in particular need to be taken down. The walled garden approach has failed and it’s not enough to be just a card repository. As a consumer I want to be able to manage my whole financial life through a single app. This means both wallet owners and issuers giving up a lot of control and learning to work together — but this would be worth it to create a service that consumers value and use at scale, and finally puts the smartphone at the heart of all of a consumer’s financial life.

Let me know what you think in the comments or you can also use Linkedin or Twitter

Go to Part 1 if you missed it — My recipe for a dream Digital Wallet experience