U.S. consumers have eschewed in-store mobile payments for years, but Apple Pay is making headway in that area just a month after the service launched Oct. 20.
Apple Pay's early success aside, the question remains over how sticky the use of mobile payments will be among smartphone and tablet users.
Will consumers try making a mobile payment a few times, and then give up? Or can Apple and other providers find ways to instill a mobile pay buying habit in reluctant Americans?
More grocers and bankers on board
Apple's latest success with Apple Pay includes the addition of support from hundreds of grocery stores within six major chains in the past week: BiLo Holding, 830 stores; Harvey's and Winn-Dixie, 530; Albertson's and Jewel-Osco, 180; Shaws and Star Markets, 150; United Food Stores, 60; and Associated Food Stores, 135. Wegmans and Whole Foods were already part of the original 35 retail chains offering Apple Pay in an estimated 225,000 stores, about 5% of all possible U.S. retail locations.
In addition, on Thursday, American First Credit Union said its Visa card now supports Apple Pay, joining more than 500 U.S. banks already supporting the service through Visa, MasterCard and American Express cards.
McDonald's confirmed Thursday that more than 50% of its in-store mobile payments at 14,000 restaurants were made with Apple Pay in its first month. Whole Foods recently said it processed more than 150,000 Apple Pay transactions in the first three weeks of the service. And Walgreens, the national drug store chain, said in-store mobile payments had doubled since Apple Pay launched.
Can I buy this leather couch with my phone?
While the initial use of Apple Pay has been impressive, the real measure is how many return users there will be in coming months and years, and whether the transactions these users make will extend beyond fast food, groceries and Band-Aids to bigger ticket items.
"Some merchants have seen strong uptake of Apple Pay in just the first month," said Denee Carrington, an analyst at Forrester Research, in an email. "As we enter the holiday shopping season we are likely to see that trend continue, but the big question is when and how quickly consumers begin to use Apple Pay in traditional retail stores," including big department stores such as Macy's.
Carrington recently wrote that overall mobile payments will triple to $142 billion by 2019, up from $52 billion in 2014. Still, that increased total is "just a drop in the ocean of total U.S. consumer spending," and would reach just 1% of annual U.S. consumer payments of $16 trillion.
Keeping mobile payment users coming back
Jordan McKee, an analyst at 451 Research, said that even with Apple Pay's success, the U.S. is "still very much in the first inning of mobile payments [since] merchant and consumer adoption remains limited and that will be our reality for some time."
What Apple has started with smartphone and tablet payments amounts to "merely a credit card surrogate," on a device, McKee said. "Consumers will have no compelling reason to ditch current alternatives such as credit cards that work quite well."
What McKee is referring to is that Apple intentionally doesn't share Apple Pay purchase data with retailers in order to protect consumer privacy. By doing so, retailers don't get insights into their customers' buying trends nor do they have clearcut ways to offer their customers discounts and incentives. That's one advantage Starbucks has with its Starbucks card.
By registering a Starbucks card with a customer's birth date, the customer gets a free coffee every birthday. Is that possible with Apple Pay or other mobile wallet services?
"The critical thing to make mobile wallets effective is that both the merchants and the consumer get something out of the deal above and beyond just a replacement for a card being swiped," said Peter Olynick, card and payments lead at Carlisle & Gallagher Consulting Group. "The big thing Apple is marketing to date is enhanced security with Apple Pay, but I don't know if that's sustainable to keep people coming back again and again."
Even Apple Pay's security is ignored at some payment terminals
Even the security virtues of Apple Pay, with its use of tokenization to hide a user's card number, are being ignored by some retailers' point-of-sale terminals, Gartner security analyst Avivah Litan said in a blog.
Litan said Apple Pay tokens are not specifically registered as coming from an Apple Pay device by some retailers' new NFC terminals and instead are being treated no differently than if the transaction came from a chip-enabled credit card.
"The Apple token information is not being passed along," she said in an interview. "It's not Apple's fault...It's going to take a while to get the kinks fixed."
Litan said it is somewhat ironic that some retailers are coming forward to say that they accept Apple Pay when many retailers were already using new terminals that accept any NFC mobile payment system, such as the older Google Wallet or Softcard or even a card with an embedded computer chip. (See this guide to mobile payment options for more insight.)
Retailers are replacing older terminals with new NFC terminals primarily because of a bank and processor requirement to update their terminals for greater security that recognizes "pin and chip" credit and debit cards as well as devices with NFC, Litan noted. By October 2015, retailers face a deadline imposed by banks to bolster the security in their payment terminals or they must assume liability in the event of credit fraud.
"To some extent, Apple Pay is riding the wave of NFC adoption where merchants have come on board by default with contactless NFC terminals" to reduce their liability by October 2015, Litan said.
Slow growth predicted, as consumers show interest
Whatever is causing Apple Pay's early success, it is gratifying for an industry that has seen years of slow starts, including when Google Wallet kicked off three years ago. Interest in Apple Pay is expected to help other mobile wallet players in the U.S., where in-store mobile payments lag far behind other countries such as Japan and Korea.
A recent survey of 1,000 U.S. adults conducted from Nov. 3 to Nov. 10 (after Apple Pay's Oct. 20 launch) found that 56% said they would be interested in using a mobile device to pay for a gift or other item in a retail store this holiday season. Almost the same number said retailers should offer some kind of mobile payment option.
"Though the majority of shoppers have yet to use mobile pay, they do see it as an increasingly useful way to pay in-store, particularly during busy shopping periods," said Pat Dermody, president of Retale, the company that conducted the survey. Retale offers a location-based mobile app and website to aggregate weekly retail circulars to help buyers find bargains.
Even though Retale's survey found support for mobile payments, it rated Apple Pay well behind PayPal. When asked which mobile payment service they would most likely use in-store, 51% named PayPal, followed by their own bank's mobile payment app with 21%. Apple Pay came in at 10%, followed by Google Wallet at 8%, which tied with "a retailer's app." CurrentC, a service coming in 2015 and backed by large retailers, was mentioned by just 2%.
"I do think a lot of people will experiment during the holiday, using a mobile device to aid in finding a store or checking a price, but that's not to say people are ready to translate that experience into people making mobile purchases," Olynick said in an interview.
In the next two to three years, he predicted a large percentage of smartphone owners will occasionally use a phone to make a purchase. "The momentum is in the right direction and it's not just with Apple Pay, but with Softcard and Google Wallet. You are seeing more interest in all three. A rising tide raises all ships."