By: Dan Woods
Apple has a long history of making things work that others have previously tried. With the iPod and the iPad, Apple brought ideas to life that many smart people had been banging away at for a while. The latest attempt to succeed where others have stalled is in the area of the mobile wallet. Almost every company who has a direct relationship with consumers will have to come to terms with Apple’s mobile payment system (called Apple Pay), either adopting it, or rejecting it for a good reason.
This story provides a high level guide to Apple Pay, explaining where the technology will be a good fit and where it will fall short. The bottom line: Using Apple Pay, like using other third party mobile wallets, has one huge flaw: You give up the direct relationship with the customer. If you are seeking to do more than accept money from consumers you must have a way, besides Apple Pay, of creating and maintaining that direct relationship in a mutually beneficial manner.
Here’s my analysis.
The Role of the Mobile Wallet
Mobile wallets are often explained ineptly and so they seem more complicated than they are. Here’s how a mobile wallet works:
- Just like a regular wallet, a mobile wallet is a place you can keep track of payment cards, loyalty cards, coupons and more.
- You can link your mobile wallet to a variety of payment sources on an as-needed basis.
- You can then use these linked accounts to make purchases.
- The transfer of money happens through an exchange of information between your mobile device and a retailer who has a system that is ready to accept money from a mobile wallet.
Google has offered a mobile wallet for several years, but it hasn’t really gained wide acceptance. Amazon has extended its capabilities to let people use their Amazon accounts like a digital wallet that works on various websites. There is another mobile wallet technology called SoftCard, formerly ISIS, that is sponsored by a consortium of wireless companies including Verizon, AT&T, and T-Mobile. Paypal also has a mobile wallet app, but few users have adopted it. Square, the creator of the little white credit card “swiper” you attach to your phone also attempted to launch a mobile wallet but recently gave up and exited the space.
Now with the launch of the iPhone 6, Apple has introduced Apple Pay that will let you use the new iPhones and your thumbprint to pay at a limited number of retailers. At the same time, Apple also announced the Apple Watch as yet another way to pay, although it must be linked to an iPhone in order to do so. This is causing some confusion. You will be able to use Apple’s wallet with the Apple Watch, but also with the iPhone 6, and probably through the web. The biometric thumbprint capability is cool, but it’s a bit of a red herring since you will be also able to identify yourself and enable the wallet using all sorts of credentials. Usernames and passwords will still be important, but other biometrics will also come along. The key thing a mobile wallet needs to know is that it is you asking to spend the money.
Any mobile wallet will succeed or fail because people like the convenience of using the wallet to pay and because of the value added services – like offers, loyalty and coupons – that are part of the user experience. In this regard, Apple’s technology isn’t particularly innovative and is limited to only the payment portion of the customer interaction. The biggest advantages Apple does have are its installed base of hundreds of millions of iPhone users, its brand, and the ability to design and market a first class customer experience using its wallet. Only time will tell if that is enough., but even then, that is only half the battle.
Mobile wallets are useless unless you have retailers that accept them. Convincing retailers to procure the hardware and do the technology work necessary to enable mobile payment acceptance is a key challenge in this space. Making the mobile wallet attractive to customers is another challenge for Apple and the other wallet vendors since it has become clear that just enabling payment is not enough to drive adoption. Mobile payment adoption has not been rapid for many important reasons and it is far from clear that Apple will be able to overcome the barriers any more effectively than the other vendors.
The Case Against Third Party Wallets
The problem is that retailers don’t have much to gain from accepting money from a mobile wallet. Apple may be able to over come this by getting enough consumers excited about using a mobile wallet that retailers are forced to sign up. That said, this has not happened with the Google Wallet which has been available for over three years as a way to pay at the very same retailers as Apple Pay, including McDonalds, CVS and others. Did you know that was possible? Few people do. That’s the problem.
For Apple to succeed it once again must create a multi-sided platform that grows more valuable as the number of participants on both sides grows. Boston University Professor and MIT Researcher Marshall Van Alstyne has described the economics of platform creation in some excellent presentations available on SlideShare. His fundamental point is that platforms that allow the creation of multi-sided ecosystems beat products and create more value for the platform provider. Apple has a strong shot at getting consumers on board, but it must now add the retailers to get a platform going.
Apple may be able to pull it off. After all, it has generated new excitement about products that were previously not considered exciting. I think there is a huge untapped potential to get consumers excited about using a mobile wallet.
I remember when I first got the Starbuck’s app and I was able to pay using my phone. I thought it was really fun. At first I was not sure why. I had a gold Starbuck’s loyalty card that I could use just as easily. The Starbuck’s app just moved the transfer of information from the swipe of the card to a scan of my phone. But somehow it felt cool to use the phone — like I was breaking new ground.
But quickly other advantages of the Starbuck’s app became apparent. I could see the balance of money I had in the wallet. I got instant feedback about my available balance. I also could see the status of my loyalty program so I was more aware of how close I was to a new reward. Just recently the app was updated to allow me to leave a tip. The only false note has been when, after a recent upgrade, the store locator function became a lot less useful. (Note to Starbucks development team: What happened? Did you switch to Apple Maps or something dumb like that?)
Notice what happened here. The new way to pay is clearly cool and fun. But the ability to explore more dimensions of my relationship with Starbuck’s added lots more value. Starbucks also got out of the business of having to send loyalty cards around, an expensive endeavor. Now, after four years of the availability of the app, Howard Schultz, Starbucks’ chairman, president and chief executive, said that 15 percent of Starbuck’s revenue comes through its mobile channel during a July 24, 2014 conference call to discuss the company’s earnings for its fiscal third quarter (ending June 2014).
For Starbucks to use the Apple wallet, the customer would have to jump from the Starbuck’s app into the Apple App and then come back. This is not a recipe for a pleasing user experience. Other retailers with their own apps are not going to want to do this either.
Here’s the challenge facing Apple in attracting retailers. Will it be possible to create a fully dimensional loyalty program through the wallet? In other words, will Apple allow vendors using the wallet to create the same type of relationship that Starbuck’s created with me? Remember, loyalty programs are just one way of enhancing a wallet. Many more will come down the line.
Right now the answer is no. Apple and many of the other third-party wallets don’t allow the creation of this multi-dimensional relationship. When a retailer accepts an Apple Pay for payment, they get only the money — just like a cash or a credit card transaction. Remember, when you swipe a credit card, you just give the vendor your credit card number, not your personal information. Apple Pay works the same way.
Is it possible that Apple will succeed in attracting retailers because consumers demand it? Possibly. But even if Apple pulls off creating a two-sided platform, retailers still have to face the challenge of creating a richer relationship with customers.
Other Choices for Mobile Payments
Retailers have two choices to create a multi-dimensional relationship that includes the ability to pay: go it alone or use an embedded platform.
Starbuck’s went it alone. They were so early to market they really didn’t have a choice. The development team at Starbucks created a wallet by interfacing with credit and debit cards to fund the wallet using the payment APIs that allowed access to each payment mechanism. This worked great for Starbucks but few companies have a development team that can pull this off. The reward for Starbucks for making this investment is the rich relationship with the customer that surrounds payments previously described.
The second choice, one made by Subway and MCX – a huge consortium of retailers that includes Walmart, Target, Best Buy, Wendy’s, Sears and many others – is to use a white label mobile payment platform like Paydiant. In this model, the retailer can build mobile payments, offers and loyalty into their own apps but keep control of the customer relationship.
Paydiant, which competes with other embedded payment platforms like those from Gemalto or C-SAM (recently acquired by Mastercard), provides a development “toolkit” that handles all the complexities of creating a wallet and integrating with a retailer’s point of sale environment. You don’t have to do the work that Starbucks did in going it alone. Here’s what a white label mobile wallet platform offers:
- The ability to create a wallet and fund it through multiple payment mechanisms.
- The ability to allow a user to identify themselves using a password, biometrics, PIN or any other mechanism that is allowed by the devices on which the app runs.
- A platform for mobile offer management, delivery and redemption.
- A fully integrated mobile loyalty system or the ability to easily integrate an existing loyalty platform
- The ability to use existing e-commerce credentials to login to the wallet.
- The ability to support multiple payment acceptance technologies so that the QR code, NFC, Bluetooth, or other mechanisms can be leveraged to initiate a payment.
- The ability to provide a branded web interface to manage the wallet that can be enhanced with other loyalty features.
- A steady stream of updates to keep up with security and other changes to the underlying payment mechanisms.
- The ability to use existing relationships with payment processing vendors such as First Data, Vantiv, gift card providers and others
- Addition of new methods of providing credentials and payment mechanisms as they become available.
Chris Gardner, Co-Founder of Paydiant
The Subway mobile application developed by Paydiant provides mobile payments for both in-store and remote transactions. Credit, debit and gift cards are all supported payment types. The platform also integrated with Subway’s loyalty platform so that consumers can earn loyalty points for all of their purchases through the mobile app. Finally the mobile app is directly integrated with Subway’s ordering platform so mobile users can order their sandwiches from their phone, pay for their order and simply gift their name and pick their food when they arrive at the restaurant. These are types of value-added services that could drive mobile wallet adoption.
The MCX consortium collectively represents over 20 percent of all transactions in the United States. MCX selected Paydiant earlier this year to power its mobile wallet platform so that the members of MCX can have better control over payments, their mobile brand and the mobile customer experience. They are using this platform to create the kind of rich experience that Starbuck’s has created and to extend it in new ways. And, they don’t give up the valuable data about their customers’ buying activity to Apple or Google or another wallet company.
“To the world’s largest retailers, leveraging the mobile experience to strengthen the customer experience and drive loyalty is a strategic imperative,” said Chris Gardner co-founder of Paydiant. “And when access to a customer’s spending history is hanging in the balance, it is clear that most retailers will not be willing to concede this to others – no matter who they are.”
What are the additional possibilities? Here are some things under development at a variety of companies in addition to loyalty programs:
Commerce services:
- Order food or other items ahead of a visit to a store for fast pickup.
- Create shopping lists
- Pick groceries for delivery
- Mobile commerce and shopping
Promotions:
- Discounts
- Offers
- Coupons
- Contests and sweepstakes
- Geolocation-based offers
Advanced data analytics
- Mobile gives retailers an even deeper understanding of the customer that can be used to design and optimize marketing and promotional programs.
Now Apple and the other third-party wallet vendors could imitate this platform approach by offering a platform that enabled some of these richer customer interactions like offers and loyalty. But that would run directly counter to Apple’s claims they are not interested in making a business out of a retailer’s data and customer behavior. And if you accept that retailers want to continue to own the customer experience, the very un-Apple possibility of a solution where Apple did not completely control the user experience emerges. Ultimately, I think this outcome is unlikely because of the long history of retailer reluctance to share customer data and ongoing consumer privacy concerns.
What Mobile Wallet Technology Fits Your Sweet Spot?
As usual, the key to making the right decision rests on knowing who you are and what your goals are. Many retailers will be happy to put another sticker on their front door or their cash register that says “Apple Wallet accepted here” and be able to take money that way – assuming it makes it easier to spend money at their store. Could Apple succeed just on this basis — by an up swell in consumer enthusiasm? It’s possible.
But even if Apple does succeed and many retailers embrace Apple Pay, it still leaves those retailers without ownership of a richer experience surrounding a wallet. Remember, retailers can both accept Apple Pay and also create and promote their own wallet. There are four criteria that will drive a vendor to deploy its own branded mobile wallet:
- The retailer is using mobile as a strategic marketing channel
- The retailer wants to leverage their existing POS equipment and avoid costly upgrades
- The retailer has a popular loyalty program using plastic cards.
- The retailer has their own payment instruments like private label cards
- The retailer can leverage mobile to streamline the customer experience
The more a vendor satisfies these criteria, the more it needs its own mobile wallet.
Will Apple succeed? Probably more than Google has. Will Apple change the way that people buy just the way it has changed the way people listen to music and user their phones? In my view, no, not until they have more to offer vendors than the ability to allow consumers to pay.
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