How Apple Can Make Mobile Wallets Actually Work

September 06, 2014

When Apple (AAPL) introduces its highly anticipated system for making in-store payments with an iPhone next week, the tech giant will be following a familiar pattern: let the first movers flail with the earliest versions of some product or service, then release a more polished version of the same idea. The mobile wallet in 2014 is a lot like the MP3 player in early 2001, just before the launch of the iPod, or the smartphones available in 2006 ahead of the first iPhone. The tools now exist for fully functional mobile wallets, just not in a way that has won over the shopping masses.

At least not yet. Apple enters the fledgling mobile-payments market with high expectations, and there are reasons to think the time is right for a breakthrough. Here’s why:

Retailers are finally adopting the necessary technology to accept mobile payment. The two most ambitious mobile wallets to date, Google Wallet (GOOG) and Softcard (née Isis, a joint venture backed by telecom companies), both rely on near-field communication. This technology allows information to move between devices when they are bumped together. Previous mobile wallets have suffered from a lack of devices with which the checkout counter is capable of receiving a bump. Apple has long pooh-poohed near-field communication, but that’s not likely to stop it from including the technology in the new iPhones. And a critical mass of retailers may finally be ready for iPhone 6-wielding shoppers in the near future. Merchants have to update their payment systems next year to accept credit cards with computer chips, which means many will finally have NFC-enabled devices in their stores.

Apple put its own pieces in place. Apple isn’t likely to rely entirely on the merchants embracing near-field communication. John Haro of Vibe, a firm that works with retailers on mobile payments, notes that there are other ways for phones to communicate transaction data—scanning screens, location sensors—that Apple has already built into its products. Current iPhones already have iBeacon, Apple’s location-tracking software, and newer models have fingerprint scanners that can be used for security. Apple’s Passbook app collects virtual coupons, which is basically a mobile wallet without the credit card information. Expect to see some combination of these features in Apple’s mobile-payment system.

People actually like mobile payments—at least for lattes and taxis. Mobile wallets haven’t caught on in part because they haven’t given customers a reason to use them. “Everything that has been done so far has not been customer-focused at all,” says Haro. “It’s all been focused on the manufacturers and carriers.” Still, mobile payments have proven popular in certain niches. With help from Square, Starbucks (SBUX) has been accepting payments on its mobile app since 2012; now 15 percent of transactions at Starbucks’s U.S. stores use mobile payments, and the coffee chain is working on a service that will let customers order and pay before even getting to the store. Another potential model is Uber, which has prospered with a mobile-payment system that lets passengers step out of the car at their destination without so much as swiping a credit card.

Apple thinks like a retailer. Unlike most technology companies, Apple is a fantastically successful retailer. It has tested out mobile payments in Apple Stores, where you can use an app to scan and purchase things like iPhone cases without ever talking to a clerk. Merchants will be tempted to use whatever mobile-payment platform Apple introduces because they want their stores to be like the Apple Store, says Denée Carrington, an analyst at Forrester, and this could be the biggest factor in Apple’s success. “The merchant value is as important if not more important than the consumer value. There has to be something in it for them,” she says. “If there is, they’ll advertise it to their customers.”

Apple already has the customers and their credit cards. ITunes has collected about 800 million credit card numbers. And Carrington points out that iPhone users tend to be affluent and are disproportionately inclined to shop with their phones. Apple has been talking to payments networks. The real test will be if it can convince them to charge merchants accepting its mobile payments the low fees assigned to transactions using an actual plastic credit card, rather than the higher charges currently in place for online payments.

There is enough moving in Apple’s direction to think that it will help mobile wallets finally reach the mainstream, even if the transition takes a while. Retailers move very slowly by tech industry standards. IBeacon, for example, came out a year ago; since then it has made its way into about 1 percent of U.S. retail stores.

(Bloomberg Businessweek)

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