The debut of Apple Pay has far-reaching implications for the future of the U.S. payments system and has cast a bright light into a murky mobile wallet payments environment. Some may even wonder if Apple Pay is in fact poised to eclipse plastic card payments.
As the digital payment card era unfolds, we can take a moment to look at the pre-Apple Pay environment as measured in an August 2013 survey of 4,200 households by Phoenix Marketing International. There are several reasons why the end of plastic payment cards is nowhere in sight.
First, it is well-known that a very small percentage of merchant terminals (estimated at no more than 5%) currently accept near-field communication payments, in which two devices placed at close range perform transactions via a wireless connection. Moreover, a significant portion of consumers are wary about the security of NFC transactions. Twenty-two percent of smartphone owners who have not used a mobile payments app said that "tapping a phone against a merchant terminal" was a major security concern.
While smartphones are certainly on the rise, they are not yet ubiquitous: 65% of households currently own one. That leaves more than a third of households for whom mobile wallets, in general, are currently not an option.
Apple Pay's impact will also be limited by the fact that Android phones are more prevalent; less than half of smartphone owners have an iPhone. And nearly half of smartphone owners say they are unlikely to use a smartphone application for in-store payments. Among users who have yet to use a mobile payment app, 48% said that they were uninterested in using one, 38% were neutral, and just 14% said that they would be likely to adopt it.
Lastly, while Apple enjoys a strong reputation, some Americans may not be willing to trust them to facilitate their transactions. Last year, 22% of smartphone owners indicated they would consider a mobile payment from Apple. A similar number (17%) said they would go with Google, but banks (72%) and PayPal (41%) were far more popular picks.
The Apple Pay announcement heralds the likelihood of substantial increases in NFC-ready terminals. Since it coincides with current merchant investments in EMV-compatible terminals, merchants are more likely to make sure the upgrades include NFC compatibility. And Apple Pay's fingerprint identification and tokenization technology will help reduce consumer NFC security concerns. Nevertheless, there is still a long way to go before scale can be achieved.
It is important to emphasize that Apple Pay brings direction and credibility to the NFC marketplace and demonstrates NFC's future viability. That leaves the door open for other NFC wallets, such as Softcard and Google, to expand and for entrants to increase the competition. At the same time, it should be noted that NFC technology is more than 20 years old. It may ultimately be deemphasized in favor of newer consumer-preferred technologies.
History suggests that plastic payment cards will remain viable for a long time to come, even as the use of digital payment cards escalates over the next decade or two. Just look at the bill payments industry: while the incidence of online bill pay is high, consumer research shows that it will never reach 100%. And a high percentage of people who pay bills online still pay some of them using paper checks. When it comes to payments, old habits die hard.
Greg Weed is director of card performance research for Phoenix Marketing International.