Cracking the Apple Pay code

| by Will Hernandez
Cracking the Apple Pay code

When it comes to deciphering Apple news, it's sometimes difficult to separate hype from reality because the company has such a cult following in the consumer tech space. Apple only added to its mythical status Tuesday when it announced record-breaking first quarter earnings. But we’re still left wondering how exactly its newest creation in Apple Pay is performing three months after it debuted late last year.

Apple CEO Tim Cook mentioned Apple Pay in his opening statement, an indicator of how important the product is within the company. He proclaimed 2015 as "the year of Apple Pay" and it's difficult to argue against this stance, at least on the surface.

Apple Pay now accounts for $2 of every $3 spent on contactless payments across Visa, MasterCard and American Express, Cook said during the earnings call. Some 80 percent of Panera's mobile payments come from Apple Pay. Whole Foods appears to have benefitted the most from the new mobile wallet as the high-end grocer experienced more than a 400 percent increase in contactless payments, Cook said. Of course, a small percentage of those Whole Foods numbers can be attributed to Google Wallet transactions (I’ve done a couple myself).

Cook, however, did not put those stats into context against the larger picture. In general, contactless transactions in the U.S. account for a small percentage of overall payment volume. Again, Panera is doing 80 percent of its mobile transactions via Apple Pay. But that's 80 percent of what exactly. You can see how it's easy to look at Apple Pay's early "success" with a glass-half-empty mentality.

Apple sold almost 75 million new iPhones worldwide in the company's first quarter that ended Dec. 31. The holiday season helped drive that number so high, but consumers came to the table with a healthy appetite for larger iPhone models. Apple’s own estimates for iPhone sales during the period were 9 million short going in. Apple did not break out sales by region, but let’s assume a good portion of those new devices are in the U.S. where Apple Pay is active. That said, the company’s iPhone sales pale in comparison with how many of those device owners actually activated Apple Pay accounts.

At the end of October, Cook said that more than 1 million payment cards were activated on Apple Pay within three days of the system's debut. We haven't heard anything about updated activation numbers since then from Apple. Earlier this month, Bank of America announced that some 800,000 of its customers had signed up for Apple Pay and added a total of 1.1 million cards to the mobile wallet.

Steve Weinstein, an analyst at ITG Investment Research Inc., told Reuters that some 20 to 30 percent of consumers who buy either the iPhone 6 or the iPhone 6 Plus activate Apple Pay, but a smaller percentage use it consistently. What those numbers exactly look like is anyone's guess because neither Apple nor the card networks have revealed any transaction numbers. That’s not to suggest Apple Pay is a flop without concrete stats, but I believe the industry would get a better sense of the mobile wallet’s true potential if we had those numbers.

It was good to hear Cook say that Apple will seek to enhance Apple Pay in the coming months and years. This is a given, of course, but confirmation from the company's leader is welcomed by many.

"We're not even through the first inning," Cook said. "There are tons of things on our roadmap [in terms of] adding functionality."

The biggest missing piece from Apple Pay is integrated rewards.

A New York Times reporter illustrated this issue in early January when he spent the day in Manhattan to use Apple Pay at a number of merchants. When it came time to pay at Panera, he still had to present his loyalty card separately. I bet that's a missing link Apple will fix later this year.

Cook said he's impressed with the way merchants reacted to Apple Pay, particularly the timing of its release. "I'm shocked how many were able to implement Apple Pay in the heart of the holiday season," he said

He also mentioned the recent announcement from USA Technologies Inc., a provider of wireless, cashless payment and M2M/IoT solutions for small-ticket, self-service retail industries. The extension of Apple Pay adds approximately 200,000 acceptance points to the growing list of locations officially supporting Apple Pay, including owners and operators of coffee brewers, vending machines, kiosks, laundry equipment, parking pay stations and other self-service appliances.

And while Cook didn't address it during the earnings call, more merchants will have the ability to accept contactless payments when they switch to EMV-enabled terminals as the October liability shift nears.

The biggest wild card in all of this is still consumers. Remember the InfoScout survey from this past holiday season?

Only 4.6 percent of 170,000 households with an iPhone 6 device used Apple Pay to purchase items at retailers who accepted it during the first week of the holiday shopping season. Thirty-one percent of those consumers didn't pay with Apple Pay because they were unaware that the retailer accepted it. Some 25 percent of respondents forgot to use it, which highlights how difficult it is to change consumer behavior after years of card swipes at the register.

Some Apple Pay enthusiasts criticized the survey and tried to discredit it, but it's not hard to believe that consumers simply forgot to use the system when they had a chance. Consumers can be stubborn and despite the cool factor with Apple Pay, swiping plastic is just as effective and produces the same result.

At the end of the day, I think Apple Pay is in a good place. It's not a runaway success just yet, but Apple will make that happen soon enough. I don’t doubt it because it’s Apple. And we still need to keep in mind the payments industry is a funny and difficult business.

As one payments executive reminded me Tuesday evening, there are no home runs in payments. He said it would take five years to change 10 to 20 percent of consumer behavior before anything could be deemed a success. No winners or losers have been determined yet.

But it's a good bet that Cook still has a power hitter or two on the bench to help Apple Pay in the late innings. 

Photo courtesy of Christopher Aloi

Topics: Card Brands, Contactless / NFC, Handsets / Devices, In-App Payments, Loyalty Programs, Mobile/Digital Wallet, POS, Restaurants, Retail, Trends / Statistics

Will Hernandez

Will Hernandez has 14 years of experience ranging from newspapers to wire services and trade publications. Before becoming Editor of, he spent two years as the content manager for, a leading payments industry news aggregator and information hub published by Mercator Advisory Group. Will spent four years covering the payments industry as an associate editor for multiple publications in SourceMedia's Payments Group based in Chicago.

View Will Hernandez's profile on LinkedIn

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