Wednesday, September 10, 2014

Why Apple Pay Is a Slow Starter

Apple Pay, unveiled yesterday, will be slow to ramp up — but that’s a good thing.

On the surface, Apple Pay looks the same as half a dozen initiatives that are out there already. The promise is that you’ll be able to make credit card payments using a mobile phone. What makes Apple Pay different is that there are two added layers of security, so that retail stores will feel that they’re reducing their risks, more than taking on an unknown new risk in the name of convenience.

Apple Pay will be a slow starter partly because it requires purchasers to have an iPhone 6 (or 6 Plus), and those don’t exist yet. The iPhone 6 is needed for its NFC antenna and the fingerprint sensor. The new iPhone models won’t be available for another week, and when they are out there, only a small fraction of shoppers will have them. Maybe it won’t be such a small fraction. In a CNBC survey I saw yesterday, 59 percent of viewers said they expected to buy an iPhone 6, the other 41 percent saying they wouldn’t or they were not sure. That’s an awfully high advance approval for any new product, and I would be quite surprised if the iPhone 6’s market share is anywhere near that high among shoppers in general. It isn’t clear that CNBC’s respondents realized the iPhone 6 would be slightly more expensive than the iPhone 5 was a year ago, and that is just one of many reasons why the actual iPhone 6 sales may be less than the survey says. Realistically, it will take months for iPhone 6 market penetration to creep up toward 10 percent of shoppers. Once you have the iPhone 6, it is still an hour of work to enable the Apple Pay app, and that process depends on bank approvals, so there is a bit of a lag at that stage also. Besides the limited number of shoppers, the list of participating banks and merchants for Apple Pay is also tiny compared to the whole world of credit card transactions, and the whole system is strictly limited to the United States for now.

But once shoppers reach the point of activating Apple Pay, I think they will prefer it for its security advantages. Why would you give a merchant your credit card number when you don’t have to?

The slow ramp-up allows any glitches along the way to get sorted out on a smaller scale. That’s a strategy Apple is known for, and it is not unknown in transaction processing either.

There isn’t anything utterly new about Apple Pay, so expect it to be widely imitated as soon as it proves successful, if not sooner. I expect this to lead to better security for online transactions more quickly than we see the system live up to the hype of making credit cards obsolete.