Did We Just See The Future of Mobile Payments?

Say hello to Apple Pay. It’s the new kid on the payments block and, depending on how things unfold, it could be the new Gorilla in the mobile payments ecosystem.

Here’s what it is.  When consumers get an iPhone6 or 6 Plus, they can use Apple Pay almost right away (obviously in October when it is live at merchants) as long as they have an iTunes account – and there are 800 million of those now in the world. All these 800 million consumers need to do is to enter their CVC code and they’re up and running.

Consumers can then use those Apple Pay accounts to pay at places that have NFC terminals by holding their phone near the device and holding their thumb on TouchID. (Whether this is faster than swipe remains to be seen.) Want to put another card in? Just snap a picture and Apple will do the rest—so long as it’s with one of its affiliated banks (which now includes those that control more than 80 percent of the consumer transactions in the U.S.).  Consumers can always do it the new old fashioned way and type in all the card details into Passbook.

Card info isn’t actually stored on the phone at all. Cardholder information is tokenized and stored in the secure element and never makes it onto the phone’s memory or on Apple’s servers in the cloud.  That’s a pretty big deal. Apple Pay leverages the card network’s tokenization standard, which pretty much seals the deal on how cardholder security will be done in a digital world. Between that and fingerprint ID, Apple Pay seems pretty secure. The spiffy Apple Watch that they showed also enables payments but must be paired with the phone to do it.

There are two other big deals here.

The first is that Apple Pay is also headed online, which means it is going head to head with every other digital online acceptance mark, e.g. PayPal, Visa Checkout and MasterCard PayPass.   With 800 million iTunes accounts worldwide, Apple is millions of miles ahead of all three of those guys combined. All Apple needs is for online merchants to accept it. And with all those iTunes accounts, that doesn’t seem like it will be that hard.

The second is the API. Apple is doing with its payments app what it did with Beacons and the apps store before that: creating an ecosystem that stimulates innovation and strengthens the power of its own walled garden. Allowing developers to embed Apple Pay in their apps is an efficient way for Apple Pay to get massive distribution and scale.

As great as this sounds, there are two limitations of Apple Pay right now for consumers and merchants.  And it’s that old chicken and egg issue that gets in the way of every new payments system.

At least as of today, no one has an iPhone 6 capable of working with Apple Pay. That will change on September 19^th, but most people won’t be able to use Apple Pay next year because they won’t have the right phones.  Estimates say that Apple will sell roughly 180 million phones over the next 12 months worldwide and about 25 million of those are in the U.S.. Since that is where Apple Pay works today, analysts say that the addressable market for Apple Pay is 25 million when they count the number of people whose contracts are up and who are eligible to buy a new phone. Apple is, of course, hoping that enough people find the iPhone 6 cool enough that they buy it anyway, contract terms notwithstanding, which could make that number much higher.

Then consumers that do have Apple Pay can’t really use at it very many places right now. Apple says that there are 220,000 merchant locations today that accept NFC but that’s a small fraction of the 8 million plus point of sale locations in the U.S..  Apple Pay ignition depends on merchants believing in Apple and consumers believing that merchants will believe in Apple.

So that’s why what happens next will be really important to watch.

Apple clearly did not intend to innovate payments in its purest sense of the word. It preserved, yet made digital, the core tenants of the four party system that has defined the payments world for the last 60 years. It has given NFC an entirely new lease on life and all but crowned it as the technology standard for payments. As we’ve said many times, NFC needed a catalyst to ignite it and the longer that it lacked one, the more it was at risk of becoming obsolete. Apple Pay is banking on the fact that enough merchants in the U.S. will light up the NFC capabilities that come with their new EMV terminals. The promise of millions of high spending Apple Pay consumers may be that catalyst.

It appears that Apple did intend, however, to reinvent the experience of buying.  We’ve seen hints of it already as making a payment with Apple Pay in a physical store doesn’t require popping open an app to activate the card. This is just the tip of a very deep iceberg. Expect that experience on steroids as the beacon and payments ecosystems mash up, inspire innovators to spring into action to create entirely new sources of value for consumers and merchants.

The other subtle, yet potentially game changing observation I had today is how Apple chose to name its payments capability. Apple introduced us today to Apple Pay, not iPay, not iWallet. Apple wants the consumer association with Apple first and foremost. Sure, card brands and network brands are visible, but Apple Pay will make every other brand subordinate to it because that is how the consumer and the merchant will view it.

That means that the power, at least in the iOS ecosystem, is likely to accrue over time to Apple. And with 800 million registered accounts, well, it might not need that much time.  Just ask the mobile operators what happens when Apple exercises its power over an ecosystem: the balance of power shifts in a pretty dramatic way to them.

Fast forward a few years and it is quite likely that payments becomes an ecosystem defined by apps in the cloud, assembled in Passbook under the control of Apple at least for the iOS ecosystem.   Not only did we meet Apple Pay yesterday, we might also have just met one of the most powerful players in the payments ecosystem.

Let’s not get ahead of ourselves. The news is still fresh and many details are still not known and those that are must still be digested. Today, in many ways, marks the beginning of mobile payments 3.0.  The next couple of years will be something to watch now that Apple is in the game.