Quick Thoughts – Initially Apple Pay More Disruptive Online than at Point-of-Sale

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Apple’s new iPads (iPad Air 2 and iPad Mini 3) announced today will have TouchID and hence allow for Apple Pay purchases within apps supporting the Apple Pay API (albeit not at point-of-sale since the iPads do not have NFC radios). Apple Pay becomes available in the US this Monday with the release of iOS8.1; the initial bank partners are AXP, BAC, JPM, C and WFC with a reported additional 500 banks signed up for the service since the initial announcement on September 9th and to be included over time.

A likely impact of reduced payments friction for online purchases (since using Apple Pay is easier than entering card credentials into a tablet screen) will be to close the gap between tablet traffic (at 17% of the e-commerce total) and tablet orders (at 13% of the e-commerce total); as shown in the chart below, the gap is even larger for mobile. Furthermore, Apple Pay will likely encourage consumers to shop more frequently via app than browser giving the app-provider (typically a retailer) more control over data and advantaging the app-provider in tracking digital ads and offers through to purchase. As discussed in our October 6th note, “Expect Data Partnership between Google and Visa”, the current difficulty in achieving this trackability is one reason Google reports “mobile does not monetize as well as other forms”.

Chart: Purchase Orders on Mobile and Tablets are Low Relative to Traffic

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The mobile or tablet wallet is a marketing platform, not just a payment facilitator. Payments consultant, Richard Crone, noting estimates for the annual revenue potential from ads and offers at $300 per active mobile wallet user, has commented that banks would prefer to recapture this revenue from their own branded wallets. However, this is not possible with Apple Pay because its implementation through the Passbook app means that Apple controls the user experience and can shape the options for tender-steering and marketing. Banks have more flexibility on Android devices (KitKat and above) because host card emulation (whereby an Android device “emulates” a payment card by storing credentials in the cloud) allows them to control payments-branding; however, ad tech company Fluent reports that over two-thirds of mobile transactions are on iOS devices.

A specific example of Apple shaping tender-options is that PayPal is not included in Apple Pay. Indeed, as noted in our October 2nd report “The Closing Window of Opportunity to Broaden the PayPal Acceptance Brand”, we see new solutions to simplifying online checkout – including Apple Pay and Visa Checkout announced in July – as significant threats to incumbent solutions such as PayPal and Pay-with-Amazon that involve the increased acceptance costs and data-leakage risks of an intermediating payments “aggregator” that acts as merchant of record. This is not the case for Apple Pay which acts simply as a conduit, and costs the retailer no more than acceptance of the customer’s payment card.

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