"I think it's in its infancy. ... I think it's just getting started. And just out of the starting block."
It's been nearly a year and a half since Cook made that characterization of the mobile payments market, yet not a lot has changed. The mobile payments market is still a jumbled mess lacking leadership, and consumer adoption is sparse at best. Only 3% to 7% of consumers in the U.S. and Europe use their phones to buy physical items with in-store mobile payments.
Apple is scheduled to unveil the iPhone 6 next week, and the Mac maker will very likely jump-start the mobile payments revolution.
Reports over the past few days suggest Apple has inked partnerships with the three dominant payment networks. Re/code said American Express (NYSE: AXP ) is on board, while Bloomberg added Visa (NYSE: V ) and MasterCard (NYSE: MA ) to the mix.
There have always been two ways Apple could tackle a payments service: facilitating third-party processors or launching a first-party processing service. The former has a far better chance of success, since embracing existing networks is much easier than building a new system from scratch. Besides, Apple doesn't care about the fees it could collect compared to iPhone sales.
Partnering with American Express, Visa, and MasterCard will allow Apple's payments service to quickly reach critical mass, as the three companies enjoyed a combined 91% market share of global purchase transactions last year.
Not many other details are known at this point. For example, how will Apple's payment service actually work, and what technologies will it use?
To Touch ID or not to Touch ID, that is the question
Payments have always been the most obvious use case for Touch ID, given the added level of security relative to standard PINs and passwords. Chances are, Apple will tether its payment service to Touch ID for these reasons.
Releasing Touch ID in 2013 without a broader payments service has allowed Apple to build up an installed base of users and given them time to get acquainted with the technology. While Apple may own 42% of the 173 million U.S. smartphone users, not all of those models are equipped with Touch ID. However, both iPhone 6 models will likely get Touch ID, and analysts expect an upgrade cycle of unprecedented scale.
Allowing non-Touch ID iPhones to use the service would broaden the potential user base, but would also lack any benefit compared to current methods. It takes longer to type in a PIN or password on your phone than it does to swipe your credit card.
Requiring Touch ID for a payments service would somewhat limit the service's scope, but also offer a much better experience. That's particularly true if Apple continues to improve the performance of the Touch ID sensors, bolstering read speed and reliability.
The best strategy is to require Touch ID, since it offers a better experience, a differentiated value proposition, and encourages users to upgrade to newer models, all of which will boost iPhone unit sales. Cook has even said that a payments service was "one of the thoughts behind Touch ID."
To support NFC or require NFC, that is the question
Near-field communication has completely fallen short of investor expectations over the years regarding its potential in the payments market. Of course, Apple has contributed to this fact by historically shunning it, but that looks set to change.
While rumors of Apple adopting NFC emerge every year, they actually seem credible this time around. A leaked iPhone 6 logic board even carries an NFC chip made by NXP Semiconductor (NASDAQ: NXPI ) . Reports indicate that Apple will indeed support NFC with its payments service. Supporting NFC is one thing, but will Apple require it?
Apple requiring NFC would limit the service to the iPhone 6 since no prior iPhones have ever included an NFC chip. Furthermore, merchants have been averse to adopting NFC since it's expensive to upgrade their point-of-sale systems, and the number of customers using NFC is negligible.
Meanwhile, Apple does have an alternative in the form of Bluetooth Low Energy, or BLE, which is the technology behind its iBeacon protocol. Many large merchants are already enthusiastic about iBeacon's potential within retail, in part because the up-front cost is much lower and they can offer unique shopping experiences based on microlocation.
eBay's (NASDAQ: EBAY ) PayPal already announced its competing offering, PayPal Beacon, late last year. PayPal Beacon similarly uses BLE as the underlying technology and works with existing point-of-sale systems. PayPal is positioning Beacon as a "hands-free" solution.
PayPal is piloting the program now and offering open APIs for developers and merchants to use, with a broader rollout planned for this year.
Here's the important part. There's been an ongoing theme that NFC and BLE are mutually exclusive, and that one will beat the other -- but they're not. It's true that a smaller merchant with a limited infrastructure budget may choose one or the other, but that's not to say larger retailers with deeper pockets won't simply adopt both. NFC and BLE can co-exist within the payments market.
Requiring NFC is a risky proposition given the technology's track record, but supporting it in addition to BLE would offer incremental upside. Assuming that Apple requires Touch ID, it should not require NFC. Instead, Apple should support NFC as a complement to BLE, which would allow iPhone 5s units to use the payments service as well. By embracing both technologies, Apple can hedge its bets since neither NFC nor BLE has emerged as a clear standard.
Still too early to call
None of this is to say that launching a successful payments service will be quick or easy. The biggest risk is that retailers don't embrace mobile payments, or that the market remains highly fragmented. Still, Apple just has the best chances of success compared to every other player that has tried to get this whole mobile payments thing started.