Is Apple Pay a Hit?

When Apple(AAPL 0.10%) first unveiled its mobile payment system that would be released with the iPhone 6, the news was met with cautious optimism.

Aside from Starbucks, which has been very successful in getting customers to use its app at the register, few companies have been able to convince shoppers to pay for purchases with their smartphones. The technology seems logical and inevitable, and the coffee chain showed us that the public is not completely averse to the idea. But aside from certain store-specific apps, no payment-via-phone system has taken off -- certainly none that tie directly to your credit card allowing for purchases across a wide variety of merchants.

Apple may have finally changed that as the company told The New York Times that a number of new banks have signed on to support its Apple Pay system including SunTrust, TD Bank North America, and Commerce Bank. With those additions and a number of others, Apple now supports credit cards covering about 90% of the credit card purchase volume in the United States.

There's still a big leap between being supported and being used, but Apple has clearly jumped a major hurdle toward mainstream adoption.

Apple Pay works with most major credit cards. Source: Apple 

How big is the market?
Apple Pay is currently only offered on the iPhone 6, 6 Plus and newest iPads -- the iPad Air 2 and iPad Mini 3. That limits the number of people who can use the service, but it's still a large universe. The company is likely to sell 71.5 million iPhones in the fourth quarter, AppleInsider reported, citing a study from KGI analyst Ming-Chi Kuo.

Of those sales, about 60%, or roughly 41.65 million units, will be iPhone 6 devices with another 15 million being the iPhone 6 Plus. Add in the rumored 10 million plus iPhone 6 units that the company sold late in the third quarter after the launch and the millions of iPad Air 2 and iPad Mini 3 tablets sold, and you can estimate that over 70 million people have devices equipped with Apple Pay.

Exclude the tablets, and it's still an audience of 65 million or so iPhone 6 customers -- about 37% of the 176 million smartphone users in the U.S. as of October, according to comScore (though the number of users will likely have climbed by the end of the quarter as well). Even if you assume that 10% of those with Apple Pay have unsupported credit cards, it's still a large enough user base to make Apple Pay successful if the potential customers actually use the feature.

So are people using it?
Apple has clearly done its part in getting banks on board. For Apple Pay to be viable, it also requires support from retailers. At launch, the company announced a large list of stores which would accept Apple Pay including Macy's, Subway, Staples, and Whole Foods among dozens of others. Since then, the number has continued to grow, and it now includes grocery chains like Winn-Dixie and Albertsons as well as a number of major venues such as the various Walt Disney parks and resorts.

As the numbers grow, there are some signs that people are actually using the technology. Whole Foods told The Times it processed more than 150,000 Apple Pay transactions in the early days after the product's release. The paper also reported that McDonald's, another original partner, said Apple Pay accounted for 50% of its tap-to-pay transactions in November. 

"Retailers and payment companies see Apple Pay as the implementation that has the best chance at mass consumer adoption which has eluded prior attempts," Patrick Moorhead, president of Moor Insights & Strategy, told the paper. 

Is it a hit?
While The Times acknowledged that the actual transaction volume processed by Apple Pay so far is small, the paper did say it appears to have more traction than any competing services. It may be too early to call Apple Pay a hit, but it's certainly heading in that direction.

Apple has banks and retailers. Now it just needs to entice its users to actually pull out their phones at checkout and make a payment. Early returns on that seem encouraging ,and Apple customers have shown a willingness to follow the company's lead in the past.

Apple Pay may not be a hit yet, but all the elements are in place for future success.