Among other goodies Apple (NASDAQ:AAPL) unveiled at its latest "big event" was its new Pay feature. Many headlines were centered on Apple's latest attempts to jump-start sluggish tablet sales with its new iPad Air 2, "the world's thinnest tablet," according to CEO Tim Cook. The updated iPad Mini 3 also garnered some attention from the big event.
Now that the buzz surrounding its new tablets has subsided, industry pundits are beginning to revisit Apple Pay and the battle for consumers' digital wallets. Some are predicting big things, but there are obstacles to broader adoption of mobile payments that perhaps even Apple with its loyal fans can't overcome.
Of course, Pay is by no means the only mobile payment solution around; longtime nemesis Google (NASDAQ:GOOG) (NASDAQ:GOOGL) introduced its Wallet solution in 2011. According to some recent estimates, mobile payments, led by Apple Pay, are set to explode. Maybe.
What is Apple Pay, anyway?
The gist of Apple Pay is relatively simple: Add your credit card or debit card info -- most major card suppliers are onboard with Pay -- into your new iPhone 6 or iPhone 6 Plus. Then, using the built-in iPhone "near field communication antenna," point the phone near the retailer's "contactless reader," press the Touch ID, and, like magic, your purchase is complete.
Don't have an iPhone 6 or iPhone 6 Plus? No problem, there's an app for that which can be downloaded to Apple's new phones, as well as the new tablets. According to Apple, its new Watch will have in-store digital payment capability by early 2015. The user's card data, rather than sharing it with retailers, as is the norm when using Wallet or traditional debit cards or credit cards, is assigned a "device account number," which is stored on a chip within Apple's mobile device.
Apple was quick to point out that Pay users' card information is not stored on a server, but remains within the device's chip. The result is that purchases can't be tracked to the Pay user, though a record is kept in Apple's mobile Passbook feature. Six of the larger banks are actively participating with the Pay feature, with five more scheduled for inclusion by the end of 2014, as are more than 200,000 retail outlets.
Apple Pay looks a lot like Google Wallet, but there are some significant differences, which appear to favor Pay. Wallet requires users to enroll with Google, which in turn conducts the transaction on the front end, meaning Google pays for the product or service then charges it back to the consumer. That's a costly proposition that has many industry pundits suggesting Wallet is leaking money like a sieve, but it provides Google with users' valuable card and transaction data. It also, however, raises significant security concerns that Pay addressed with its device account number.
So, what's the big deal?
Largely due to Apple Pay, the mobile wallet market is set to explode, according to recent research.
One such study suggests that mobile payments will grow from 2013's $1.8 billion to a whopping $189 billion by 2018. How can that be, considering a mere 8% of the U.S. adult population is expected to use mobile payments in 2014? The answer to that question, according to this research, is: Apple.
According to the study from BI Intelligence, a research service from Business Insider, Apply Pay will up the percentage of Americans that pay for their transactions using a mobile device, and effectively bring mobile payments into the mainstream, largely because of its rabid iFan base. But growing annual mobile payments more than hundredfold in five years because of iDevices? That seems like a stretch, even with Apple's unparalleled fan loyalty.
Don't believe the hype
There are a few major hurdles to overcome before Apple Pay, Google Wallet, or any other mobile payment solution goes mainstream. The Federal Trade Commission (FTC) noted several issues with digital wallets, including liability issues for unauthorized charges, the use of consumer information, and, most importantly, data privacy and security.
In research conducted on digital wallet usage, 80% of Americans were aware of mobile payment alternatives, but only a small portion use them. Why? Concern about security was far and away the No. 1 reason U.S. consumers avoided mobile payments. Not surprising, considering the revelations from Edward Snowden still linger, and privacy concerns surrounding governmental monitoring seem to grow daily. For many Americans, data security has become a widespread problem and mobile payments simply add to the angst.
The notion of logging on in a Wi-Fi-enabled public setting is unsettling to many mobile users, let alone conducting financial transactions. Security, not to mention changing the ingrained buying habits U.S. consumers, are big hurdles, even for Apple. Google Wallet sounded great, too, but after three-and-a-half years, usage remains anemic. Can Apple change the market for mobile payments? Possibly, but don't expect the instant explosion of digital wallets that some pundits are suggesting: U.S. consumers aren't ready yet.