Apple Pay’s Technology Adoption Problem
Apple wants to convert your iPhone into a digital wallet with Apple Pay. Professors Benjamin Edelman and Willy Shih assess its chances for success and wonder if consumers have a compelling reason to make the switch.
When
Apple introduced the iPod, it had a simple but compelling
tag line for
music fans: "1,000 thousand songs in your pocket." The
company sold 300 million of them.
On
the eve of debuting its digital payment system, Apple
Pay,
two Harvard Business School professors think the Cupertino company
will have trouble coming up with an equally compelling message to
drive sales of a service that allows you to pay at the retail counter
with a swipe of an iPhone.
"What
does it do for me as a consumer?" asks Associate
Professor Benjamin
Edelman.
"Why would I want to trade for something that already works
[e.g. credit and debit cards], something that doesn't complain when
it gets wet in the rain, something that doesn't complain when I
launder my pants?" Especially, he adds, when those cards give
users and additional 1 or 2 percent off the purchase price.
"I
think Apple has its work ahead in convincing thoughtful and
potentially skeptical customers," says Edelman.
ON WITH THE SHOW
Reports
say Apple will roll out the digital payment service later this week,
with perhaps more details coming at a press conference Thursday. But
will it catch on, especially when several other similar services with
big name sponsors such as Google have failed to gain much traction?
Apple
has a chicken-and-egg game to solve. Consumers won't use the service
unless they are in use at a compelling number of stores. But
merchants won't install the expensive near field communications
readers used by Apple Pay unless consumer demand is high.
First
off, Apple must convince merchants to adopt its service, says Willy
Shih,
the Robert and Jane Cizik Professor of Management Practice.
Only
about 10 percent of retailers use NFC readers, and at least one
retailer—Best Buy—stopped using them because they were too
expensive. Officials with both Best Buy and Walmart have said the
retailers have no plans, at least right now, of accepting the new
payments technology in their stores.
Shih
believes merchants who consider adopting Apple Pay will naturally
wonder: What do we get out of this? And they will specifically want
to know if they will be asked to pay higher fees than credit card
companies are charging?
"Consumers
might be motivated to do it, but if I don't have the merchant side in
place, it doesn't matter," Shih says. "The merchants
certainly aren't going to be motivated if the economic model is less
favorable than today. It's a complicated puzzle."
Apple
has touted that Apple Pay will be supported by several leading
retailers, including Bloomingdale's, McDonald's, and Macy's—and
that it will work at about 220,000 merchant locations across the
United States that have enabled contactless payments. But some
analysts believe that's a small number compared with the nine million
US merchants that currently accept credit cards. In short, Apple has
a long way to go to knock off the established credit card system,
Shih says.
"Ecosystems
are very delicately balanced, and the current payment system
represents a balance that has resulted from 40 years of evolution.
There's a lot of inertia around that," Shih says. "You can
have great technology, but you really have to line up the
complementary assets so all the pieces play with you and they are
motivated to make it work. At the end of the day, Apple is going to
have to make the economics work for everybody. That is a hard job."
DO CUSTOMERS CARE?
Which
brings us to the customer side of the chicken-and-egg conundrum.
Millions of shoppers have used cards for years, with little hassle.
Edelman points out that people will continue to carry cards even if
digital payments gain some traction, so the barrier to overcome for
mass acceptance is even higher.
Edelman
has studied Bitcoin, a software-based online payment system, and he
sees similarities between technology adoption roadblocks Bitcoin has
encountered and issues Apple Pay is likely to face.
"Apple
Pay has the same problems as Bitcoin: There's no reason for the
regular consumer to use it," he says. "Why would a consumer
want to make a $100 purchase with Bitcoin when the consumer can pay
with a credit card and get 2 percent cash back?"
In
addition to the limited number of merchants, Apple Pay appears to be
limited to users of the latest iPhone 6, iPhone 6 Plus, and Apple
Watch—which leaves out many consumers with older iPhones or Android
models.
"Apple
might be hamstrung by an incompatibility issue that the company
intentionally introduced," Edelman says.
Shih
agrees that selling technology is tricky in a market full of
incompatible products.
"We're
in a period now where you see this design competition with competing
offerings, and on top of that, you have a platform competition where
everyone has their network effects," he said. "It's like
PlayStation versus Xbox. The technology convergence has brought us to
a place where people are scrambling to come up with a new platform
and trying to become the new dominant design."
Other
companies that have attempted mobile payments have run into similar
problems. Google Wallet was limited by its compatibility with
different types of phones and cellular networks. And Softcard, which
was backed by major wireless carriers, has seen little traction with
its mobile wallet for similar reasons.
PITCHING SECURITY
One
marketing pitch Apple is sure to try out with potential users is
security, especially after notable breaches at Home Depot and Target.
When a customer pays with an iPhone, cashiers won't see the
consumer's name, credit card number or security code because Apple
uses a fingerprint reader on its recent iPhones to confirm
identities. And when consumers add a credit or debit card with Apple
Pay, the card number is not stored by Apple—instead, Apple provides
a unique device account number for each transaction. In addition, the
company says it won't collect consumers' purchase history.
Edelman
questions whether addressing security and privacy will be enough of a
carrot to wean consumers off of their beloved plastic. Hesays other
companies have tried to market the security angle, including the
RevolutionCard, a PIN-based credit card that had no name, signature,
or account number on it so that if it got lost or stolen, it couldn't
be used unless the PIN was known. "It was stillborn,"
Edelman says. "It didn't work as a feature set. No one cared."
Even
recent high-profile data breaches have not led consumers to abandon
credit cards in significant numbers. "Security doesn't work for
the thoughtful consumer," Edelman says. "(Data breaches)
mostly mean inconvenience for the consumer because the losses are
really borne by banks, merchants, and credit cards, not by
consumers."
Besides,
Shih wonders whether data will be any safer with the Apple Pay
system.
"The
fingerprint reader generating a unique code is pretty smart," he
acknowledges. "But it electronically seems to do the same thing
as a PIN code. And to the extent that the code goes into the existing
payment network that's still not secure, have we really accomplished
anything?"
CAN YOU PAY ME NOW?
Other
technical questions remain. Edelman wants to know whether Apple Pay
will work if the phone isn't charged, or in areas with poor cell
reception?
Apple
may release more details tomorrow, so time will tell whether the
company will address some of the system's potential shortcomings—and
perhaps more important, whether regardless of any shortcomings,
merchants and consumers will embrace this new mode of payment. Either
way, even if Apple stumbles with its mobile wallet, the company will
likely survive the reputation hit.
"Any
failure Apple experiences here will be more than offset by the
legions of fans that like their other stuff," Edelman said. "I'm
not losing any sleep for Apple."
Dina
Gerdeman is
a writer based in Mansfield, Massachusetts.
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