Apple Pay’s Rollout a Test for Merchants Weighing NFC, Other Options

Written by FinTech Futures
20th October 2014

By Kate Fitzgerald, Emerging Payments Editor

As Apple Pay goes live Oct. 20, millions of merchants will be measuring consumer and marketplace reaction at the POS, as they contemplate their own mobile payments strategies, including accepting NFC-based payments.

Apple Pay at a Glance

Launch date: Oct. 20, 2014
Partners: 500+ banks, including American Express, Bank of America, U.S. Bank, Capital One, Chase, Citi, Wells Fargo, others. First Data also said today it’s supporting FI participation in and merchant acceptance of Apple Pay.
Supporting payments networks: Visa, MasterCard, American Express.
Retailers Accepting Apple Pay (at POS): 220,000 stores with NFC-enabled payment terminals, including Apple Store, McDonald’s, Macy’s, Walgreens, Subway, Whole Foods Market, Sports Authority, Toys ‘R’ Us, Babies ‘R’ Us, Foot Locker, Office Depot, Chevron and Texaco, The Disney Store and more. Staples and Sephora coming later this year.
E-commerce merchants supporting Apple Pay for in-app checkout: Apple Store, Groupon, Target, Uber, Lyft, HotelTonight, others.
Who Can Use Apple Pay: Consumers with an iPhone 6 or iPhone 6 Plus owners (or iPad Air 2 or iPad mini 3, for in-app purchases).
How it works: Users link credit or debit cards from Apple Pay participating banks by moving an existing card from the iTunes account into Passbook or taking a picture of the card and uploading it to Passbook. At participating retailers, users hold their phones close to the payment terminal and the NFC reader opens Apple Pay from sleeping mode. Users select a card and complete the purchase with Touch ID. For e-commerce purchases, users select Apple Pay and complete the purchase via Touch ID.

If the first wave of iPhone 6 and 6 Plus owners light up the POS using Apple Pay at checkout, merchants may be motivated to move faster to upgrade their payment terminal hardware to accept NFC, experts say. But if Apple Pay gets off to a slow start—or problems plague the rollout—merchants may drag their feet, and NFC acceptance may continue to flounder—at least in the U.S.

“I suspect many merchants will watch the rollout closely, and any acceptance glitches or security concerns that crop up during the launch phase could limit merchant demand,” suggests Brooke Ybarra, a manager with First Annapolis Consulting.

NFC Acceptance: 2 Percent

Even if Apple Pay is a hit with early adopters of the latest iteration of iPhone, NFC has a long way to go before it becomes a standard option at the POS. Only 220,000 U.S. stores currently are ready to accept Apple Pay (and other NFC wallets), representing just 2 percent of nearly 10 million U.S. merchant locations, according to the Electronic Transactions Association. Though retail giants McDonald’s, Walgreens and Macy’s are supporting Apple Pay, the total number of NFC acceptance points is relatively small, despite the introduction in recent years of rival NFC wallet concepts Google Wallet and Softcard, experts observe. “The NFC wallets in the market to date haven’t had much of an impact in growing the number of merchants accepting NFC,” notes Rick Oglesby, a senior analyst with Double Diamond Group.

One thing merchants will be looking for is whether Apple’s legendary marketing influence can increase awareness and usage for all NFC mobile wallets. The contactless technology for Apple Pay, Google Wallet and Softcard is similar, so participating merchants would be able to support all three NFC wallets with no interoperability concerns, according to Randy Vanderhoof, executive director of the Smart Card Association.

The EMV Effect

Upgrading to NFC shouldn’t pose too much of a technical challenge for merchants. With payment card networks’ EMV liability shifts going into effect in October 2015, merchants are in the process of replacing older payment terminals with EMV-capable devices, and most of the new terminals are NFC-compatible, according to the Smart Card Alliance. The separate decision of whether to turn on NFC acceptance will depend on merchants’ own business decisions, Vanderhoof says.

Walmart is one retailer that so far has steadfastly opposed enabling NFC at the POS. Walmart is a key player—along with Target Corp. and hundreds more retailers—in Merchant Customer Exchange (MCX), a retailer consortium devising a barcode-based mobile wallet expected to launch next year that will connect to merchants’ proprietary mobile apps. Few details are available yet about CurrentC, but merchants are keeping a close eye on it as an interesting potential rival to NFC-based wallets.

But experts say no single mobile wallet—no matter how dazzling its features—is poised for immediate success. It likely will take six months—at a minimum—after Apple Pay’s launch to determine how many iPhone 6 owners with Apple Pay use it regularly, Vanderhoof observes. “Many mobile apps are downloaded by consumers and soon forgotten, and while I don’t expect Apple Pay to be short-lived, changing consumer behavior takes time.”

NFC vs. BLE?

Payments industry analysts say merchants weighing their mobile payments options also must carefully consider the role of Bluetooth low energy (BLE), a technology that can support mobile payments inside stores, with options to add interactive marketing and geolocation-based features. Apple has done intensive work on iBeacons, a BLE technology that enables merchants to communicate with consumers as they walk through stores, though the company has not yet disclosed a broad strategy for merchants outside of its own Apple Stores.

“What’s really about to erupt is an NFC vs. BLE battle, so assuming NFC will be the de facto winner among all these mobile payment approaches is a mistake.”

—Rick Oglesby, Double Diamond Group

BLE could become vital for merchants such as Walmart and other MCX participants that want to drive consumer behavior, Oglesby points out. “What’s really about to erupt is an NFC vs. BLE battle, so assuming NFC will be the de facto winner among all these mobile payment approaches is a mistake,” he says. Merchants wishing to drive consumers to their preferred payment methods could selectively lock out NFC, and use BLE, as a way to gain the upper hand, Oglesby speculates. “Just as Passbook can be used to bring up your boarding pass as you arrive at the airport, it can also be used to bring up the merchant’s preferred payment tender as you arrive at the POS,” he adds.

Mobile payments technology has reached an exciting threshold, and Apple Pay could be a catalyst for change. But Oglesby says it’s important to keep in mind that Apple’s objective is to drive mobile payments in general. “NFC is a likely winner due to the simultaneous migration to EMV that will drive merchant infrastructure upgrades, along with NFC’s support from the largest payment companies, but Apple is still positioned to be technology-agnostic,” he warns.

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