TAP & PAY. Has Apple Pay Already Sealed the Lead in Mobile Payment? February 12, 2015

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1 TAP & PAY Has Apple Pay Already Sealed the Lead in Mobile Payment? The positive buzz around Apple Pay is luring new users to the idea of buying things with a mobile phone Tap- and- pay (or contactless) usage, in particular, looks headed for robust growth, albeit off a small base Some hurdles could slow adoption: Consumers security concerns and the lack of large- scale retailer buy- in It s still too early to call a winner in this space, despite what Apple says DEBORAH WEINSWIG Executive Director Head Global Retail & Technology Fung Business Intelligence Centre deborahweinswig@fung1937.com New york:

2 Has Apple Pay Already Sealed the Lead in Mobile Payment? Will 2015 be the year that mobile payments take off? Consumers are increasingly warming up to the concept, thanks in large part to the arrival of Apple Pay, which has done more than any of its predecessors to build awareness and enthusiasm for paying for things with a cellphone. It s early days, but we think growth in mobile payments, particularly the contactless versions, is at a tipping point. That said, questions remain about the pace of consumer and retailer adoption and which option of mobile payment will ultimately win. Apple CEO Tim Cook would have us believe that Apple Pay has already secured that title, dispatching predecessors Google Wallet, Amazon Payment, Square and PayPal to the dust heap. At the company s December quarter earnings call, Cook reported that Apple Pay was ringing up more than $2 out of every $3 spent on purchases using contactless payment across the three major US card networks. He also shared some stunning statistics from two large retail partners: Panera Bread, which said that Apple Pay accounted for 80% of its contactless mobile payment, and Whole Foods, which said that mobile payment usage at its stores had risen more than 400% since the launch of Apple Pay. Sizing Up the Apple Pay Pie Dazzling numbers, but let's put them into perspective. These big percentage gains are coming off of a very low base. The reality is that very few people are using mobile payment of any kind just yet, and even fewer are using NFC- based, contactless solutions like Apple Pay's, where the user pays by tapping or waving the smartphone over the point- of- sale system. idate put global NFC- enabled phone penetration at 278 million transactions in 2014, and projected half a billion in But, according to analysts at Forrester Research, only a small portion of the millions who bought the NFC- ready iphone 6 and 6 Plus in 2014 have even tried the service or used it on a significant basis. Let's do the math: Apple sold 74.5 million iphones last quarter, a large number of which are likely Apple Pay- enabled iphone 6 and 6 Pluses not a small number, but still only a fraction of the current global smartphone user base of close to 2 billion. Moreover, Apple Pay launched at 220,000 retailer locations, representing only 6% of the 3.8 million sites in the US. It looks as though Apple Pay has a big slice of an incredibly tiny pie. There s Still Obstacles to Clear Big hurdles remain before contactless mobile payment can gain widespread consumer and retailer acceptance. For the most part, constituents of both groups are generally satisfied with current payment systems. To succeed, the new systems must offer unequivocal improvements in convenience, security and ease of use. A recent Retale survey found that, though consumers are very open to the idea of using such options for in- store purchases, there was broad misunderstanding of what constituted a mobile payment. The same survey also found that consumers were leery about using mobile for purchases above $50, mainly because of fears about privacy, data breaches and possible financial loss. The bigger the price tag, the bigger the perception of risk. On the retail front, though a number of major chains signed on with Apple Pay at its launch, many others have begun accepting other mobile wallets and some have even 2

3 introduced their own mobile order- and- pay apps. In an especially successful example of the latter, Starbucks recently reported that more than 13 million customers were actively using its mobile- payment app in the US, and that its stores were averaging more than 7 million mobile transactions a week, or 16% of the total. The seamlessness of the coffee chain s rollout had a lot to do with the already strong infrastructure behind its mobile app. Besides adding an additional printer, the chain didn t have to change much in terms of how the stores functioned to offer the mobile pay service. While the retail industry may find Apple Pay s security features (the tokenization system and fingerprint verification) appealing, they don t like the fact that the Apple version leaves them with virtually no information about their own customers. One response to that issue is CurrentC, a retailer- driven mobile payment system being developed by the Merchant Customer Exchange consortium (MCX) that will work on any smartphone operating system. CurrentC allows merchants to control access to valuable customer data during the transaction process, and to incorporate customer loyalty features. MCX members include Walmart, Target, Sears, Wendy s and Dunkin Brands, as well as Rite Aid and CVS. Even with the looming October 2015 deadline to switch to the more secure Europay, Visa and Mastercard (EMV) point- of- sale standard (by which time they must comply or incur greater liability for customer data and identity breaches), a January 2015 survey by RIS News and IHL Group found that only 12% of US retailers had invested in the NFC- enabled card readers, although another 48% were planning to do so in Most mom- and- pop stores are particularly behind schedule in installing the required POS equipment. PayPal currently leads the payment pack, with 13% of large retailers supporting the platform, versus 8% for Apple Pay, according to a survey conducted by consultancy Boston Retail Partners (BRP) in November and December of 2014 (Figure 1). (The survey didn t cover mom & pop stores, which make up the vast majority of retailers in the US.) Nonetheless, BRP projects that Apple Pay will be accepted by 38% of large retailers by the end of this year, making it the most widely used mobile- payment platform among that group. That forecast was based on 56% of respondents saying that they ll likely support Apple Pay by the end of Figure 1. Retailer Acceptance by Payment Type Already Accept Plan to Accept within 12 months Plan to Accept with 1-3 Years PayPal ApplePay Mobile Payment in App Google Wallet Sohcard CurrentC 8 13 Bitcoin 8 5 Through January 12, 2015 Source: Boston Retail Partners Point- of- Sale (POS) Customer Engagement Benchmarking Survey, January

4 But Tap- and- Pay Growth Is Coming on Fast But don t get us wrong. We still expect strong and steady growth for mobile payment usage, particularly in- store tap- and- pay (contactless) options. Forrester Research forecasts that US mobile- phone spending will nearly triple to $142 billion by the end of 2019 from $52 million in More than one in five mobile phones will have a mobile wallet function by 2018, up from 10% at the end of 2013, according to Juniper Research estimates. Figure 2. US Mobile Payments ($ in Billions) $16,833 $14,428 $34,160 $11,899 $23,472 $5,255 $3,737 $42,555 $7,308 $6,815 $53,141 $9,614 $10,451 $63,351 $16,240 $72,269 $81,349 $90, Remote Payment In- person Payment Peer- to- Peer Transfer Note: Forecast does not include purchases made on a tablet or card payments made at a mobile point- of- sale (mpos) or with a mobile card reader. Source: Forecast Research As illustrated in Figure 1, Forrester breaks the mobile payment market into three categories: The largest is remote payment, or e- commerce, encompassing purchases made online via a mobile device Peer- to- peer transfer, which includes services like Venmo, Square Cash, PayPal and even Gmail that allow users to send money back and forth among one another The smallest segment is in- person payments, or using the mobile phone to pay at a cash register (Apple Pay and Google Wallet) Although Forrester forecasts healthy growth for all three categories, it sees in- person mobile payments growing the fastest, nearly doubling from an estimated $3.7 billion in 2014 to $6.8 billion in 2015, then advancing another fivefold to $34 billion by By then, this segment will account for nearly a quarter of all mobile payments, up from 7% in

5 This growth outlook assumes that consumers will continue to be attracted to the demonstrable benefits and convenience of contactless options and that retailers will increasingly jump on the bandwagon in response to greater consumer demand for these services. Forrester also expects grocery stores and restaurants to take the lead in accepting and promoting new mobile- payment options. Ultimately, then, the future of contactless payment rests on winning over the consumer the same consumer who is generally happy with credit cards and other current offline systems. To convince them to make the switch, in- store mobile options must offer significant improvements in convenience, data security, cost and ease of use. Retailers will go with the technology that is best for their bottom line. All this suggests that the shift from offline to mobile is likely to be evolutionary, rather than revolutionary. So, while Apple Pay has been a huge catalyst for broader mobile- payments adoption, it is still far from the dominant system. Rival e- wallets are not taking the challenge lying down. Google is reportedly in talks to buy mobile wallet group Softcard, and is expected to return to market with a product much more to retailers liking. Google and Facebook are hunting for acquisitions that offer payment services, and even newer technologies are on the horizon. Alibaba s payments affiliate Alipay is reportedly getting closer to establishing a partnership with Apple that would allow iphone users in China to pay for goods with Apple Pay using money from their Alipay accounts. However, this collaboration could also eventually allow Alipay (and Alibaba) to gain a foothold with retailers and consumers in the US, which would be a potential game- changer for the US mobile- payment ecosystem. It s still too soon to call a winner in the US mobile payment space. 5

6 Deborah Weinswig, CPA Executive Director Head Global Retail & Technology Fung Business Intelligence Centre New York: Hong Kong: Marie Driscoll, CFA Christine Haggerty John Harmon, CFA Amy Hedrick John Mercer Lan Rosengard Jing Wang 6