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.
by Dina Gerdeman

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 it's 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.

“I think Apple has its work ahead in convincing thoughtful and potentially skeptical customers”

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."

“Apple Pay has the same problems as Bitcoin. There's no reason for the regular consumer to use it”

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."

About the Author

Dina Gerdeman is a senior writer for Harvard Business School Working Knowledge
    • Owner, BSEI
    If Apple can connect with PayPal and other systems that make paying secure and simple outside of credit and debit cards, that will be the link customers need. PayPal needs more connection with vendors, as well.
    • Dr Ray Williamson
    • Contributing Professor, Walden University
    I vaguely recall the uproar when credit cards were introduced to replace cash as a means of conducting trade. Credit cards and debit cards may find their future similar to that of the typewriter when the word processor was introduced.
    • Steve
    • Technology
    Wow, these professors completely missed the boat on EMV. The reason POS terminals will get changed is because VISA and MasterCard are shifting liability to Merchants go don't accept EMV cards. The retailers must change their POS terminals to support it. Apple will simply request that merchants purchase EMV enabled terminals that also accept NFC. It's brilliantly simple.
    • Anon
    • Amus, PAY-Out
    Weak analysis that does not take into account massive EMV payment terminal upgrade required by 2015 at US ALL merchants, lest they be liable for fraud. This will require PIN entry and new cards to be released. It also does not take into consideration the effect of combined promotion with payment really only possible on the apple platform : personal couponing that can mean higher margin shopping for merchants and loyalty for mfg. Finally this does not account for Android's existing infrastructure in the market. Clearly barriers exist, but many of the old ones are going away and new incentives exist.
    • Tim Latham
    • Marketing Director, Marketing Director On Tap
    Far be it from me to disagree with Harvard Faculty but I expect that Apple are onto something potentially very big and they have the resources and influence to make it work.

    A big potential plus is that we will have fewer things to carry around in our pocket. We aren't going to be separated from our mobile phones easily these days so if the mobile phone can take on the role of payment card (as it already has done mini computer, radio, camera, GPS etc) then it is appealing.
    • Vikram
    Apple can target a different demography like India where credit cards are still not used at wide scale. People still pay through cash. But again its Android which has bigger market share then iPhone in India.
    • N.R.Jothi Narayanan
    • HSE Consultant (chemical/gas/oil), Palakkad-678001.INDIA.
    The 'Apple Pay' would be able to catch about 20-25% of
    I-phone market in the next three years. Pay Pal and other systems will survive.
    The communication on the comparative performance on the flexibility and security between the 25% of the Apple's present customers who are going to adopt Apple Pay in the next three years and the 75% who would like to continue with the existing system will decide the future of Apple Pay.
    The suggested catch word for marketing Apple Pay from my end is
    " Correct Payment by Contactless Payment Technology" -
    ( CP by CPT). Please forward to Apple-Marketing Division.
    • John
    This analysis needs a thorough fact review. One oversight is that Apple Pay does not seek to displace the existing card networks. Rather, it serves as a digital wallet to which consumers link their credit/debit cards. This "disruptive technology" is actually commonly viewed as a positive for card networks as it provides another means for consumers to migrate away from cash/check to card payment. Also, cell phone signal is largely irrelevant to whether this technology will work - NFC does not rely on cell reception. Finally, recent security breaches have occurred at merchants rather than with networks. So the tokenization provided by Touch ID will go a long ways to eliminating storage of sensitive payment information at merchant sites.
    • Rajiv Parikh
    • CEO, Position2
    I thought that Apple Pay utilizes current credit cards, so rewards are still included. Consumers get to rid themselves of physical wallets along with increased security and functionality. They get their cake and eat it too.
    • Consumerman
    • Consumption Leader, US&A
    Here's why:

    First: When you pull your communication device out of your pocket with its protective plastic case and silicone surround no longer will you need to wonder if the surround is gripping plastic cards within your pocket as well: after all, wallets are burdensome as half of materials go unused and cause unnatural seating posture. Plus having to deal with replacing card after not noticing them fall to ground after a night of drinking leaves one with little ability to consume until replacement is mailed or collected at nearest financial institution.

    Second: Wait for announcement thursday from Appl
    • Mohit
    I expect much better from Harvard folks. This article is disappointing. It tries to make the following silly arguments:
    - Bitcoin failed, so Apple will too [actually Bitcoin has surprised me with its adoption]
    - Google failed, so Apple will too (Google has a different work culture. It promotes several new ideas from engineers to consumers directly, most of them fail. Apple is different. It curates ideas before consumers see them)
    - Won't use Bitcoin so I can get 2% cashback. So won't use ApplePay either (which gives the same cashback as it used existing cards and is not comparable to Bitcoin)
    - No added security. This is incorrect. ApplePay is much more secure than the outdated magnetic stripe cards we use. More security equals less fraud (see my notes at Less fraud equals lower transaction costs. We can't guarantee that the lower costs will be passed on to the consumer in the future, but the possibility opens up. Also it is much easier to keep improving the security with ApplePay because it is just software.

    Other people have pointed out the payment terminal upgrades coming up as well as the value for the consumer (e.g. thinner wallet)
    • Abhishek Khanna
    • Senior Manager - User Experience Design, Eko India Financial Services Pvt. Ltd.
    From what I saw of apple pay in the WWDC, its just a wrapper around the card, so the consumer still gets this 1 or 2 percent off depending on the card which gets used through Apple Pay as eventually the payment is happening through the card only.

    Also in my opinion the argument "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?" is not right, I personally don't like carrying a bulky wallet in my pocket but always love to have my phone with me. Lot of times, I leave my wallet in the car and just carry some cash in the pocket. When one uses their phone to pay, its inside the store, no store makes you stand in the rain and pay for the product/service. No matter what in the world happens one will always have their phone with them.

    The only challenge I feel is what happens when the phone's battery goes off!

    He then talks about NFC being used by only 10% retailers. Well, when HTML5 was promoted by Apple Adobe Flash was big, but the consumer convenience and requirement finally led to Adobe Flash becoming obsolete (Promotion of HTML5 even led to a rift between Apple and Adobe). I feel the current technology scenario should never be considered when creating break through products, else it would have never lead to inventions of products like iPod or the iPhone in the first place. I feel if the product is good it will automatically carve the technology scenario around its need and people will give in eventually. Merchants will do it if the consumers start asking for it.

    Bottomline: Someone joked about the iPhone when it was launched and today that person is no longer the CEO of Microsoft!