Apple Pay a 'fraction of a fraction of a fraction' of credit cards
While mobile payments account for a very small percentage of payments, retailers should not discount them completely, according to Mallory Duncan, senior vice president of the US National Retail Federation. Card payments remain the standard with Apple Pay making up just a "fraction of a fraction of a fraction of credit card use". But while "hard economics" may run against the adoption of mobile payment services, Wharton marketing professor Z John Zhang said that "image is everything in retail".
Black Friday is days away, and retailers’ point-of-sale (POS) devices at the checkout counters are increasingly featuring mobile payment logos like Apple Pay and Android Pay. And it’s easy to see why.

Mobile payments are expected to account for a whopping $1 trillion in sales worldwide by 2017, up 124% from 2015 levels, according to a report by research firm International Data Corp.

But before retailers rush to equip their point-of-sale systems with the capability to accept Apple Pay, Android Pay, Samsung Pay and other forms of digital wallets, it’s worth asking: Does it really matter? Could merchants land a sale just as easily by only accepting traditional credit cards and cold, hard cash?

Tallying the Register

One data point to consider is the growth of new credit card accounts. According to the latest figures from the American Bankers Association, new credit card issuances rose 11% to 84.9 million accounts in the second quarter, compared to the same time last year.

“No form of payment has ever gone away since the invention of currency, and cards are the payment standard right now,” says Thad Peterson, an analyst with the Aite Group. “They work and people understand them. Mobile will take its place in the payments ecosystem, but it will be a while and it’s likely that cards and mobile will co-exist for some time to come.”

“Mobile will take its place in the payments ecosystem, but it will be a while and it’s likely that cards and mobile will co-exist for some time to come.” –Thad Peterson

That growth rate in new credit card accounts is comparable to PayPal Holdings’ increase in active customer accounts, which climbed 11% to 188 million in the second quarter, according to the company’s earnings report.

Some Apple Pay users, meanwhile, appear to be losing their enthusiasm for the iconic computer maker’s payment service, according to a survey by Pymnts.com. Of more than 4,000 consumers who have Apple Pay installed on their iPhones and shop at merchants that accept it, 21.3% of those surveyed in June said they used Apple Pay every chance they got — down from 33% a year ago. At the same time, the number of users who rarely consider making an Apple Pay payment reached 34% in June, which increased from 23% a year earlier, according to the survey.

‘A Fraction of a Fraction of a Fraction’

“Apple Pay is a fraction of a fraction of a fraction of the credit card use today. It is not even a rounding error off of the merchants’ bottom line. So, it will not affect their holiday season this year if they don’t offer it,” says Mallory Duncan, senior vice president and general counsel at the National Retail Federation.

Merchants who are weighing the expense of updating their POS systems to handle mobile payments need to consider several issues. One is the cost of updating the POS; another is the potential for lost business if they don’t upgrade, as well as the potential for leaving money on the table as a result of missing out on upside sales without the additional capabilities that can be added to mobile payments.

“PayPal, Apple Pay, etc., are used by a small number of customers, and hard economics may run against their adoption,” says Wharton marking professor Z. John Zhang. “However, image is also everything in retail.”

He notes that retail competition is especially fierce during the holiday season and that retailers want to appear cutting-edge and progressive to help generate sales — or at least avoid anything that would suggest otherwise.

The cost to accept mobile payments largely depends on whether a retailer has already upgraded its POS systems to accept chip-enabled credit and debit cards. These Europay, MasterCard, Visa (EMV) chip cards need to be inserted into an EMV POS device for the chip technology security feature to work. In October 2015, the liability for fraudulent credit and debit card transactions shifted from banks to retailers, if those stores did not have (EMV) POS systems.

EMV POS devices tend to already come with near-field communication (NFC) technology, which is needed to make a mobile payment at the checkout stand. As a result, it’s a fairly small task and expense to enable an EMV POS system with NFC to accept Apple Pay, Android Pay, Samsung Pay and other digital wallets, according to Peterson, the Aite Group analyst.

And for those merchants who haven’t yet adopted an EMV POS, the devices can run anywhere from approximately $100 for a small device to something a little larger in excess of $500.

“PayPal, Apple Pay, etc., are used by a small number of customers, and hard economics may run against their adoption.” –Z. John Zhang

“Merchants were distracted by the EMV shift in 2015 and 2016 … so mobile payments were quiet in 2015 and 2016, but I expect to see renewed interest in 2017 and 2018,” says Joe Mach, senior vice president and general manager of vertical solutions for Verifone, a major POS manufacturer.

Kohl’s is among the retailers that have launched their own mobile payment service. Kohl’s Pay launched in October to generate potential upside sales in time for the holiday crush. Kohl’s Pay combines the in-house Kohl’s credit card with the retailer’s mobile app for in-store purchases with the smartphone app. Kohl’s Pay also stores reward points, gift card cash and store offers that can be used at in-store checkout.

Catalysts for Change

Several catalysts are at play that will drive more merchants to offer mobile payments, ranging from the pervasive growth and use of smartphones to Apple throwing its weight into the market, say experts.

“Over time, more and more people will be accustomed to paying with their smartphone,” notes David Reibstein, a Wharton marketing professor. “It is comparable to when credit cards first started. It wasn’t essential, but became more necessary over time.”

And as consumers become more comfortable paying with their smartphones, they are apt to begin leaving their traditional wallets at home.

Once the inflection point is reached where smartphones serve as the primary wallet for consumers, merchants who don’t have mobile payment options on their POS systems will lose out on sales, according to Steve Kenneally, vice president of payments and cybersecurity policy for the American Bankers Association.

“Ninety-nine percent of the people who can pay with a mobile device have a card in their pocket,” Kenneally says. “But as people shift and put more data on their phones and leave their wallets at home, they won’t have a card to use in their pocket, and that will increase the importance of digital payments.” He predicts that this shift will begin within the next two years.

Convenience and speed may also drive consumers to turn to mobile payments, if given an option. Currently, it can take roughly eight seconds for an EMV POS system to authorize a chip card payment, which is slower than making a mobile payment with a tap of the Apple Pay icon on an iPhone, Mach points out.

Additionally, as new payment forms emerge, retailers need to get ahead of the curve, otherwise they may be viewed as having their heads in the sand, says David Bell, a Wharton marketing professor.

“They need to be where customers are, and to the extent that customers want to pay via those platforms — and some surely will — they need to be present.” –David Bell

“They need to be where customers are, and to the extent that customers want to pay via those platforms — and some surely will — they need to be present,” Bell notes. “They might need to be there for ‘signaling’ reasons; for example, younger consumers, in particular, who are used to paying via their phones … might infer that a brand that does not allow for these new payment platforms is ‘old, outdated, irrelevant,’ etc.”

Millennials, for example, appear to have a stronger interest in using their smartphones to make payments. Of the 4,000 North American consumers surveyed by Accenture, 40% noted they used their mobile device to make a payment. For surveyed millennials, however, the number was 52%.

Google launched its mobile payments system, Google Wallet, in 2011, but it failed to take off due to a lack of support from telecom carriers, Mach says. But Apple’s entry into the digital payments arena with Apple Pay has served as a catalyst to get others interested in offering digital payment services, he notes. In addition to Android Pay, Samsung Pay has also jumped into the fray. Retailing behemoth Wal-Mart Stores Inc. this year rolled out its Walmart Pay to all of its stores nationwide, and restaurant chain The Cheesecake Factory debuted its CakePay app.

In sizing up the landscape of retailers moving toward accepting mobile payments, Stephen Hoch, a Wharton professor emeritus of marketing, says: ”In the long run, consumers want convenience and speed, and retailers want lower transaction costs, convenience, speed and fraud detection. How it all plays out, I don’t really know. But I can guarantee you that Visa/MC/AMEX have a lot to lose and so will not make it easy on the new payment systems breaking into the oligopoly.”

Indeed, card issuers like Visa and MasterCard charge merchants an interchange fee for every transaction when the companies’ credit cards are used, which translates into billions of dollars each year. But with the advent of digital wallets, it presents more competition and can reduce the visibility of the credit card companies. MasterCard, according to American Banker, charges higher interchange fees on payments made using two-stage digital wallets like PayPal. With PayPal, if a consumer ties his or her PayPal account to a credit card, the MasterCard brand and the brand of the bank that issued the credit card will be invisible to merchants and customers.

Meanwhile, if merchants create a new mobile platform to accept digital payments, but find it costs as much or more to operate it because of the interchange fees credit card companies charge, then Duncan raises this question: “Why would a retailer use it?”