Apple Pay’s Technology Adoption Problem

I was due for a new phone recently, and as a devoted Apple fan I got an iPhone 6 (the 6 Plus was just too huge for me). While it has all the phone, photography, internet, messaging, and apps functionality I’ve come to know and love, it also comes with something new – the ability to pay vendors through my phone. Apple Pay is rolling out in October 2014. That’s why I was interested to find an article about potential adoption problems in a recent issue of the HBS Working Knowledge, which I’ve included below.

“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.


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.”


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.


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?”


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.”

photo credit: the magic apple via photopin (license)

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