Why Apple Pay is Failing

Apple Pay: A New Hope?

It was an auspicious opener. Apple sent out cryptic invitations to the press on August 28th, 2014 with just the date of the conference and a single sentence: "Wish we could say more." The special event on September 9th in Cupertino, California could not have been more anxiously awaited. Leaks were spouting from every direction, anticipating the new iPhone, Apple Watch, and payment system set to be officially revealed. Investors knew the event would be big and their suspicions were egged on when Tim Cook walked on stage and began speaking in biblical verse. "Steve introduced the Macintosh to the world," he said. "And on this stage we introduced the iMac, which signaled the rebirth of Apple. Today we have some amazing products to share with you. And we think at the end of the day that you will agree that this too is a very key day for Apple." Just as God created Eve from Adam, so too had Tim Cook created his Apple Watch and Apple Pay from its predecessors. This was a reawakening. The second coming of sorts.

While Apple's overall stock price fell the day of the announcement, investors seemed most excited about Apple Pay. The stock price jumped almost three dollars when Cook announced Apple Pay, and it began to fall only after the announcements of Apple Watch and a free U2 album popping into everyone's iTunes library uninvited.

Investors had reason to be optimistic about Apple Pay. If Apple could capture just a small fraction of the $12 billion dollars of daily transactions happening throughout the U.S., financiers would see a significant return. Most importantly, the word "infrastructure" seemed to be traveling through Wall Street like wildfire. After so many companies had tried to pull off similar stunts, Apply seemed likely to finally nail the landing. The company already had unique security features in place to make payments via the iPhone safe and secure. Additionally, it had the global reach necessary to ensure a loyal following among retailers.

So why did major brands like Best Buy, Target, Walmart drop Apple Pay?

The answer seems to be multifaceted, having to do with both implementation issues and the U.S. banking system as a whole.

First off, Apple Pay”s distribution was executed almost as poorly as a Herman Cain commercial. One of the biggest issues that slipped Apple's mind was that retailers have remarkably small profit margins as it is and would need to be incentivized to use Apple's new system. While Apple Pay might make shopping simpler and more enjoyable for the average consumer, the product did not fit into the business models of many retailers. Apple had built the infrastructure to accommodate most major banks and payment processors, but did nothing to help retailers. Already encumbered by fees from major credit card companies, many retailers saw Apple's entry into the market as another weight on their shoulders. In the same weekend, CVS and Rite Aid cried mutiny. Walmart happily joined in soon thereafter.

While it would be nice to think that Walmart and company revolted for the good of humanity, there seems to have been some ulterior motives in play. Mobile payment companies have been fiercely aligning themselves with different retailers since the start of the decade, shooting themselves in the foot in the process. Google Wallet was one of the first players to use NFP technology to process payments on a large scale back in 2011. However, T-Mobile, Verizon, and AT&T banded together, warning that they would drop Android phones from their stores if Google kept the app on its operating system. The primary reason behind these threats from mobile carriers was that these phone companies were building their own NFP system called Softcard. When Apple Pay entered the mix, it not only directly threatened Softcard, but also flew right in the face of CurrentC, an app that many retailers were already using that allowed them to avoid transaction fees from credit card companies by siphoning money directly from a user's checking account. With so many players now on the field, no one seems to be able to catch the ball. It's a cold world.

On top of all that, mobile payment schemes are much more difficult to implement in countries with fractionalized commercial banking systems. The U.S. still has over 8,000 different banks around the country, making it very hard for a third party to make a smooth, one-size-fits-all payment process. Countries with far fewer banks, such as the UK, have an easier time streamlining transactions. The Payments Council, for example, is the brainchild of Britain's most beloved Prime Minister, Gordon Brown. The government brought together a group of financial institutions to create a standardized strategy for UK payment processes. In large part due to this centralized nature, Britain has been able to implement a mobile payment system fairly effortlessly. Paym, an app that allows users to exchange funds using just their phone number, was launched by none other than the Payments Council itself. Google Wallet, Apple Pay, and CurrentC are unable to align with one primary organization in the states. The American road to P2P dominance has many more potholes than elsewhere.

A Patch for Apple Pay?

Resonating the familiar, dreaded words of romantic break-ups, retailers told Apple Pay and iPhone customers, "It's not you. It's me." Retailers know that Apple Pay would be a net benefit for consumers, but the infrastructure needs to be built in such a way that it is a net positive to each retailer's bottom line. If Apple wants to get Apple Pay off the ground, they need to eliminate the middle men, like Visa or Mastercard, who are taking a cut of the transaction from retailers. Apple must ensure that it is providing a service not only to iPhone users, but to retailers themselves.