Apple Pay: A technology looking for solution?

We can now exhale - Apple has finally launched the next version of iPhone, leaving us with making the hard decision of choosing between a 6, 6 plus, or maybe wait for the Watch! But for me the more intriguing announcement was Apple Pay, marking Apple's entry into the huge offline, brick and mortar, payments space (remember Apple already does about $16 billion in online transactions through its iTunes and AppStore). Getting into payments is a massive play, while mobile payments itself was a huge $235 million segment, it is dwarfed by the total payment transactions of $14 trillion last year!

Apple's game plan here seems to be to be one of an orchestrator, they provide the platform and bring together the critical components and make them work in harmony.

That being said, I am not sure that they have solved the full puzzle yet. It's not clear why a customer will switch from cash or credit card to a digital wallet. Reality is that moving to digital wallets for physical purchases is a huge habit change. And habit change is never easy.

Apple Pay is bringing two innovations to the table. First, to ensure the security of your credit card information as it travels from your iPhone to merchant and then to the bank, so that even if the data are intercepted, it is not useable by unauthorized parties (follow the link for a more detailed understanding how it works). Second, convenient usage compared to other digital wallets, but not necessarily against cash or cards. To use it, you hold the phone next to a payment terminal, and authenticate with your fingerprint.  

Payment has only two key parties - merchant (seller) and customer. All the rest, such as banks, payment gateways, processors and card networks are merely enablers. Any payment system has to first meet the needs of these two parties.
So, here's why I am guarded in heralding this as the future of payments - Apple Pay reduces card fraud for merchants (and banks) but what's in it for the customer to make the change?

The reality is that cash and credit card are really easy and convenient. We have been doing it for a long time, we feel comfortable with the physical product in our hand, and most importantly, credit card fraud is largely borne by the banks or merchants - all we have is a short inconvenience of our card being blocked and waiting for the replacement. There just isn't a big enough incentive to switch to Apple Pay, as it stands today.

The key to encourage the shift to digital payments will be to completely reimagine the transaction chain, and not be constrained by the industry-defined boundaries of payments. As we look at payments from a customer's standpoint, then it is only one step amongst many in a transaction - from awareness, consideration, choice, payment, usage, repurchase to recommendation, and to make give the customer a reason to use the digital wallet, the innovation has to take place at different points in the transaction chain.

To see how mobile payments could open up new possibilities, the one that I think that has started to crack the customer proposition puzzle is Starbucks. In the US and some other markets it has introduced it Starbucks' app. This app goes beyond payments to include incentives (buy 12 cups, and get 1 free) and unique rewards (new beverage sampling) resulting in Starbucks currently doing 5 million transactions in a month in the US. They are rethinking even the purchase behavior by experimenting with offering an order-ahead service that makes sure that the coffee is ready just before a customer walks in but it doesn't sit long enough that it becomes cold! This isn't to say Starbucks is the final iteration, but can at least glimpse on how the retail experience can change.

For me the start-up or organisation that figures out the customer proposition, and not just the merchant proposition, will be the one to bet on. As we have explored the implications, there are three areas of advice that I would give to people looking to build a customer proposition for digital wallets, like Apple Pay:

1. Help the brick-and-mortar stores bridge the digital gap: Traditional retail is under attack from pure online plays such as Snapchat, Flipkart. However, Apple Pay and other payments technologies could help even the scales by combining the physical store experience with digital data to improve the transaction experience. The key is to look for other parts in the transaction process, that are big pain-points which if fixed, would make the customers happily transition to digital wallet. For instance, seamlessly combining in-store sampling, social recommendations with loyalty points and payments might overcome the problem of choosing and getting the best deal

2. Explore re-combinations of technology to predict customer behavior: Combining parts of existing technology - iBeacons, Passbook, GPS, and now Apple Pay, with other data like location awareness and CRM, in new and different ways, could lead to innovative hyper-local and personalized retail offerings that increase the purchase conversions and lower the cost of marketing

3. Experiment a lot! Apple Pay is a new platform, and in this phase there will be a lot of players experimenting new business models before one or two leaders emerge, at which time it's too late to enter. Payments is at this initial churn stage, and merchants, banks, startups who want to get a toe-hold need to invest in experimenting now with different business models, so that they have a shot at becoming one of the lead players in the market

As one can see, Apple Pay is a very interesting and secure technology but it's still looking for a compelling customer solution. And till the customer proposition is not nailed, I am holding judgment on Apple Pay's success.

Akshay Mehra is a Partner at InvYramid Innovation Strategy Consulting

Follow Akshay Mehra at @akshayinvyramid