PMK Tutorial 8 Apple Pay Case Study PDF

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CHAPTER 12

| Marketing Channels: Delivering Customer Value

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Company Case Apple Pay: Taking Mobile Payments Mainstream After leaving his office in Manhattan, Tag stopped at a nearby Panera to grab a Frontega Chicken Panini and Green Passion Power Smoothie as a quick dinner on his way to see some friends in Soho. Upon ordering, he held his Apple Watch to the contactless reader near the register, gently pressed his finger to the TouchID fingerprint sensor on the small screen, and let Apple Pay do the rest. Wanting to get across town as soon as possible, Tag used his Uber app to summon an UberX car. During the car ride, he remembered that he needed a couple of new dress shirts. With a few quick clicks on his watch, he selected the shirts through his Macy’s app. With a simple tap, he used Apple Pay to seamlessly complete the transaction. As he neared his destination, Tag added a tip to the bill for the ride through the Uber app, which he’d already configured to use Apple Pay as the default. With one simple press of his finger to TouchID on his watch, he exited the cab. Three purchases—offline, online, and, well, sort of in between—no wallet required. No traditional wallet, that is. This new reality—one that many early adopters are already living—is rapidly expanding toward what some experts predict will become the future for everyone. Folks like Tag don’t even carry traditional wallets anymore, only their mobile devices and perhaps an ID and a backup credit card for retailers that don’t accept mobile payments—yet. After years of predictions that mobile payments would replace cash and credit cards, there are finally signs that it might actually be happening. And Apple is leading the way.

Hardly New The ability to pay for transactions with a mobile device is hardly new. In fact, the first technology for mobile payments was invented by Sony way back in 1989. It was first put into use in Hong Kong’s subway system in 1997 and began taking root in Japan in 2001. The tech-savvy Japanese warmed to the idea quickly, and mobile wallet apps were being used on mobile phones throughout Japan by 2004. Ever since, more than 245 million Japanese mobile phones have been equipped with the capability to make mobile payments, and Japanese consumers use mobile payments for everything from transportation to food and household purchases. So it seems odd that a similar system has not taken root in the United States, although it has not been for lack of trying. Companies have been experimenting with different approaches for years. PayPal was the first to take advantage of the smartphone revolution by creating a payment app that gave just about every smartphone the potential for mobile payments. About a year later, Google entered the mobile payment game with the launch of Google Wallet. In the past six years, numerous other companies—from small start-ups to retailing giants—have tried to gain market acceptance in mobile payments. They include the likes of Samsung, Square, and CurrentC—a failed mobile wallet

app backed by Walmart and a consortium of U.S. retailers in hopes of cutting credit card companies and their fees out of the buying loop. But none of these players—individually or together—has made much of a dent in replacing traditional credit cards and cash as a form of payment in the multitrillion-dollar U.S. retail market. Although the mobile payments concept may seem like a no-brainer for convenience-loving American consumers, numerous barriers on both the buyer and seller sides have kept the concept from gaining momentum. Late to the game with Apple Pay, Apple is clearly a market follower. But it’s a feat that the innovative company has performed to perfection time and again—take a new technology, make it better than any of the initial offerings, then watch the market explode as the Apple version becomes the runaway market leader.

Overcoming Negative Consumer Perceptions As with every new technology that involves paying for things, consumers have concerns about the security of mobile payments. PayPal, Google, and the others took significant measures to design secure systems. However, most consumers just weren’t comfortable with the idea that their phone might be used as a portal to their credit cards and bank accounts if it fell into the wrong hands. Never mind that the same could be said of a wallet or handbag, “devices” that are far less secure. Recognizing consumer reluctance to place digital versions of their financial devices in one app, Apple took security to a higher level. Requiring a fingerprint makes the process much more secure than the more common safeguard of entering a passcode. And if a mobile device is ever lost or stolen, the owner can use its Find My iPhone feature to immediately lock down Apple Pay or even wipe the device completely clean. Additionally, every compatible Apple device is assigned a unique device account number. This is encrypted and securely stored in a dedicated security chip on the device. It and a transaction-specific security code are the only numbers that Apple transmits to merchants. In fact, the merchant doesn’t even need to know the customer’s name. Credit and debit card numbers are stored only on the local device, not on Apple servers. This makes Apple Pay even more secure and more private than paying by credit card. Beyond consumer security concerns, previous adoption of mobile payment apps has been slowed by perceptions of a clunky user experience. If convenience is the biggest draw for consumers, then anything more arduous than the alreadyconvenient swipe of a credit card simply won’t cut it. Setting up any of the existing mobile payment apps takes time and effort. Using such apps at the point of purchase is far from seamless, especially if the technology isn’t working quite right. “I don’t want to be that guy holding up the line while we fumble around to get it all to work,” says one business columnist, “just like I don’t want to be the guy who holds up the line boarding an airplane

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PART 3 Designing a Customer Value–Driven Strategy and Mix

because his mobile boarding pass can’t be read.” Mobile apps that hit the market prior to Apple Pay required entering a passcode and—in some cases—hitting multiple buttons. That took longer than the traditional swipe of the card, even if everything worked as intended. With Apple Pay, users still need to configure the app. But Apple entered the digital wallet business with 800 million credit cards already on file within its existing iTunes store. Not only can this facilitate a setup that is already streamlined compared with existing apps, it’s a sign that iTunes users may be more comfortable with using the app given that they have already given their credit card information to Apple. And with the TouchID sensor, Apple has the transaction down to a one-touch process. That’s quicker than swiping a card and going through the typical menu, not to mention quicker than inputting a passcode.

Establishing Points of Acceptance For mobile payments to penetrate the market, consumer acceptance is necessary. But companies face a twofold challenge in making such a technology successful. Consumers won’t adopt it if retailers don’t accept it, and retailers won’t invest the resources necessary to accept it unless there is sufficient consumer demand. And the lack of consumer demand is the biggest factor that has kept retailers from jumping onto the mobile payments bandwagon. As a result, having too few retailers accept mobile payments was a barrier to convincing people to leave their credit cards at home. But thanks to Apple that situation is changing rapidly. It may be because of Apple’s clout or because of its massive and loyal user base. But in less than a year, Apple signed up far more retailers than all the previous mobile payment providers combined. Today, more than 2.5 million contactless-enabled terminals in the United States accept Apple Pay, a level that demonstrates the type of momentum that will keep Apple on a growth trajectory. “You need so many points of acceptance to make mobile payments work,” says a mobile payments analyst for Forrester Research. “Apple has made that happen, striking partnerships with top national brands across a variety of categories that will give consumers plenty of opportunity to use the service.” Apple has also signed up enough credit card–issuing banks and credit unions to cover the vast majority of charge volume. Given the tremendous potential for this market, the competition has been very active. Google has pulled back on Google Wallet, even as it has released a more user-friendly and more widely accepted Android Pay. PayPal has the advantage of its massive online payments network as well as the first-mover advantage. Samsung intends for Samsung Pay to be a fluid component for its foray into the Internet of Things. Banks such as Capital One, JPMorgan Chase, and Wells Fargo are intent on keeping payment transactions in the banking business with apps of their own. And numerous startups are pushing digital wallet apps, including Coin, eWallet, Gyft, KeyRing, and

LevelUp. What’s more, most of these digital wallets utilize the contactless-reader technologies that are already part of existing point-of-sale terminals, eliminating retailer acceptance as a barrier to entry. In addition to the competition, Apple still faces other challenges. For starters, while Apple’s market penetration far exceeds that of the competition and continues to grow by a million new users each week, the mobile payments leader has a long way to go before reaching critical mass as digital wallets are still being used for only a sliver of all retail transactions. Additionally, the complexity of the payments industry has required Apple and other companies to focus on developing one system. And with everything from smartwatches to refrigerators now featuring payment capabilities, changes in consumer payment behaviors are inevitable. In an environment as volatile as this one, an alternative technology could certainly upset the apple cart. Still, Apple remains confident. With in-browser and peerto-peer payments on the horizon, there is more potential than ever to boost transactions. And don’t count out an Apple Pay app for Android devices. In short, experts predict that this year will be a watershed one for the payments industry. Although there are still plenty of doubters that mobile payments will replace plastic as the go-to method for purchasing goods and services, there are also plenty of believers. And although Apple is clearly ahead at this point, its success also bodes well for the competition. As the concept catches on and technologies become more compatible, demand among non-Apple users will increase as well.

Questions for Discussion 12-18 As completely as possible, sketch the value delivery network for Apple Pay.

12-19 With respect to Apple Pay, is Apple a producer, a consumer, or an intermediary? Explain.

12-20 Identify all the reasons why Apple’s partnerships are essential to the success of Apple Pay.

12-21 With respect to marketing channels, what are some threats to Apple Pay’s future? Sources: Andrew Meola, “Apple Pay Is Showing Promising Growth,” Business Insider, April 28, 2016, www.businessinsider.com/apple-pay-isshowing-promising-growth-2016-4; Jason Del Rey, “Apple Pay Coming to Mobile Websites before Holiday Shopping Season,” Recode, March 23, 2016, www.recode.net/2016/3/23/11587214/apple-pay-coming-tomobile-websites-before-holiday-shopping-season; Robert Hof, “Apple Pay Starts to Take Off, Leaving Competition in the Dust,” Forbes, January 27, 2015, www.forbes.com/sites/roberthof/2015/01/27/apple-paystarts-to- take-off-leaving-competition-in-the-dust/; Robert Hof, “Apple Pay Momentum Keeps Growing Despite Challenges in Stores,” Forbes, April 27, 2015, www.forbes.com/sites/roberthof/2015/04/27/apple-paymomentum-keeps-growing-despite-challenges-in-stores/; and information from www.apple.com/apple-pay/, accessed June 2016....