Apple wallet to take aim at growing mobile payments market

September 4, 2014, 6:09 PM UTC
Photo courtesy: Justin Sullivan—Getty Images

Apple appears poised to change the way Americans pay for stuff. Or at least, it will try.

Sources confirm several reports that the iPhone 6, expected to be introduced on Tuesday, will include technology that will turn the device into a mobile wallet that could be used to pay for items at retail stores. Apple’s mobile wallet will be based on NFC, or near field communications, a technology that uses radio communications to transmit data and that works in a growing number of point-of-sale systems. The iPhone’s Touch ID fingerprint scanner will be used to authenticate users, and Apple (AAPL) has teamed up with credit card companies to make the service broadly useful, the sources, who agreed to speak on condition of anonymity, said.

An Apple spokeswoman declined to comment.

Apple, which already has payment credentials for some 800 million people globally through iTunes accounts, has long been expected to make a bid to dominate mobile payments.

While Apple’s move is certain to shake up the mobile wallet market, the company’s success is far from guaranteed. And it comes at a time when the utility of digital wallets is being called into question, even as other forms of mobile payments are taking off.

Indeed, there is no longer a mobile payments market, but rather, several mobile payments markets.

Mobile wallets, which were expected to take the world by storm, have languished in the past few years. Giants like Google, PayPal, wireless carriers, and major retail chains, as well as promising startups like Square, have all struggled to make wallets popular. After years of effort, just $3.1 billion in purchases came from mobile wallets last year, according to Javelin Strategy, a research firm. That’s just a tiny fraction of the roughly $4.5 trillion in annual retail payments in the United States.

The challenges have been myriad. Google’s Wallet has been hamstrung by the company’s inability to get enough partners—most notably merchants and credit card companies—on board. Google also struggled to overcome roadblocks put up by some wireless carriers, who were promoting the own rival wallet.

That service, which is backed by Verizon, AT&T, and T-Mobile, struggled as well, first because it was plagued by delays, and later, because of its ill-fated name: Isis. After the emergence of the violent jihadist group in Iraq by the same name earlier this year, the carriers announced that they would ditch the brand. Just this week, CEO Mike Abbott announced that the service would be renamed Softcard.

Square, for its part, pulled its Wallet app in May, replacing it with Order, an app that allows users to order ahead and skip the line at local restaurants.

From a consumer standpoint, all these efforts suffered from the same pitfalls: acceptance at merchants was spotty and paying by phone was not necessarily more convenient than paying with plastic.

Some analysts believe that Apple, with its market clout and experience designing consumer products, could change the dynamics. In particular, the inclusion of NFC technology in the iPhone, could encourage more merchants to upgrade their point-of-sale system so they can accept mobile payments from both iPhones and the growing number of Android phones that are also equipped with NFC.

“Smartphones didn’t take off until Apple came in,” says Mary Monahan, research director for mobile at Javelin. “Tablets didn’t take off until Apple came in. A lot of people are hoping that this is a game changer.”

But recent publicity about hacking into Apple accounts of celebrities could pose a new obstacle for the company.

“For this to work, Apple has to garner much more confidence in the security of what they offer,” says Tim Bajarin, a veteran Apple analyst with Creative Strategies.

In the meantime, other parts of the mobile payment market are growing quickly. Javelin estimates consumers spend more than $56 billion in “mobile commerce” last year. The category includes not only e-commerce purchases made with mobile phones or tablets, but also purchases of services like rides through apps like Uber and Lyft, deliveries of food and merchandise through apps like Postmates and Seamless GrubHub, and others. Those in-app payments have quickly become a multi-billion business dominated by companies like PayPal’s Braintree and Stripe, one of the hottest payment companies to emerge in recent years.

Finally, mobile person-to-person payments, which are enabled by banks and by companies like PayPal and Square, are also growing, though the total number of transactions remain small. It’s not clear whether the iPhone’s mobile wallet will enable these kinds of transactions.