All talk about Americans embracing mobile payments has been about the “when,” not the “if.” That manifest destiny may at last be within sight now that Apple (AAPL) has announced it will soon begin selling phones equipped with technology to support mobile wallets. That, at least, is what the digital-payments cheerleaders would have you believe.
As with many things in tech, it’s not just a matter of build, and they will use it. Just ask Google (GOOG) or Softcard, which made bump-to-pay smartphone wallets several years ago and have been waiting for customers to show up ever since. In order for mobile wallets to work, merchants have to meet the smartphone companies halfway. To accept near-field communication payments (that’s the bump-to-pay technology), stores and restaurants must install point-of-sale terminals with sensors that can talk to phones equipped with NFC chips. While most people buy a smartphone every two years, the assumption in the payments industry is that merchants are likely to upgrade payment systems about every five years.
Apple might be inspiring some to do so sooner. In the last few days, reports have surfaced that both McDonalds (MCD) and the Disney Store (DIS) are preparing large rollouts of NFC-enabled payment terminals this month, though it’s not clear that they’re doing so specifically because of Apple’s plans. Neither company responded to requests for comment.
Helping propel the changeover is the transition to so-called smart credit cards, which come embedded with computer chips instead of magnetic strips. Smart cards also require new kinds of payment terminals, and the credit-card companies have given merchants until October of 2015 to have them in place. After that, merchants will have to foot the bill for any fraud that occurs in transactions using the old kind of cards. (Gas stations will get two additional years.)
Smart card terminals are less susceptible to Target (TGT)-style hacking, a factor that may compel retailers to shell out for the new technology. Verifone (PAY), the leading provider of payment terminals in the U.S., says about 80 percent of the devices it sold last quarter can accept both smart card and NFC payments. It says about 30 percent of payment terminals can currently process smart card payments, while other estimates put the number even lower.
Those businesses that have such terminals aren’t necessarily using them. In the same way you haven’t figured out how to use Airdrop or Passbook, your local drugstore may not have bothered to activate the new features. “Even though the terminals are there and available, retailers haven’t turned them on,” says Nitesh Patel, an analyst at Strategy Analytics. “It sounds trivial, but you’d be surprised at the number of retailers who haven’t quite gotten around to telling people about it.” Part of McDonald’s preparation is requiring that its franchises teach each employee how the new payment system works, according to Mobile Commerce Daily, a trade publication.
There’s not universal enthusiasm for NFC among retailers, as demonstrated by the proliferation of competing technologies. Starbucks (SBUX), usually cited as the most successful purveyor of mobile payments, has an app that lets people spend money from preloaded cards by scanning a bar code that displays on their screen. MCX, a mobile wallet being developed by a group of major retailers, will use this approach next year, when it begins offering a full version of its service. That way, they control more of the exchange and keep more of the customer data, rather than ceding control to technology companies.
Apple will probably launch its wallet with a select group of merchants it has been working with directly, says Henry Helgeson, chief executive officer of Merchant Warehouse, a company that works with retailers on smartphone payments. For merchants, digital payments is just a means to an end—getting people to spend more money at their establishments—and not an end in itself. “Everyone is just using payments to get in front of the customer in new ways,” he says. “Putting a credit card on a smartphone is a parlor trick.”