Apple Faces Several Hurdles in Making Mobile Payment a Success

SAN DIEGO, CALIF. (TheStreet) -- With Apple  (AAPL) just weeks away from entering the mobile payments market with Apple Pay, experts remain on the fence as to whether the brand can do what others can't: convince consumers to pay with their smartphones. If Apple is lucky, it'll achieve, match or exceed the success enjoyed by Starbucks (SBUX) , which has enticed millions of its coffee-drinking customers to pay for items in its stores with a mobile transaction.

Starbucks' barcode-scanning solution, introduced in 2011, is by far the only system to have made measurable inroads with consumers. The coffee chain dangles perks and reduced waiting times in line to prompt customers to use its mobile app for store purchases. Currently, Starbucks processes more than 6 million mobile pay transactions per week in the U.S., with mobile pay accounting for 15% of those transactions, CEO Howard Schultz told investors during a recent earnings call. 

Except for this singular case study, "it's really hard for us to get good, credible data because [mobile payments] is just so small," James Wester, Research Director of Global payments at IDC Financial Insights, told TheStreet.

Read More: Why Apple Pay Is So Important to Apple's Future

Companies ranging from startups like LevelUp, to corporate entities such as Google (GOOG) , and even large consortiums as Merchant Customer Exchange and Softcard, have developed various technologies and apps for smartphone payments at the point of sale. But to little avail.


Only 10% of smartphone users, or 15.9 million people, will pay with their device in the U.S. this year, according to eMarketer, which counts all proximity payments made at the point of sale. And while eMarketer projects that figure will rise to 27%, or 57 million, by 2018, the number of people using it now is small, suggesting that this behavior remains unnatural or is unavailable to most shoppers.

"In terms of payment methods, nobody really complained about taking the credit card out of the wallet as an activity that is ... difficult," Brian Blau, Technology and Business Research Director at Gartner, told TheStreet. "There's every reason to believe that payment cards are going to stick around."

Yet, there's no ignoring the fact that when you walk into a Starbucks store, you'll see people of all ages take their iPhone or Android device and scan it at the register. Is it so hard to believe that this behavior could exit the Starbucks store with the consumer, who then heads to Macy's (M)  where Apple Pay is accepted?

"When you look at what Starbucks has done, you can't help but feel that they've caught lightning in a bottle," Wester said. 

The winning recipe? The coffee company has mixed mobile payments with rewards, Starbucks card management, app features, and soon mobile ordering, Starbucks Digital Chief Adam Brotman told TheStreet.

"In a vacuum, payment itself through the phone, while it's convenient, is not the main reason our customers are adopting [mobile pay]," Brotman explained. He added that Starbucks' mobile pay customers tend to be its best customers, spending more overall, returning more frequently, and engaging more with the company.

It's telling that Starbucks, which is adopting Apple Pay at launch, is only doing so as a means to give customers a way to digitally reload their electronic Starbucks cards. The company is not implementing near-field communication (NFC) terminals at its registers. Why mess with the only proven system on the market?

Read More: Apple Pay Is the Latest Reason It Stinks to Be a Traditional Bank

Most analyst firms agree that if there is to be a winner in NFC payments, it will be Apple, but they aren't going so far as to say it's a certainty.

"We think Apple, with its scale, brand and track record, has the best shot of making this a reality. However, given that payments will only work with the new devices, it will take time to ramp, both among users and merchants," Macquarie Capital analysts concluded in a note published on September 9.

Even Apple Pay bulls like Piper Jaffray don't expect it to be a big win for Apple. In a Sept, 16 research note, Piper Jaffray projected Apple Pay will have only a "fractional impact" on operating income, with estimated revenue of $89 million from transaction fees in 2015 and $310 million in 2016.

Apple has two serious obstacles at launch, Wester noted. First, he questioned the roll out during the winter holidays, when introducing a new technology at the register may prove chaotic. Plus, the 220,000 locations accepting Apple Pay when it launches isn't substantial enough to form a habit for consumers, he said.

"What's going to be the motivating factor for consumers to change their behavior?," Blau pontificated, without having an answer. Perhaps it's security or trust, but if experts can't answer the question, should we expect consumers to be able to answer it?

Still, most experts seem to agree that mobile payments are here to stay, it's just the form factor that remains up in the air. Starbucks' success suggests that the simpler, the better. Perhaps, the less than avant garde barcode has been the answer all along.

Read More: Apple Pushes Digital Wallet With Apple Pay

 --Written by Jennifer van Grove in San Diego, Calif.

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TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance."

You can view the full analysis from the report here: AAPL Ratings Report

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