Apple Pay has launched to much fanfare. People with the iPhone 6 or 6 Plus are now able to make credit card payments at certain shops and restaurants in the US. But Apple Pay isn’t the first of its kind and the technology it uses has actually been around for the past 15 years. So why has it taken so long to enter the mainstream?
My colleague Filipe Santos, professor of entrepreneurship at INSEAD and I studied the market in North America, Europe and Asia between June 2006 and June 2011, conducting 65 interviews with 40 informants. We found that, if it wasn’t for the egos of the different companies involved in making mobile payments systems work, it would already be a lot more widespread.
Clash of the titans
The mobile payment industry is a perfect example of titans from different industries clashing over how to deliver a new concept. It is often the case that firms from distinct industries struggle to reach an agreement when launching a new market. This is due to their history of dominance in their own industry and lack of joint collaboration experience.
So, in the case of mobile payments, you had the giants of the banking industry on the one hand and the network operators on the other. Their inability to reach an agreement led to a weak compromise on how the mobile market would function, with many unresolved issues in how it would be managed.
This creates a vicious cycle where other players hold off investments in the necessary market infrastructure: implementing point of sale devices, rolling out payment technology enabled phones. When the infrastructure falls behind, the disagreeing parties in turn lose any incentive to work on an agreement because the market is not taking off. The result: despite the mobile payments technology being readily available since 2000 and despite the strong demand for it, the market has been incredibly slow to materialize.
The interviews we conducted across industries, including banking and network operators, revealed just how difficult it was for the differing industries to see eye-to-eye.
One financial consultant said:
The financial industry is in a defensive position against this proposal. Until now, they owned their customer and whatever payments the customer was making. They have a lot to lose from sharing their card payment business with other players because cards are not just a source of revenue, but also a way to create loyalty and an opportunity to cross-sell products and services. So banks are not excited about opening their business to mobile network operators.
And an associate director of mobile payments at a US bank said: “Who would you trust with your digital money, your bank or your wireless carrier, who keeps charging you every time you go over your monthly plan?”
Referring to the banking sector, a senior sales associate at a US mobile operator added: “They either don’t need us or don’t need this market. Because if they needed it, we would be talking right now.”
15 years later
It has been recognized since the early 2000s that Near Field Communication (NFC) was the preferred choice of technology to get the mobile payment industry rolling. But mobile operators needed access to bank accounts, while banks, in turn, needed mobile operators because the user’s bank information and the payment software needed to be integrated into the mobile service of the user. But wrangling over who dealt with—and essentially owned—the consumer resulted in it being delayed for a number of years.
Eventually, a technology development known as single wire protocol emerged and the first Nokia SWP phone was announced in April 2009. But Nokia shelved the phone in February 2010 without ever launching it.
Google was the first player to introduce the NFC payment system, Google Wallet, in 2011. So far, the adoption of Google Wallet has been limited as the point of sale devices and software have not yet reached mass adoption among merchants.
Now that Apple has joined them, the fact that two big technology players are backing the payments system on their devices will certainly help with more widespread adoption issues. One interesting difference between Apple Pay and Google Wallet, though, is that Apple won’t have any access to information about what users buy or how much they paid. Google, on the other hand, “sees” every transaction that a user makes.
Overall, it has taken nearly 15 years after the first discussions on mobile payments began, for the key players to agree on the market architecture due to disagreements over who would control the customer relationship. This disagreement then extended to the responsibility for securing the transaction, but the companies eventually lost interest. Our data shows that the longer the players from distinct industries disagree about the market architecture, the more likely they were to turn their attention to investing in alternative architectures within their own industry. This then further inhibited a joint market from emerging at both global and local levels.
Whether Apple Pay is finally the service which cracks the mobile payment industry and brings the cross-industry squabbling to an end, while at the same time paving the way for a true emergence of a technology touted for years as the next big thing, remains to be seen.
So far, one thing that Apple has done right is to use its reputation as a top technology firm and platform provider to strike deals with the industry leaders in banking and mobile communications to finally get them to co-operate. When a company like Apple gets behind a technology, nobody wants to miss that boat.