Apple Pay will open up customer data to retailers. This will happen. It’s a matter of time. Look at the evolution of every major platform in recent memory. Facebook opened up its customer data to advertisers after getting scale. Google did the same with AdWords. Apple already did this by offering ads for apps in iOS8. The list goes on and on.
Once a platform is at scale, it can slowly evolve without triggering consumer apprehension about privacy. After consumers’ have adapted to using Apple Pay, they won’t care as much about whether or not Apple shares their information with retailers.
Still, many major retailers are complaining about accepting Apple Pay in their stores, including Wal-Mart, CVS, Rite Aid and Starbucks. The official reason is either 1) money or 2) information on customers.
In terms of money, Apple Pay is a wash compared to the current fees that retailers pay. A customer is considered to have purchased with “card present,” which receives the “lowest” fees from credit-card processing companies. However, merchants still bear the cost of upgrading to NFC-compatible card terminals, so there is a justifiable complaint here. One option would be for Apple to subsidize the installation of NFC hardware for merchants who sign up for Apple pay, as we suggest here.
In terms of customer information, retailers using Apple will receive a lot less information on their customers than many of them do today. This fact might seem at odds with what you’d expect from a digital payments company. However, from Apple’s perspective, it makes sense.
Put yourself in Apple’s shoes. You are about to launch a disruptive new way to purchase goods in stores. You are able to secure deals with banks and credit-card merchants to allow your payments platform to function in stores with NFC readers. You have integrated that technology into your new iPhones and are ready to go to market.
You’ve seen many consumer-facing platforms undergo huge scrutiny for privacy concerns. You don’t want that to happen to you at launch because the media will pick up the story and attack you. This will hurt consumer adoption. If you can get strong consumer adoption at launch, you have overcome the first hurdle of the chicken-and-egg problem.
But, guess what? Retailers shouldn’t worry. Here’s why.
Picture a world where Apple has strong consumer adoption and decent penetration in retail stores. Given that Apple Pay has already registered well over 1 million credit cards and found its way into 200,000 stores, this world isn’t too far off.
Apple Pay’s existing user base will give it a pretty robust payments network with a high volume of customers and merchants. Customers will already be accustomed to paying with Apple Pay (some will even be addicted to the convenience), and many merchants will have already upgraded to NFC-compatible equipment. The “sunk cost” for each of these groups – cognitive for consumers and financial for merchants – will be considerable at this point. At this point, the existing network will serve to continually attract more consumers, who can now use Apple Pay in most major stores.
Apple will then move to ramping up the “supply” side of its payments platform by adding more stores. How will Apple do this? By starting to collect and open up more customer data to retailers. Some consumers will protest, but the uproar won’t be widespread.
Why not? Because Apple stuck to the cardinal rule for building a successful platform in a highly competitive industry: only try to change one behavior at a time. The concerns about privacy won’t be enough to sway most who have already made the effort of switching to Apple Pay.
Once Apple has gotten consumers to think of Apple Pay as a safe and reliable way to pay, it can then start to expand its platform in new directions.
As mentioned above, Facebook did the same thing. Meeting and talking with people online was once an unusual behavior. But Facebook took that behavior and made it mainstream. They did this by making it feel safe and familiar – note how seriously they took the requirement that you use your real name. They also capitalized on existing peer networks and tightly controlled access in the platform’s early days. Only after “Facebook” had grown popular enough to change from noun to verb (“Facebook me”) did the company open up its platform. Facebook started by allowing more people to join and then it started using your personal data to sell advertisements.
Apple Pay will take the same trajectory. Merchants shouldn’t worry. They should recognize the delicate balancing act Apple has to play in starting a payments platform, and be ready to capitalize when Apple Pay shifts to phase two. As for consumers, you should expect this change in the near future. But you shouldn’t worry. Apple Pay will still be more safe and secure than using your credit card, and we’ve done alright with those for a while now.
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