Apple has granted permission for third-party applications to facilitate contactless payments. In practical terms, this means that digital wallets not owned by Apple employing host card emulation (HCE) can utilize the NFC chip on iOS devices to perform contactless payments at a POS terminal. iPhone users can set a default wallet that activates when initiating a payment gesture, like double-clicking the side button or placing the phone over a compatible NFC field. The newfound accessibility to Apple’s NFC chip is likely to invoke significant changes to the payment ecosystem: It is a noteworthy event when a proprietary technology, catering to millions of users, opens for utilization by literally anyone.
NFC vs QR vs Bluetooth
NFC is a way for devices to communicate through proximity. Alternatives for proximity communication relevant for payments exist, like Bluetooth and QR codes, and these technologies have their distinct pros and cons. QR codes are excellent for widespread distribution and compatibility, Bluetooth works well for face-to-face interactions but comes with risks. NFC is ideal for quick and secure exchanges in-person. The choice between the three options ultimately depends on factors such as compatibility, convenience, and the context of use. In Asia, QR-code based payment wallets have achieved huge success, mostly due to the slow adaption of contactless cards and terminals, as well as the “beyond payment” value propositions within the wallets. NFC based solutions did not get significant traction until Apple Pay was launched, and today, NFC-based payment solutions is slowly capturing market shares across the globe.
The limitations
When assessing the potential impact of Apple opening for HCE, five important limitations are noteworthy:
- The third-party access to the NFC seems to be limited to payment use cases. Using NFC to e.g. open doors or car locks seemingly still must be done through Apple’s wallet, meaning suppliers must follow other requirements and commercial programs. In result Apple’s wallet will have more NFC enabled use-cases beyond payments.
- Opening for HCE redistributes power to banks and issuers. With HCE, each issuer gains control over the authorization of apps/wallets permitted to handle their cards.
- It only works with payment means that are ISO14443 and ISO7816 compliant. Simply translated it mainly supports card schemes (Visa, Mastercard, domestic card schemes that are EMV compliant) and transit schemes (MIFARE-based). This limits the number of players who can benefit from Apple´s opening of NFC payment capabilities.
- The change is limited to the EEA, potentially positioning Apple’s native wallet as a more advantageous option for international travelers from outside the EEA region. EEA citizens travelling outside the region will however be able to use third party apps for payment.
- Wallet providers wanting to develop an HCE-based payment solution are required to meet qualifications set in Apple´s HCE entitlement program. Such requirements can greatly influence who can release a compliant wallet and their time-to-market.
Status on mobile payments and Apple Pay
Apple Pay’s status quo indicates what is possible to achieve within user adoption for mobile payments and will be main competitor for newcomers utilizing HCE. Different markets should be compared with caution as fundamental market characteristics influence adoption rates of contactless payments. Examples are iOS market share, the relationship between banks, merchants and Apple Pay, and local payment schemes not backed by Apple Pay.
Apple’s US home market represents a developed wallet nation operating in a free market. Most of the US banks support Apple Pay, around 75-90% of retailers accept contactless payments, and the product has been live for around 10 years – plenty of time to onboard and educate consumers. The exact numbers are difficult to come by, but estimations typically hover around Apple Pay being used to pay for 2-6% of in-store purchases, while mobile wallets have a total of 4-12% of the total in-store transaction volume. Of online purchases, Apple Pay accounts for 10-15% of the total transaction volume, while mobile wallets in general have a total market share of 30-40%.
The UK has a similar story. Apple Pay is estimated to account for about 7% of in-store purchases, while mobile wallets have a total of 12%. Of online purchases Apple Pay has 12%, and mobile wallet a total of 35%.
These numbers are rough and based on estimations, but the conclusion seems valid: where the markets allow it, mobile payments through NFC are growing steadily and gaining market shares. The adoption has not been explosive, the main reasons are centered around time to onboard banks and merchants, a required change in user behavior, and contactless cards being introduced at the same time. After 10 years live in these markets (USA and UK) where the banks have supported Apple Pay and other wallets, in-store market share is still under 10%.
Within the EU, accurate numbers are hard to find and vary for each country, but generally, Apple Pay is still a small player. A recent survey done by ECDB (July 2023) indicates that Apple Pay has a slightly lower user adoption in both France and Germany compared to that of the US and the UK. In Denmark, a recent study done by the local competition authorities indicated that around 10% of “last in-store purchases” were done with Apple Pay.
Reasons to believe the impact will still be high
While Apple Pay market shares are still relatively low, they are growing at an accelerating speed, especially in digital mature markets. When we combine this fact with Apple’s move to open up for HCE solution, and the certain characteristics of several countries within the EEA, it is likely that the growth rates of contactless payments will increase. Particularly, countries with the below characteristics are more likely to see a quicker shift:
- High iOS market share and digital maturity (high contactless acceptance coverage, high mobile payments user adoption online/in-store, and low cash usage)
- Local dominance of issuer/bank-owned payment applications that easily can be updated with NFC capabilities to become wallets.
These characteristics are in place within the EEA, though they vary by country. For instance, as a strategic maneuver against big tech firms fighting for dominance in the digital wallet space, banks and banking consortia in some countries have introduced wallet apps for online and peer-to-peer (P2P) payments. Typical examples include Payconiq in the Benelux, Mobilepay in Denmark and Finland, Vipps in Norway, and Swish in Sweden. Due to their high adoption rates, these platforms are in a prime position to leverage Apple’s Host Card Emulation (HCE) capabilities to develop their NFC-based payment solutions, thereby enhancing their market competitiveness. However, it is important to acknowledge that not all local wallets will benefit from Apple’s opening of NFC technology, as it is compatible solely with card-based systems, specifically those compliant with ISO14443 and ISO7816 standards.
In addition to the wallet players, the opening of Apple´s HCE capability also fuels the entrance of new competitors. Specifically, issuers with big user bases and strong digital capabilities are well-positioned to fight for wallet market shares. Typical examples of such players include Klarna, Revolut, N26, among others, leading to a more competitive and dynamic landscape in digital payment solutions.
All these players have a combined massive marketing reach, meaning entire populations could be targeted by information campaigns concerning the newfound possibility of using their cards in-store. End-user adoption barriers will also be low as the applications already exist on millions of iPhones. To win consumer attention and transactions we could very well see an all-out marketing war for becoming the default wallet app.
In these markets, there is a good potential to see an uptick in mobile in-store payments, which in turn will likely affect the online wallet purchases as users get accustomed to use their new wallets in-store.
A threat to domestic schemes and transaction costs
Domestic card schemes ensure a lower transaction cost compared to international card schemes in several countries in the EEA. Examples are BankAxept (NO), Dankort (DK), Cartes Bancaires (FR), Bancontact (BE) and Girocard (GE). For the cards to also function abroad, they are mostly co-branded with an accompanying international card scheme. When such a card is used in a local store, the local scheme is automatically preferred by the payment terminal, leading to a lower cost for the merchant.
Unfortunately, the competitive environment for these schemes are intensifying, particularly as international card networks strategize to expand their footprint in the digital wallet space and capture greater market share. One strategy involves incentivizing issuing banks to not issue domestic cards in digital wallets by paying them a higher interchange fee. Another tactic leverages the legal premise of consumer choice, advocating for a process that promotes consumers to choose the payment scheme whenever paying with a co-branded card. Due to superior brand recognition and the ability to facilitate international payments, consumers are more likely to opt for the international component of the co-branded card, such as Visa. Consequently, as mobile wallet gain popularity, the market share and revenue of domestic schemes are expected to decline, ultimately eroding their market positions. Conversely, international schemes are likely to witness an uptick in transaction volume, inflating the transaction costs for merchants.
Potential concerns for merchants
A declining use of local schemes and increased use of international cards will drive up merchant cost for accepting payments. For merchants already operating with slim margins, such a scenario triggers big concern.
An additional concern is associated with consumer insights. Many advanced merchants have loyalty programs. The key driver of these programs is to identify the consumer and have insights into their purchase behaviors, which fuels unlimited opportunity for value-adding services, including distribution of loyalty points, digital receipts, personalized content, targeted offerings, and much more. Such services would secure the merchant´s relevance against existing and new competitors. Therefore, a key priority for larger merchants is to drive users into their own channels (i.e., merchant Apps). Unfortunately, with the entry of 3rd party wallets, it becomes more complicated to secure these priorities as the end-user will have more options at the point-of-sale, hence the knowledge about the buyer and their basket can become more scattered.
Additionally, in markets dominated by leading general-purpose wallets (such as Benelux, Scandinavia, and Spain), the likelihood of consumers opting for their preferred payment wallets during retail transactions could result in merchant applications facing greater difficulties in staying relevant. Should this scenario unfold and proper mitigation not be done, merchants might struggle to gather adequate insights into consumer behavior and miss opportunities to leverage such insights to enhance their competitiveness.
What can merchants do?
It seems evident that merchants, especially large retailers confront significant challenges in addressing the threats posed by new entrants that are empowered by the NFC payment capability. Among these threats are the diversification of wallets due to an increasing number of players in this space; increased payment costs driven by increased transaction volume through international card rails; and most importantly, the diminishing of customer insights. The last point is the most serious, as there exists a significant risk that the merchants’ own Apps may become obsolete, undermining their ability to gather and act upon valuable consumer behavior data.
The most immediate question one might ask would be: how should the merchants respond to such challenges? At a high-level, the merchants seem to have several options to regain control of the situation. These include blocking certain card schemes, partnering with the wallet providers, or launching competing payment wallet that utilizes alternative payment methods like account-to-account through “open-source” technology (like QR-codes). Alternatively, they might consider entering the NFC battlefield by developing their own HCE solutions, with the aspiration that consumers will adopt them.
The answer, however, is neither straightforward nor universal. While the challenges may look alike on the surface, their impacts vary across different merchants. Every merchant is unique in terms of their target customer segments, growth strategy, and competitive advantages, making a one-size-fits-all solution impossible. The real answer, therefore, lies in a deep understanding of one´s strategic focus, strength & weakness, and available resources and tools.
To navigate the complexities, merchants should refrain from drawing conclusion too quickly and start by answering a few key questions:
- What are the most important priorities for my business´ success? For instance, is maintaining the customer touchpoints more crucial, or minimizing the payment costs, or possibly other strategic objectives?
- Who are my competitors within the market I operate in? Are they the local general-purpose payment wallets, international challengers (either wallets or digital banks), or other merchants seeking to expand their payment capability through NFC technologies, among others?
- What are my strengths and weaknesses in addressing the market shifts and competitions?
- What resources and tools (funds, loyalty, brand, technology, expertise, partnership, market dominance, etc.) do I have? How could I turn them into competitive advantages which align with my business objectives?
Regardless of the answers to the above questions, we believe that the merchants possess serval distinct tools that, when properly leveraged, can set them apart from the competitors. Foremost among these is the fact that merchants operate the shops, thereby maintaining the control over the customer journeys in their shops, both online and in-store. Thus, rather than focusing on pure payments, merchants should expand the battlefield beyond it by creating unique value propositions that other payment providers, such as general-purpose payment wallets or banking applications, are unable to offer. For example, build a unique user journey that redefines the entire shopping experience, delivering additional value (such as speed, clarity, loyalty programs, new way of interaction, etc.) to consumers. By doing so, merchants can attract consumers to their own channels for specific use cases, leveraging their unique position to enhance customer engagement and loyalty. Consequently, the choice of payment technology—be it NFC, QR-code, or any other method—becomes a secondary consideration.
Again, like most big threatening changes, there is also a possibility to leverage the change to become an advantage.