After leaving his office in Manhattan, Tag stopped at a nearby Panera to grab a Frontega Chicken Panini

and Green Passion Power Smoothie as a quick dinner on his way to see some friends in Soho. Upon
ordering, he held his Apple Watch to the con tactless reader near the register, gently pressed his finger
to the TouchID fingerprint sensor on the small screen, and let Apple Pay do the rest. Wanting to get
across town as soon as possible, Tag used his Uber app to summon an UberX car. During the car ride, he
remembered that he needed a couple of new dress shirts. With a few quick clicks on his watch, he
selected the shirts through his Macy’s app. With a simple tap, he used Apple Pay to seam lessly complete
the transaction. As he neared his destination, Tag added a tip to the bill for the ride through the Uber
app, which he’d already configured to use Apple Pay as the default. With one simple press of his finger to
TouchID on his watch, he exited the cab. Three purchases—offline, online, and, well, sort of in be
tween—no wallet required. No traditional wallet, that is. This new reality—one that many early adopters
are already living—is rapidly expanding toward what some experts predict will be come the future for
everyone. Folks like Tag don’t even carry tra ditional wallets anymore, only their mobile devices and
perhaps an ID and a backup credit card for retailers that don’t accept mobile payments—yet. After years
of predictions that mobile payments would replace cash and credit cards, there are finally signs that it
might actually be happening. And Apple is leading the way. Hardly New The ability to pay for
transactions with a mobile device is hardly new. In fact, the first technology for mobile payments was in
vented by Sony way back in 1989. It was first put into use in Hong Kong’s subway system in 1997 and
began taking root in Japan in 2001. The tech-savvy Japanese warmed to the idea quickly, and mobile
wallet apps were being used on mobile phones through out Japan by 2004. Ever since, more than 245
million Japanese mobile phones have been equipped with the capability to make mobile payments, and
Japanese consumers use mobile pay ments for everything from transportation to food and household
purchases. So it seems odd that a similar system has not taken root in the United States, although it has
not been for lack of trying. Companies have been experimenting with different approaches for years.
PayPal was the first to take advantage of the smart phone revolution by creating a payment app that
gave just about every smartphone the potential for mobile payments. About a year later, Google entered
the mobile payment game with the launch of Google Wallet. In the past six years, numerous other
companies—from small start-ups to retailing giants—have tried to gain market acceptance in mobile
payments. They include the likes of Samsung, Square, and CurrentC—a failed mobile wallet app backed
by Walmart and a consortium of U.S. retailers in hopes of cutting credit card companies and their fees
out of the buying loop. But none of these players—individually or together—has made much of a dent in
replacing traditional credit cards and cash as a form of payment in the multitrillion-dollar U.S. retail
market. Although the mobile payments concept may seem like a no-brainer for convenience-loving
American consumers, nu merous barriers on both the buyer and seller sides have kept the concept from
gaining momentum. Late to the game with Apple Pay, Apple is clearly a market follower. But it’s a feat
that the innovative company has performed to perfection time and again—take a new technology, make
it better than any of the initial offerings, then watch the market explode as the Apple ver sion becomes
the runaway market leader. Overcoming Negative Consumer Perceptions As with every new technology
that involves paying for things, consumers have concerns about the security of mobile pay ments. PayPal,
Google, and the others took significant mea sures to design secure systems. However, most consumers
just weren’t comfortable with the idea that their phone might be used as a portal to their credit cards
and bank accounts if it fell into the wrong hands. Never mind that the same could be said of a wallet or
handbag, “devices” that are far less secure. Recognizing consumer reluctance to place digital versions of
their financial devices in one app, Apple took security to a higher level. Requiring a fingerprint makes the
process much more se cure than the more common safeguard of entering a passcode. And if a mobile
device is ever lost or stolen, the owner can use its Find My iPhone feature to immediately lock down
Apple Pay or even wipe the device completely clean. Additionally, every compatible Apple device is
assigned a unique device account number. This is encrypted and securely stored in a dedicated security
chip on the device. It and a trans action-specific security code are the only numbers that Apple transmits
to merchants. In fact, the merchant doesn’t even need to know the customer’s name. Credit and debit
card numbers are stored only on the local device, not on Apple servers. This makes Apple Pay even more
secure and more private than pay ing by credit card. Beyond consumer security concerns, previous
adoption of mobile payment apps has been slowed by perceptions of a clunky user experience. If
convenience is the biggest draw for consumers, then anything more arduous than the already
convenient swipe of a credit card simply won’t cut it. Setting up any of the existing mobile payment apps
takes time and effort. Using such apps at the point of purchase is far from seamless, especially if the
technology isn’t working quite right. “I don’t want to be that guy holding up the line while we fumble
around to get it all to work,” says one business columnist, “just like I don’t want to be the guy who holds
up the line boarding an airplane because his mobile boarding pass can’t be read.” Mobile apps that hit
the market prior to Apple Pay required entering a pass code and—in some cases—hitting multiple
buttons. That took longer than the traditional swipe of the card, even if everything worked as intended.
With Apple Pay, users still need to configure the app. But Apple entered the digital wallet business with
800 million credit cards already on file within its existing iTunes store. Not only can this facilitate a setup
that is already streamlined compared with existing apps, it’s a sign that iTunes users may be more
comfort able with using the app given that they have already given their credit card information to
Apple. And with the TouchID sensor, Apple has the transaction down to a one-touch process. That’s
quicker than swiping a card and going through the typical menu, not to mention quicker than inputting a
passcode. Establishing Points of Acceptance For mobile payments to penetrate the market, consumer
accep tance is necessary. But companies face a twofold challenge in making such a technology
successful. Consumers won’t adopt it if retailers don’t accept it, and retailers won’t invest the resources
necessary to accept it unless there is sufficient consumer de mand. And the lack of consumer demand is
the biggest factor that has kept retailers from jumping onto the mobile payments bandwagon. As a
result, having too few retailers accept mobile payments was a barrier to convincing people to leave their
credit cards at home. But thanks to Apple that situation is changing rapidly. It may be because of Apple’s
clout or because of its massive and loyal user base. But in less than a year, Apple signed up far more
retailers than all the previous mobile payment providers combined. Today, more than 2.5 million
contactless-enabled terminals in the United States accept Apple Pay, a level that demonstrates the type
of momentum that will keep Apple on a growth trajectory. “You need so many points of acceptance to
make mobile payments work,” says a mobile payments analyst for Forrester Research. “Apple has made
that happen, striking partnerships with top national brands across a variety of categories that will give
consumers plenty of opportunity to use the service.” Apple has also signed up enough credit card–
issuing banks and credit unions to cover the vast majority of charge volume. Given the tremendous
potential for this market, the competi tion has been very active. Google has pulled back on Google
Wallet, even as it has released a more user-friendly and more widely accepted Android Pay. PayPal has
the advantage of its massive online payments network as well as the first-mover advantage. Samsung
intends for Samsung Pay to be a fluid component for its foray into the Internet of Things. Banks such as
Capital One, JPMorgan Chase, and Wells Fargo are intent on keeping payment transactions in the
banking business with apps of their own. And numerous startups are pushing digital wallet apps,
including Coin, eWallet, Gyft, KeyRing, and LevelUp. What’s more, most of these digital wallets utilize the
contactless-reader technologies that are already part of existing point-of-sale terminals, eliminating
retailer acceptance as a bar rier to entry. In addition to the competition, Apple still faces other chal
lenges. For starters, while Apple’s market penetration far exceeds that of the competition and continues
to grow by a million new users each week, the mobile payments leader has a long way to go before
reaching critical mass as digital wal lets are still being used for only a sliver of all retail transactions.
Additionally, the complexity of the payments industry has re quired Apple and other companies to focus
on developing one system. And with everything from smartwatches to refrigerators now featuring
payment capabilities, changes in consumer pay ment behaviors are inevitable. In an environment as
volatile as this one, an alternative technology could certainly upset the apple cart. Still, Apple remains
confident. With in-browser and peer to-peer payments on the horizon, there is more potential than ever
to boost transactions. And don’t count out an Apple Pay app for Android devices. In short, experts
predict that this year will be a watershed one for the payments industry. Although there are still plenty
of doubters that mobile payments will re place plastic as the go-to method for purchasing goods and
services, there are also plenty of believers. And although Apple is clearly ahead at this point, its success
also bodes well for the competition. As the concept catches on and technologies become more
compatible, demand among non-Apple users will increase as well