Since the advent of electronic payments, there has been a clear shift away from cash and checks. Credit and debit cards, and more recently prepaid debit cards, have been a staple of many consumers’ daily lives.
With the announcement of Apple Pay, Apple is betting that consumers want an even more convenient way to pay in person. Many in the payment space have attempted to make this evolutionary leap, but it seems that with Apple’s dominance of the easy-to-use mobile device market, it is uniquely positioned to become successful. There are existing examples of similar, successful implementations, with consumers in South Korea and Japan having long used mobile phones at the point of sale.
Glenbrook Partners, a payments strategy and consulting firm, believes that consumer adoption of new payment mechanisms comes down to two things: significant increases in convenience and/or perceived financial gains.
Apple Pay has internalized these two main drivers of consumer adoption and will likely be successful given its relationships with major card networks and banks. Similarly bitcoin, once past the learning curve, has significant conveniences over other payment methods and as the software evolves, will become more so. However, the financial benefits have not yet materialized.
Another parallel between Apple Pay and bitcoin is security. Apple Pay employs tokenization of information across the network and so is one of the most secure ways to pay in person, along with cash.
Apple Pay is well-positioned to make mobile payments pervasive with 220,000 merchants already signed up, an estimated 5 to 10 percent of the millions of merchant locations in the U.S.
It’s important to note, though, that Apple Pay has a dozen partner banks representing 83 percent of credit card spending in the U.S. but makes no mention of debit cards, which are issued by 14,000 merchants. As Generation Y is considered the debit card generation, hopefully Apple can cover that market, as well.
How does bitcoin benefit? Bitcoin depends on only one network — the Internet. Consumers are required to use mobile devices to initiate payment. Apple will shift consumer behavior to their devices and will make security a major consideration when consumers choose payment methods, especially after the recent parade of cyber intrusions of banks and merchants.
Bitcoin, as a payment network, is unmatched in its global design, affordability and security. Apple Pay is helping to lead the charge, and as bitcoin matures it will benefit from it. Rather than being a threat to bitcoin, as some commentators have rhetorically suggested, Apple Pay should provide digital currency with a boost — it could be the killer app that digital currency has been waiting for.
With digital currency, there’s nothing to jangle in your pockets and weigh you down as you walk. You can’t lose digital currency down the back of the couch. There’s no paperwork required and it supports online payments. Other advantages that digital currency has over physical, which may not be so obvious to the casual observer, are the lower transaction fees and the lack of a central issuer – so the user doesn’t have to put their faith in a banking system that may have let them down in the past.
According to a 2014 report on the use of cash by the Federal Reserve Bank of San Francisco, cash is still king when it comes to retail payments under $25 in the United States. The report states that the fact that debit cards tend to be used frequently for person-to-person transfers and several other categories of expenditure such as gifts, food, transportation and entertainment indicates that cash usage likely is not the result of a lack of access to alternative payment options.
The average transaction size for many of these expenditure categories is relatively low, suggesting that the reason cash is the most or second-most frequently used payment instrument is because small value transactions tend to dominate these categories.
The conclusion I draw from this is that cash is encouraged by merchants and retailers for small transaction sizes either through minimum transaction sizes or with higher prices by including taxes. Who can blame them? The transaction fees for credit and debit cards erode profits for smaller transactions, 30 cents + 3 percent for each transaction.
As bitcoin grows and Apple Pay extends its reach over the next few years, cash will shrink. The governments are incentivized to promote digital currencies because of the visibility they can glean from their public ledgers. Bitcoin analytics startups such as Blocktrail and Coinalytics are receiving funding to help the world understand what’s going on in the payment network, much the same way the traditional banking system has been monitored.
Apple Pay and digital currency will play a massive part in changing how consumers perceive — and make — low-value payments. The businesses that are quickest to realize this will be the ones that benefit – but believe me, the days of physical cash are numbered.