Is it really true that Apple Pay is "a solution in search of a problem?" Or maybe it's a silver bullet that will help put an end to rampant credit card fraud and data theft? Actually, neither is demonstrably true at this point -- it's simply too soon to know.
But that hasn't stopped pundits of all stripes from weighing in on opposite sides of the issue. I won't pretend I have the answer, but in talking to analysts and reading quite a bit of commentary, I realize how nuanced a discussion of Apple Pay needs to be.
Apple has to make the case that Apple Pay is indeed a solution to a real problem, says Brain Blau, Gartner's director of consumer research. "Consumers don't have the motivation to switch [from credit cards], they don't see the benefit." Pretending that using a credit card is terribly difficult -- Apple tried to convince us of that in a video at the launch even this week -- is silly. Using a credit card is simple; people do it billions of times a year, Blau points out.
But when Apple and others argue our retail payments system is in such disarray that we really do need to "think different," as CEO Tom Cook said, I'm paying attention -- even if the proposed solution is unproven.
As the late, great Joan Rivers use to say, "Can we talk?"
The Tic Tac problem isn't a good reason for Apple Pay
Last Tuesday, Apple CEO Tim Cook showed a video of a woman burrowing in her purse for a credit card, navigating past a box of Tic Tacs, and struggling to open her wallet to find her card, then being asked to show her driver's license before completing the transaction.
C'mon, Tim. Implicit sexism aside, that argument makes little sense. It's not much harder to take a credit card out of your wallet than it is to take out your phone and tap it or wave it at a terminal. Seriously, we're all smart enough to do that, and selling Apple Pay the way late-night pitchmen sell goofy products with bogus before-and-after vignettes is insulting -- and a crummy marketing strategy.
Sure, credit cards get lost, stolen, and sometimes demagnetized. But phones are often lost, stolen, and dropped. What happens if you've spent a long day running around and haven't had a chance to recharge your iPhone? Oops. You're stuck, unless you still have credit cards in your wallet as a backup, which is what Apple is trying to eliminate.
You're also stuck if you saunter up to the register (or whatever we want to call it), wave your phone or Apple Watch, and see that nothing happens because the store is not on board with Apple Pay. At launch, Apple had lined up about 200,000 retail locations, which is a good start, but only about one-tenth of the total in the United States. (Also on board are major banks, including Bank of America, Chase, and Wells Fargo.)
What's more, Apple Pay will only work with the latest generation of iPhones. The iPhone 6 and 6 Plus are solid products that will likely sell well, and Apple's share of the installed base of smartphones in the United States is about 40 percent, according to Comscore. However, it will take years for there to be a critical mass of NFC-capable iPhones in the market. And what about all those people carrying around Samsung Galaxies and other Android smartphones?
Those are critical weakness, and the classic doctrine of network effects comes into play. Until there are many places to use Apple Pay, consumers won't be interested, and until a critical mass of consumers accepts Apple Pay, selling it to merchants who have to foot the bill won't be easy.
On the positive side for Apple Pay is the move to a European-style chip-and-PIN system mandated by the credit card companies, says Gartner mobile payments analyst Sandy Shen. Because retailers will have to roll out new terminals beginning in late 2015, this is a good time for a transition to terminals that are also compatible with Apple Pay and other NFC platforms, she tells me. Because many of the industry-standard, EMV-compliant payment terminals will be compatible with NFC, it's likely that the chicken-and-egg conundrum will be eased a bit. (EMV means Eurocard, MasterCard, and Visa, the dominant payment processors.)
Last Wednesday, one day after Apple announced Apple Pay, MasterCard also announced that all of its payment terminals in Europe will have to be contactless by 2020. When (or if) that will happen in the United States isn't clear, but the move in Europe is a very positive sign for Apple Pay.
Former Apple CEO John Sculley, who is bullish on Apple Pay, voiced this caution in a recent post on Entrepreneur: "Don't confuse vision and aspiration with near-term reality. It's going to take time to fully deploy Apple Pay on a large scale. Apple Pay is a play for the long game, and lots of infrastructure must be created before it becomes the game-changer that the iPhone became."
The big question: Security, security, security
Is Apple safer than what we've got now? Given the proven vulnerabilities of the current system, you'd have to think Apple Pay couldn't be worse, although the embarrassing leak of intimate celebrity photos most likely shook consumer confidence in the company's ability to protect private data.
Still, "from the little information we have so far, Apply Pay is at least on par with card payment and other NFC wallet using the Secure Element architecture," says Shen.
Apple has clearly given the issue real thought. As my colleague Galen Gruman pointed out this week: "If you move valuable information through lots of networks and accessible devices, you have an indefensible perimeter. Apple Pay does away with that issue by sending one-time codes from the iPhone to the sales terminal, matched to a unique user ID. The reconciliation happens on the back end through presumably highly secured, low-footprint connections."
Given that apps are often leaky, Apple has stored the unique ID and the fingerprint in the Touch ID portion of the iPhone's and Apple Watch's Secure Elements chip, inaccessible to the apps.
Still, hackers are very clever, and until Apple Pay has been in use for a while, there's simply no way to know if it really is secure.
Assuming Apple Pay passes that test, Apple will then have a real benefit to sell to people, one that's a lot more meaningful than the Tic Tac effect.