What Will Be Apple Pay's Local Killer App?
We’ve made no secret about bearish attitudes toward Apple Pay; owing mostly to user acclimation and POS implementation challenges. It requires network effect to gain the scale necessary for any two-sided marketplace to work. It’s a classic local chicken & egg challenge.
But most of the variables we’ve examined are for Apple Pay’s use with offline retail check out. Since using (and loving) Apple Pay all over town, I’ve been reminded of a lower-barrier play; in-app payments to “order ahead” or summon offline local services, a la Uber.
This is different than in-app payments as they’re currently known — mostly used to order virtual goods (games), songs, or m-commerce (i.e. Amazon). A much larger opportunity is offline, given that e-commerce is only 7 percent of U.S. retail spending. The rest is offline.
Meanwhile, on demand local services (ODLS) are exploding in attention and investment. This not only includes Uber but myriad “Uber for xyz” companies for everything you can imagine in local services: dog walking, Ikea assembly, drug delivery, etc..
Could ODLS house the near-term opportunity — dare we say “killer app” — for Apple Pay? While the physical POS logistics take longer to fall into place, Apple Pay’s functionality is a nice match for the ODLS use case, including touch ID, speed and security.
The benefit also boils down to Apple Pay’s position as a unification layer. As ODLS usage grows and apps become more fragmented, that unification layer’s need grows with it. It will solve a real pain point in having a single, secure and trusted payment authentication engine.
And it won’t just be ODLS apps. As noted, “order ahead” is a growing retail app feature that likewise requires speed and security. PayPal has done this for a while, Starbucks just announced it (as we predicted), and it will be table stakes for retail apps in 2015.
As background, one of our biggest objections to the exuberance over mobile payments is that paying with a credit card ain’t broke. Most mobile payments are a “solution in search of a problem.” So winners will be those that solve real pain points, like skipping store lines.
With this in mind, Apple Pay could eventually dominate POS transactions, but it will take longer than everyone thinks. Meaningful iPhone 6 penetration alone will take about a year, not to mention the larger challenge of retail POS compatibility. And each holds the other back.
The question is whether or not the ODLS opportunity exists in the nearer term for Apple Pay. And that will be answered by the volume of ODLS usage. If consumers end up using these apps frequently, the fragmented volume of disparate transactions will compel Apple Pay.
But if the usage isn’t as robust, will Apple Pay be again addressing a pain point that doesn’t exist? The over-under for local apps usage that compels a unification layer is probably around 7. BIA/Kelsey data peg regular local shopping app usage at 3.4 per user. Is that enough?
That average could ratchet up with the ODLS movement. Apple Pay — benefiting from ODLS growth — could itself drive that growth with a more attractive use case, and Apple’s classic halo effect. If anyone can move adjacent markets and user behavior like that, it’s Apple.
This will be a key topic for BIA/Kelsey in 2015, and at our Interactive Local Media conference next month (12/3 – 12/5) in San Francisco.