Apple Pay in the US - Essay Example

Apple Pay in the U.S With technological advancement, consumers are looking for easier and more convenient means of making payments. The mobile phone has evolved into a gadget which supports a number of functions To add to the list, modern smart phones now act as payment devices, thereby eliminating the use of cash and cards every time consumers make purchases. In the U.S the mobile payments industry is expecting to boom rapidly as more consumers are adopting the use of such technology. Till a few years back, the idea of being able to make payments at checkout counters in super markets, seemed like a distant dream. However, companies such as Apple are helping to make that dream turn into reality. The growth in mobile commerce is seen to be quick with more of smart phone users. The current paper aims to analyze the mobile payments industry of the U.S emphasising upon its trends, growth rates, environmental factors and competition aspects. Table of Contents Abstract 2 Introduction 4 Industry focus 4 The m-payment systems market 5 Pest factors 7 Porter’s five forces- competition analysis 9 Strategic advantages on the basis of pest and competition analysis 10 Expert predictions 11 Conclusion 12 Reference List 13 Introduction Apple Pay is a mobile payments solutions product developed by Apple Inc. The system allows the users of iPhone 5, iPhone 6, iPhone 6 plus, iPad mini3, iPad Air 2 and Apple Watch to make direct payments. The service was launched on October 20, 2014 in the U.S. The system currently exists only in the U.S, with the company’s plans of expanding the same into other nations in the near future (Apple Inc., 2014). The contactless payment system enables users to pay for different types of purchases in a safe and a highly secure manner. The solutions payment systems are a part of the electronic payments industry. The purpose of service providers in this industry is to develop an easy method of transacting business and transferring money without having to carry or use cards every time a purchase in made. Users can store their banking information in their mobiles in a secure way and can use the same whenever purchases are made. When consumers store their debit or credit card information in their iPhones, Apple generates a unique encrypted code called the device account numbers. These codes get saved within the mobile chip and is never accessed or stored in the Apple servers. Whenever any transaction is made, these device account numbers along with transaction specific security code is used. In this manner the actual debit or credit card information is not used by Apple for transmitting the payment (Heggestuen, J., 2014). Industry focus The mobile payments and online payment solutions industry is seen to have grown rapidly in the last few years in the U.S. The industry is seen to be in its booming phase with new types of technologies and services constantly developing. The companies which develop the systems of online cash transmission are essentially software or technology based. The systems are built for financial, retailers, utilities and various other types of businesses who sell their products and services online. The popularity of online transactions in the U.S was set when banks began providing the facility of online cash transfers from one account to the other. Soon, retailers began availing the online transactions facility. The non-cash industry is expected to rise in terms of size and revenue in the coming decades. As technology advances, firms are looking towards developing easier ways for transacting money (Dahlberg, et al., 2008). The growth in the volume of non-cash transactions was seen from the year 2011. The net online transactions in the year 2011 were seen to be 307 million. The increase was mainly seen in the regions of Europe, Middle East, Africa and the developing nations of Asia which accounted for almost 20% rise in online and mobile transactions. North America and Europe are however the largest non-cash payments markets and together these nations account for almost two thirds of the global online transactions (Capgemini, 2013). The growth in the online transactions industry in the U.S is seen to arise out of the increasing use of debit and credit card purchase. This essentially triggered software firms to device ways in which debit and credit transactions could be managed with greater ease. Moreover, increasing usage of mobile and the lack and lesser off work time are viewed to be the core driving factors of the development of the electronic payments industry. The increased usage of smart phone and internet in the U.S has accelerated the emergence of various types of technologies associated with online payments solutions. Technology companies in the U.S have remained successful in developing an ecosystem where millions of buyers and sellers transact business through online accounts and secure systems. Android phones account for almost 60% of the market share in the overall online transactions market (Ondrus and Pigneur, 2006). The m-payment systems market In the mobile payments technology, the mobile phone is essentially used as payment method and not just an alternative channel. The information in respect of payment is sent in real-time. On the basis of the type of business, mobile payments are seen to be following the four types, namely, peer to peer, consumer to business, business to business and business/government to consumer. Peer to peer money transfers are mainly domestic or international transfer of money. The consumer to business payments are made in respect of the purchases made online for different products or services, such as the ones which are made on Amazon or e-bay. It must be noted that the browser in the mobile is not used for making such payments, the payments are made using the built in application of the mobile. The business to business model of mobile payments is used to replace cash transfers from the organizations supply chain. The business/government to consumer’s mobile payment system is used for distribution of salaries and pensions. The mobile payments technology is especially useful in regions where infrastructural development is weak and other payments structures are not well developed. Mobile wallet and similar payment innovations are seen to be useful under such circumstances (Mallat, 2007). The mobile payments systems are expected to rise in the U.S by the year 2019. Currently, the mobile payments are the smallest payment option used in the nation. As the trend of making payments through mobile advances, grocery stores, retailers and restaurant are seen to accommodate the same to increase customer base and to prevent losing consumers due to innovation in the manner in which payments are made. However, the mobile payments solutions market is still in their infancy stage (Jacob, 2007). Users of the system are also of the opinion that smart phone manufacturers are required to bring more feasibility and ease of use in the mobile payments division. The complexity of the system and high costs of access prevent many users to access the same. Moreover, new users of smart phones are scared to adopt such payment facilities due to security related issues. Many businesses are yet to come into the mobile payments solutions industry. Unless majority number of mobile brands and retailers begin to provide such facilities, popularity of the system is expected to remain low (Funk, 2009). Although there are many brands in the market which provide the mobile payments solution, very few offer the same through tokenization. Mobile payments through the token system are expected to generate more consumers in the future as technology advances and consumers realise the potential advantages of the system. Online payments market has already been accepted positively by consumers across the world. This is expected to provide suitable impetus to the manner in which mobile payments are accepted by consumers (Chen and Nath, 2008). A high rate of growth is expected to arise in terms of the mobile in-store payments options. However for massive increase in the payment option, access and ability to use smart phones more frequently is required to be enhanced. For such reasons, the mobile payments options are expected to remain less than 5% as compared to other traditional payments option. Firm which have begun to provide network based payment solutions are in their growth stage. Only when the online payments market becomes massively popular and slowly become obsolete, can it be expected for mobile payments option to gain popularity (Evans and Schmalensee, 2009). As per predictions regarding economic and industry growth, it is expected that systems such as online payments and mobile payments will grow rapidly as the market for non-cash transactions enhance. The developing markets play a major role in fuelling the rise. The network based payments are an ideal solution for the developing nation’s economy which is generally characterized with lack of infrastructure. Such mobile payments solution facilitate in developing a virtual environment when transactions can be dealt with. However, the idea of popularizing mobile payments in the developing nation is not as easy as it seems to be, due to the requirement of high investments in technology up gradation. Hence in the coming few years it can only be expected that well developed nations of the world will show an increasing rate of using the mobile payments services (Kreyer, Pousttchi and Turowski, 2003). Pest factors Political- One of the most essential factors required for the growth of mobile payment services is the existence of strong banking systems. Mobile devices channelize payments through the banks and therefore the development of banking activities becomes a crucial factor. A number of rules have been established by the government of the U.S in respect of mobile banking such the daily transaction limit and the Know your Customer norms. The mobile banking and payments systems being a simple method may encourage a number of fraudulent activities if they are not properly regulated. Mobile carriers are required to meet all safety and security related norms so as to ensure both security of customer bank details and the prevention of exchange of illegitimate goods and services. Mobile banking is also considered as a useful strategy to encourage more people to save their money with banks and to bring in greater section of the population into the banking system. Therefore the presence of supportive government regulations and their contribution is essential for the growth of online activities (Chen, 2008). Economical- Mobile payments are however not a facility that can be availed by all sections of the society. A considerable number of individuals in the U.S do not use smart phones and therefore are unable to take advantage of the mobile payments systems. Hence, the market penetration of the mobile transactions sector is limited only to the smart phone users. However, if the smart phone prices decline, larger sections of the society can avail the mobile transactions facility leading to an increase in the revenues of the industry. Such a technology is considered useful for developing the economic conditions regions of the U.S where infrastructural development is weak. Many semi-urban regions have made use of the mobile payments technology for meeting the needs of the consumers and for exploring new avenues of revenue. The mobile payments systems have also remained successful in generating greater employment. The industry also contributes adequately towards the nations GDP as well (Kumar and Zahn, 2003). Social- The growth of the mobile payments industry depends upon social advancement and the presence of technology friendliness. A considerably large section of the population of the U.S is seen to use advance mobile technologies and smart phones. This provides greater scope for the development of the mobile payments market. It is estimated that by the year 2016, the estimated number of smart phone users in the U.S would be close to 36 million (The Statistics Portal, 2014). The U.S also accounts for the largest population of android device and iOS users globally. It is followed by China. Figure- Smart phone users in the U.S trend (Source- The Statistics Portal, 2014) Technological- The advancement of the digital technology has been seen to influence the U.S society to a very large extend. The reliance upon technology for meeting day to day personal and business needs is seen to remain high in the nation. This triggers greater development of software and technology related firms. The mobile payments industry has greater scope of development if there are a number of well developed software companies. This is one of the significant advantages which the U.S mobile payments industry enjoys (Dahlberg and Oorni, 2007). Figure: Global ranking of android and iOS system users (Source- The Business Insider, 2012) retailers and other commercial firms would remain reluctant to invest adopting such payment solutions. Due to lower scale of adoption, technological advancement in this sector would not be very high. Another significant drawback in respect of the system is the existence of lack of regulations. Since the mobile payments solutions are a new concept, adequate legal regulations providing protection to consumers, retailers and the bank are yet to come into practice. This further hinders the participation of commercial organizations to be a part of this system. Existing players of the industry are seen to take advantages of the low number of regulations (Valcourt, Robert and Beaulieu, 2005). Porter’s five forces- competition analysis Competitive rivalry- The prime rivals of Apple Pay in the U.S market are PayPal and Google Wallet. However, Apple Pay is already having a greater consumer acceptance and capturing a unique position in the market. The competitive rivalry existing in the market is high as there are a number of technology and mobile companies who provide such mobile payment services through different applications. Moreover, as more innovative products and services are developed in the information and telecom industry, larger scope of growth is provided which attracts companies to enter the industry and thereby increase the competition (Dahlberg and Oorni, 2007). Bargaining power of suppliers- The growth of online payments systems rely upon banking framework and technology. If banks increase the rates charged making online payments, consumers might not be willing to avail such facilities. This may adversely impact the mobile payment service providers. Bargaining power of buyers- Buyers in the mobile payments service industry are essentially the users of smart phones in the U.S. The users have a considerable level of impact upon the payment service provided by the mobile companies. Such services are built in with the device. Therefore, when a user purchases a mobile, he or she is automatically exposed to the option of availing such services. If users do not use the service, it may lose popularity and the technological systems developed in this respect becomes a wasteful investment. Consumer interest in advanced technology for purchasing different items is an essential aspect (Karnouskos, 2004). Barriers to entry- The mobile payments industry of the U.S is highly cost intensive. For being able to provide such services, companies must manufacture advance mobile phones with inbuilt facilities and applications for making online payments. Smaller mobile companies who are technologically not very advanced cannot enter this industry due to lack of adequate resources. Moreover since banking systems are involved in the process, users would prefer availing such services using devices of reputed companies such as Apple or Google. Hence, when such technologies are developed by smaller firms, their acceptance and popularity remains low. Threat of substitutes- In place of the mobile payment option, consumers may avail online payment services using a computer or a laptop. Consumers also may avail the option of purchasing products and services through swiping their debit or credit cards at retail outlets. Additionally, the threat from substitutes rises due to constant technological improvements and up gradations which may lead to the invention of better and more convenient systems (Kumar, 2004). Strategic advantages on the basis of pest and competition analysis While analysing the market situation of the U.S, Apple pay is seen to have arrived at a more convenient time than Google Wallet (McKitterick and Dowling, 2003). When Google was launched, consumers were just getting familiarized with the mobile payments solutions market. As a result, the growth of the system was very slow. Apple Pay, on the other hand was launched at a time when consumers were well aware about the mobile payment solutions. The Apple Pay technology is considered superior than the general smart phone payment system which consists of connecting to a cloud server. Apple pay system of making payments is faster than other cloud based systems. It is also secure as it is based on generating the token for making the payment on the phone itself rather than the on the cloud system. Apple Pay is based on the embedded security system. This makes it faster than the existing SIM security element and HCE security element based payment solutions based on which other traditional mobile payments are made. Apple has also included the touch identification system for making payments for authenticating the device operator. In other mobile payments solutions systems, the retailer to whom the payments are made can easily come to know about the bank and the card used in the transaction. However, the Apple Pay system provides the retailer only with a token generated by the embedded element in the phone to make the transaction. No details regarding the bank and the card are provided to the retailer (Maurer, 2012). The Apple Pay system is considered to be a major disadvantage for firms such as Google and other retailers who track the payments for promoting different schemes (McKitterick and Dowling, 2003). The system is also considered to be a major disadvantage for mobile network operators as consumers will begin to avoid the SIM generated token process. Apple Pay is expected to make the MNO based payment solutions decline considerably in the market as smart phone user’s increase in number. However, the users of the Apple Pay system is expected to remain low, especially in the global front, due to less number of users of the brand and a lower share in the overall smart phone market of the globe. Alternatively, there exist many other smart phones in the market that provide similar payment solutions to the consumers. The launch of the Apple Pay system along with Apple Watches is expected to spur up the sales of the brand considerably (McKitterick and Dowling, 2003). Expert predictions Industry prediction and trends in the rate of usage of the mobile payments solutions shows that in the near future the use of the technology is expected to be high. However, expert analysis tell a different story altogether. Data from a number of leading mobile payments solutions provider’s shows lack of adequacy. A significant amount of gap has also been observed in the obtained information. Experts are generally of the opinion that the mobile payments industry might not grow as rapidly as users and companies expect. Many also state that artificial information in respect of the rapid growth of the mobile payments solutions has been generated so as to influence consumers to adapt the system. The mobile payments industry is highly fragmented. Considerably, a large proportion of such services are provided by the small and local mobile brands (Valcourt, Robert and Beaulieu, 2005). Data in respect to such firms are hard to obtain. Although, mobile payment solutions seems much like a promising industry in terms of growth, it is expected to take quite a while to expand considering the economic and technological situation existing globally. Developed nations are expected to do better in terms of the manner in which they invest in developing the technologies associated with mobile payments. However, developing nations are expected to adapt to it at a very slow rate. Due to lack of popularity and common usage of the system, Conclusion It is expected that the mobile payments industry of U.S will expand in an explosive manner as the number of smart phone users continue to rise. The mobile payments drive is likely to exist amongst the millennial (individuals belonging to the age group of 18 to 34). Smart phone users are largely seen to exist amongst individuals in this age group. The enthusiasm to adopt new technologies is also seen to exist amongst individuals belonging in this age group. However, market penetration is a huge concern for providers of this technology. The mobile payments options come only in expensive gadgets. Hence the scope of popularity of the system reduces to a considerable extend. Technological revolutions are seen to take a considerable amount of time to gain mass acceptance. However, the mobile payments systems are expected to revolutionize consumer purchases world. At present the system is used for narrow range of products and services such as booking tickets or ringtones. The system is expected to expand over a larger number of products and services. 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