Apple Pay Is Helping Sell Phones And Drive Transactions, But With Caveats

When Apple Inc. launched its Apple Pay mobile-payments service in October, the computing giant hoped the new wallet would help sell smart phones and banks hoped it would help drive transactions on their cards. Now new research indicates both hopes are being realized, but the risk for financial institutions may be significantly greater than for Apple.

To begin with, numbers from the first four months of Apple Pay’s availability indicate the service is helping drive sales of Apple’s new iPhone 6 and 6 Plus phones, the only models the service works with. Some 40% of consumers who bought one of these devices said the wallet was a primary reason for their purchase, and a hefty 70% of these owners have activated Apple Pay, according to research released on Tuesday by Phoenix Marketing International, a Rhinebeck, N.Y.-based firm.

Overall, some 26% of cardholders have bought an iPhone 6 or 6 Plus, according to the research.

That 70% sign-up rate appears to reflect the popularity, and marketing power, Apple enjoys. The percentage is nearly three times the activation rate Phoenix has seen with research on earlier mobile wallets, according to Leon Majors, a senior vice president at the firm.

Majors presented the research as part of a panel discussion at the Bank Administration Institute’s Payments Connect conference in Phoenix. The firm surveyed 1,000 consumers as part of a six-part series of interviews it is conducting on Apple Pay.

Among those owners who have activated the wallet, 77% have linked a credit card, 50% a debit card, and 16% a prepaid general-purpose card. But two-thirds are linking only one type of card.

As might be expected, Apple Pay users skew young. A little more than three-quarters of the so-called Millennial generation, persons generally speaking who were born in the 1980s and 1990s, have activated the wallet. The proportion among the somewhat older Generation X is the same. Only 37% of Baby Boomers have done so.

Apple Pay faces stepped-up competition that has only emerged in recent days. Samsung Electronics Co. Ltd. this weekend introduced a wallet called Samsung Pay that, when it goes live this summer, will rely on technology that lets it work at most point-of-sale terminals. Apple Pay relies on near-field communication, which is supported by a relatively small percentage of terminals. And Google Inc. confirmed it will introduce Android Pay, which will let developers build contactless-payment services into apps they create for Android devices.

But Phoenix Marketing’s research also contains some cautionary indicators for the financial institutions that are signing up to support Apple Pay. This list of institutions with technical connections to the service had grown to 90 as of Feb. 20, according to Apple. Majors said while iPhone 6 and 6 Plus sales appear brisk, Apple is still selling a significant number of iPhone 5 models, which have been discounted to clear shelves for the newer smart phones. “A chunk are still buying 5s, and will not get a 6 until that contract runs out” in a few years, he told bankers attending the conference.

Another concern for banks, meanwhile, is that most consumers seldom or never change their so-called default card in the wallet—the card they use first. According to Phoenix Marketing’s research, 19% of users never change the card, and 43% rarely do. “Default card wins,” Majors told the audience. “If you’re not top of the wallet, you need to do some marketing.”

Majors also presented data on Apple Pay gathered by the Chicago-based BAI. According to these numbers, some 6.6% of bank customers are using the service, which accounts for 13.8% of the customers’ transactions. Forty-one percent of banks are training so-called front-line staff to educate their customers about Apple Pay.

Apple’s efforts to recruit banks as issuers for Apple Pay also appear to be having a moderating influence on banks’ perception of non-bank players’ efforts in digital services. Twenty percent of banks now perceive “emerging providers” as a competitive threat, compared to 37% in 2014.