Bank Board Letter — March 2015
Apple Pay: Leveling The Playing Field
Ali Raza

All things considered, Apple Pay is off to a good start. This should not be surprising, given consumer demand for all things Apple, mobile and digital. Some recent consumer data is showing that about 9 percent of consumers with an iPhone 6 or 6 Plus who shopped on Black Friday have tried Apple Pay. A report from research firm ITG indicates that during Apple Pay’s first full month of service in November 2014, it accounted for 1 percent of all digital payment dollars.

Not only did major banks and card issuers sign onto the new service at launch, but now roughly 500 additional financial institutions are set to participate, including many regional and community banks. However, the physical acceptance side is lagging Ð both in terms of merchants signed up and merchants that are enabled to accept NFC-based payments. This will need to change for Apple Pay to scale up. The number of merchants is expanding but not fast enough to achieve broad and ubiquitous coverage.

While Apple Pay, in and of itself, represents an important turning point in the evolution of the payments industry, it is a significant opportunity for community banks. Despite issues (NFC, QR codes and iPhone 6 penetration) community banks should view Apple Pay within the context of a longer mobileenabled commerce journey.

First and foremost, it levels the playing field with major national financial institutions by allowing community banks to offer a competitive mobile payments solution to their customers. It helps position them as modern, technologically advanced and innovative, which can attract new customer segments, particularly millennials.

Secondly, given broad infrastructure support from the networks and processors, community banks do not have to make investments in developing their proprietary mobile payments or digital wallet solutions. They can deploy Apple Pay without large capital outlays to cater to consumer requirements, as well as address payment card fraud and security concerns. While there is a cost related to Apple Pay based on usage, the cost is potentially offset by a reduction in payment card fraud losses and increased purchase volume. In fact, community banks should focus on marketing and promoting both debit and credit card usage to not only defray Apple Pay costs, but also grow payment card income. Low-ticket spending could be an area to target.

Most importantly, Apple Pay allows community banks to connect with their customers and enhance the banking and payments experience by providing an additional touch point and engagement opportunity. In fact, as technology evolves and digital capabilities expand, the lines between mobile banking and mobile payments will start to blur. The phone or smart device will become a crucial interaction tool for customers.

To truly leverage Apple Pay, community banks need to define their mobile payments and digital wallet strategy. This will become important as more mobile payments wallets become commercially available, the acceptance side expands and new apps are created. Some critical questions bankers will need to consider include: How many wallets is a bank willing to support? How do ‘wearables’ fit in? Who are business-enabling partners?

Bankers will also need to have a clear understanding of the business case and changing payments economics. Beyond direct costs, community bankers need to be sensitive to changes in marketing, servicing and operational costs. Banks need to determine which marketing tactics need to be employed to position their cards as “top of wallet” within Apple Pay’s platform, and then, which messages need to be reinforced. Should communication focus on richer rewards, higher credit lines, digital coupons, zero liability or something else?

In our view, community banks will need to actively make marketing investments and regear communication campaigns to build awareness, drive mobile payments usage and position themselves as innovative. They will also need to develop robust servicing and operational capabilities to align with their customers’ mobile payments needs. This could take the shape of in-branch payment card wallet provisioning support, informational videos and online banking, chat and phone help.

At the back end, community banks will need to provide easy-to-use and easy-to-access channels to respond to customer queries related to incomplete transactions and other system-related issues. As basic as it is, thorough testing of actual transactions versus statement descriptors for both in-person and in app purchases will go a long way in minimizing customer frustration and customer service calls. While potentially more challenging, community banks need to work with their merchants and merchant acquirers/processors to broaden Apple Pay acceptance in their local communities. The key is to ensure that Apple Pay proves to be a rich experience for customers Ð one in keeping with the “high-touch” relationship-oriented philosophy that is the hallmark of community banks.

Apple Pay provides a superb customer engagement platform. Beyond using the phone as a form factor to make payments, Apple Pay provides community banks a highly effective medium to interact with their customers in a relevant, targeted and timely fashion. We see significant upside in the bank’s ability to bring customers and merchants closer together within their communities through creative marketing that drives business to merchants while providing unique value to customers. And it is all possible with geo-locational targeting, real-time preference-based offers and frequent shopper recognition programs. For example, a campaign built in conjunction with a town or city, focused on growing local commerce, can yield rich dividends. A page from the “locavore” playbook is apt here.

The power of the smart phone combined with advances in data analytics and knowledge-based marketing ushers in a whole new world of possibilities. Community banks should leverage this opening Ð their customers will thank them.

Ali Raza is a principal and payments leader at CCG Catalyst, a bank consulting firm working with clients on their strategy, business and operating issues. Contact him at or 800-439-8710.