Because of slack buyer interest and other obstacles facing mobile payments in the U.S., Apple and other companies must inject new features and inducements to boost adoption.
Apple is expected to announce at its Worldwide Developers Conference (WWDC), which starts Monday, new technology to combine customer rewards with its existing Apple Pay mobile payments service. That service launched last October.
The technology would allow customers to automatically get coupons, rewards, loyalty points and special offers from a specific retailer -- or from Apple itself -- applied when a purchase is made from an NFC-ready iPhone or Apple Watch.
Google recently announced at Google I/O that its upcoming Android Pay service would do something similar by combining rewards with payments when its service launches later this year alongside the older Google Wallet system.
But will it matter?
Too few retailers -- and credit card use is entrenched
A number of surveys and analyst assessments indicate that despite the excitement generated by Apple Pay, the U.S. buying public isn't very excited about making payments from a phone or watch when it's just as easy to use a credit card or cash.
The findings show that some customers are still worried about security and privacy, even with tokenization in NFC-based systems (like Apple's), which is more secure than magnetic-stripe credit cards -- by a long shot.
Also, many people who have tried mobile payments for in-store purchases find they use the system once or twice, then give up because so few retailers support NFC so far.
Apple in March boasted 700,000 locations supporting Apple Pay, which sounds like a lot. But it's still just a fraction of the estimated 12 million physical payment terminals in the U.S. It will take up to a decade for 90% of U.S. retail locations to install and support NFC terminals; it took Canada eight years to widely adopt smart card technology.
An IDC survey of hundreds of Americans and Western Europeans found low interest in making in-store payments with smartphones. "No one in the survey seemed that jazzed-up about using mobile payments," said IDC analyst Will Stofega, who said Apple, Google and other mobile payment providers now face a "slog" in winning over customers.
"Last year, I thought that with Apple on the scene, people would be using this stuff, and maybe they are in San Francisco and New York, but there really aren't that many elsewhere," he said.
Apple hasn't said much about actual number of users adopting Apple Pay. In January, CEO Tim Cook said Apple Pay accounts for two-thirds of dollars spent with contactless payments, which includes NFC. But the overall use of mobile payments is very low still, about 4% of all in-store payments in the U.S., according to an online survey released in January by Verifone, a company that makes in-store payment terminals.
"Adding rewards to mobile payments is certainly helpful, but whether it is enough to get people fantastically crazy about this stuff, we'll have to see," Stofega said.
An April survey by Kantar WorldWide found that fully 76% of users of iPhone 6 and iPhone 6 Plus smartphones (the only phones that include NFC) hadn't tried Apple Pay. On the other hand, the survey found only 2.6% didn't use Apple Pay because they didn't trust it, while only 4.1% said they didn't use it because they didn't understand how it works.
"People don't use Apple Pay and other services because they don't need to; their credit card works just fine," said Carolina Milanesi, chief of research at Kantar.
A separate survey of 1,000 iPhone 6 users done in March by PYMNTS.com found 15% had tried Apple Pay, but only 6% said they continued to use it. Some analysts have linked that fall-off to the shortage of stores offering the service.
If Apple links reward cards to payment options next week, "that will be interesting, but not much of a driver of mobile payments in my view," Milanesi said. "But some kind of cash-back or point system, similar to how credit cards work, will be more appealing to users who are more reticent about trying out the technology."
Mobile payments are inevitable
Patrick Moorhead, an analyst at Moor Insights & Strategy, said Apple Pay will probably catch on in the coming year in greater numbers for reasons beyond any new rewards capabilities.
"I've watched year after year the failures of mobile payments, but I'm positive on Apple Pay because it provides ease of use with the experience and offers users privacy that Apple won't resell your personal information," Moorhead said. "Apple doesn't take personal data and use it like Google does."
Another analyst, Garter's Avivah Litan, said the real growth with mobile payments in the U.S. will come when retailers of all sizes get on board in greater numbers than they have so far. Apple's biggest focus has been to reassure consumers about its service and working with banks and credit card companies -- and less so, merchants, she said.
"Apple Pay is very consumer friendly, but that doesn't necessarily drive out a new payment system," he said. "It's really about the merchants. The mobile payment area is still really small and it's a major inflection point to install equipment in stores to support smartphones to make payments, so you've got to find a big critical mass of merchants who can benefit. It doesn't seem like Apple's found that critical mass yet."
Litan argued that merchants generally want to avoid paying fees of 2% to 5% per transaction to credit card companies and the banks behind the cards, which still happens with Apple Pay and its use with Visa, MasterCard, American Express and others. "Apple's system is consumer friendly and is tight from a security and privacy standpoint and that's why they are aligned with Visa and MasterCard, who are also consumer-driven. But the banks and card companies are not aligned with the merchants," Litan said.
Apparently aware of the need to bring in more merchants, Apple has reportedly been aggressive in signing up the 100 biggest U.S. retailers this year. A spokesman for Apple, according to a Reuters report, said that about half of the top 100 will accept Apple Pay by the end of 2015, with many more in 2016.
However, Reuters surveyed the top 100 merchants and found fewer than 25% currently accept Apple Pay, while nearly 66% said they won't be accepting Apple Pay this year. Four of the 100 said they have plans to join next year. The top reasons retailers cited for not accepting Apple Pay were insufficient customer demand, lack of access to personal data about buying habits generated by Apple Pay transactions and the cost of the technology.
Some in the Reuters survey said they belong to the MCX coalition of big retailers, which includes WalMart and 18 others in the top 100. They support an alternative new payment system called CurrentC coming later this year.
Moorhead believes that Apple's projection of getting half of the 100 top retailers to accept Apple Pay by year's end is spot on. Some retailers might be reluctant to say they are moving ahead in a survey format because they could be bound by nondisclosure agreements, he explained.
"Granted, there's going to be no sudden 'on' switch to mobile payments, but as more and more people use it and as wearables get more pervasive, it will come," Moorhead said. "It's going to be like the difference between going to the bank to get money versus using an ATM."