Is Apple Pay Set to Power On-Demand Local Services?

The debate continues over Apple Pay’s chances of world domination. This has accelerated as more information and perspectives prevail in the wake of the product’s long-anticipated release last week.

In last month’s column, we posited that Apple Pay could be transformative but it will take a while. That looked at compatibility-burdened proximity payments (i.e. retail check-out). But LSA’s Greg Sterling reminds that there’s a lower-barrier area to examine: In-app payments.

Apple dominates in-app payments, given iTunes billing is tied directly into apps. That has driven 79 percent of total app revenues and has sweetened the deal for developers, especially with games. Apple Pay will speed some of those virtual goods transactions.

But where it could really impact in-app payments is real world products and services fulfilled offline. That’s the larger opportunity given that more than 93 percent of U.S. retail spending — and near 100 percent of service transactions — happen offline.

That’s where Apple’s payment layer adds value, and where apps are increasingly used to summon on-demand local services (ODLS). The segment is exploding in use and investment, a la Uber… not to mention “Uber for dog walking,” weed delivery and everything else.

I’m continually saying in presentations that Uber has been one of the few companies to nail mobile payments. Like we discussed last month, it solves real pain points by taking the physical transaction out of the equation — perfect for hurried transit scenarios.

And it’s not just ODLS apps; it will include retail apps for “order ahead” functionality, which likewise solve real pain points like saving time and skipping long lines. This will include dedicated retail apps like Target and Starbucks, as well as aggregators like shopkick.

That in-app route is where Apple Pay’s near-term impact will reside, while its retail POS moving parts — NFC terminals, hardware ubiquity and all the other factors mentioned last month — fall into place. But there are still potential barriers for the in-app angle.

Specifically Apple Pay’s value as a conduit for ODLS will be determined by how many apps consumers transact with daily or weekly. If the answer is many, its value as a single entry point (trusted and at the OS level) to all those apps and services will be validated.

But if that fragmented transaction volume doesn’t exist, there’s not much of a problem for Apple Pay to solve. To further the Uber example, I have a direct relationship with Uber (Visa on file) for the 2-3 times a week that I use it. All good… no Apple Pay necessary.

If I add a few more ODLS apps to the equation, I can likewise sign up directly with them. In fact, I already had those accounts set up in a pre-Apple Pay world. So Apple Pay does nothing for me in that scenario. Admittedly that analysis is based on a sample of one (me).

But if aggregate mobile transactions prove to be more fragmented and frequent, Apple Pay will certainly fill a need. In that case, it eliminates a true pain point; payment authentication across several individual services. Call it the Facebook Connect of payments.

Therefore, the key question is what’s that sweet spot? What will be the average monthly app-based transactions per consumer? Or more importantly how many different apps/services is that spread across? The over-under is probably somewhere around seven.

BIA/Kelsey survey data pegs local search/discovery apps used regularly at 3.4 (just like having 2.5 kids). I’m not sure if that’s enough to compel a unification layer like Apple Pay. Another key question is will that number hold steady, or grow with the ODLS economy?

Perhaps Apple Pay itself will drive that per-user app growth, which will in turn justify/compel further need for the unification layer. If anyone can pull that off, it’s Apple. It has the brand, marketing muscle and it owns the user touch point through all kinds of iThings.

Put another way, if fragmentation in app-based local transactions doesn’t exist to compel Apple Pay, maybe Apple pay will compel it. And there once again, it all comes back to a classic chicken and egg scenario. It wouldn’t be a local topic without one.

Michael Boland is chief analyst and VP of content at BIA/Kelsey. Previously, he was a tech journalist for Forbes, Red Herring, Business 2.0, and other outlets.