Opinion

Discover’s Big, Bold Apple Pay Move (And What It Means For Mobile Payments’ Future)

When it comes to getting on board with Apple Pay, Discover is one of the last major credit card issuers to jump in the pool. In doing so, however, they may have started a big new wave that pushes mobile payments toward greater acceptance.

Earlier this month, Discover announced that their cards would soon be compatible with Apple Pay. Nothing groundbreaking there. All the other card networks — Visa, MasterCard and American Express — had long ago jumped onboard with the much hyped mobile payments tool, as had most of the nation’s largest credit card issuers. They’ve all gone out of their way to promote their relationship with Apple Pay through TV spots and other types of ads.

What they haven’t done is give cardholders extra cash for using Apple Pay — until now.

Discover said that from Sept. 16 through the end of this year, their cardholders will earn 10 percent cash back on up to $10,000 of purchases made in stores using Apple Pay. Considering that the average cash back offer is 1 or 2 percent, with rewards in quarterly rotating categories sometimes reaching 5 percent, a 10 percent cash back bonus is a big deal. Add in the fact that you only get it if you buy using Apple Pay, and it becomes groundbreaking.

“We want to encourage new and existing Discover cardmembers to add their Discover card to Apple Pay with a few simple clicks using our mobile app, take advantage of this 10% Cashback Bonus, and experience the ease and convenience of using Apple Pay,” Heather Roche, vice president of rewards at Discover, said in a press release.

It’s been an uphill climb to this point to get people to try out Apple Pay and other mobile payment tools. According to PYMNTS.com, “In March, 48 percent of iPhone 6 customers in a store where they could use Apple Pay did. In June, that number had dropped to 33 percent.” Apple Pay has recently begun integrating retail credit cards, loyalty cards and even corporate cards into their tool. However, people clearly still need some sort of push to use mobile payments instead of just whipping out the plastic.

Citi tried to make a push by offering 10x American Airlines miles if you paid with Apple Pay using the Citi Aadvantage credit card. The problem with that was that you could only earn up to 2,500 miles. That’s not nothing, but it’s hardly a huge draw.

How do you really move the needle? Cold, hard cash.

It has long been speculated that some sort of reward bonus for paying with Apple Pay would eventually come, and it makes sense that it would take the form of cash back. A CreditCards.com study showed that cash back is by far Americans’ favorite credit card reward.

Wells Fargo reportedly offered $20 cash back to its cardholders who used a Wells Fargo card through Apple Pay. As was the case with Citi’s miles offer, it’s a good offer, but it didn’t seem like a game changer. A 10 percent cash back bonus for three and a half months, on the other hand, is a definite eye-opener. It becomes even more so when you consider that Discover’s current Double Cash Back bonus reportedly also applies to the Apple Pay bonus, meaning that cardholders could effectively get 20 percent cash back for Apple Pay purchases with their Discover cards.

The reality is that it will be a challenge for anyone to spend $10,000 on their Discover card via Apple Pay in three and a half months. Not everyone has an iPhone 6. It’s still a pretty limited universe of merchants that accept mobile payments. And some people still just don’t trust mobile payments. That means that the size of the bonus payouts probably won’t be as big as they could be, but that’s not really the point.

This move is all about splash. Discover wants to make you think of them when you think of Apple Pay. That’s because there’s a huge advantage to issuers to be the default credit card on your phone for Apple Pay. If your card is the default card, it automatically pops up whenever you use Apple Pay. In order to use another card, you have to take several extra steps to do so. That takes time and effort and essentially kills the bang-bang convenience of using Apple Pay, making people much less likely to bother with it. That means big trouble for the other cards in your digital wallet – they’ll probably get used a whole lot less.

All of Discover’s competitors will be watching to see the response to their announcement, and it’s an absolute certainty that other issuers eventually will make similar moves to try and keep their cards at the top of consumers’ digital wallets. There’s just too much money at stake and the demographics of the typical iPhone user are just too desirable for banks to ignore.

There’s also a bigger question: Will all of these moves really push mobile payments into the mainstream? I think it will help. I’m pretty bullish when it comes to the long term prospects of mobile payments, but the truth is that there’s a long, long way to go until mobile payments hit critical mass. A lot of things have to happen, not the least of which is having more merchants accept mobile payments. That will happen since most merchants’ new EMV terminals will also work with mobile payments. Then, mixing in mobile-payment-specific rewards might just be the thing that finally tips mobile payments into the mainstream. If so, we might just look back and see this Discover move as just the tip of a very large iceberg.

Matt Schulz is Senior Industry Analyst at CreditCards.com. He is also a regular contributor to USNews.com’s My Money blog.

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