By Tanya Agrawal and Anil D'Silva
(Reuters) - Apple Inc's launch of its own tap-to-pay system using near-field communication in its new iPhones and smartwatches may not be a game changer after all.
The success of Apple Pay, unveiled at a gala launch on Tuesday, hinges on the willingness of retailers to use NFC-based payment systems, industry experts said.
So far the technology, which uses wireless technology to transfer data over short distances, has failed to catch on due to the high costs involved.
An NFC-enabled reader costs between $250 and $300. In addition to that, merchants also need to train staff and set up backend IT systems.
Apple is betting on the popularity of its iPhones and the convenience and security of its payment system to prompt customers and retailers to make the shift.
The technology will allow iPhone users to pay for anything from office supplies to burgers at the tap of a button, using their American Express Co, Visa Inc or Mastercard Inc bank cards.
But Apple first needs to swiftly add more retailers such as Wal-Mart Stores Inc and Best Buy Co Inc, which recently stopped accepting payments using NFC terminals.
"At this point we have no plans to accept Apple Pay," Best Buy spokesman Jeff Shelman said.
U.S. retailers have been notoriously slow when it comes to adopting new payment technology.
They are already lagging in the adoption of payment systems that can read chip-enabled credit and debit cards, a move hastened by a massive data breach at Target Corp last Christmas.
Trying to convince them to move to mobile-based payment terminals can be a big challenge.
"Apple's tremendous failure yesterday was in demonstrating anything that was merchant-friendly," said Tom Noyes, chief executive of Commercesignal Inc, a data and payments company.
"There is nothing they showed that wasn't possible 7 years ago. There's nothing for the merchants," Noyes, a former Citigroup Inc executive, added.
Apple declined to comment.
RIVAL SYSTEMS
Apple Pay also faces competition from Merchant Customer Exchange (MCX) - a consortium of retailers including Wal-Mart and Best Buy - which is developing its own mobile payment platform.
MCX merchants account for over $1 trillion of consumer spending, or roughly a quarter of the total retail spending in the United States, Morgan Stanley analyst Smittipon Srethapramote wrote in a note to clients.
Its members are currently prohibited from accepting all other mobile wallets. Some members have even flipped the switch on their NFC terminals.
Mobile handset makers included NFC chips in about 300 million smartphones last year, a third of all smartphones shipped.
The number of NFC-enabled phones is expected to touch 550 million this year, helped by Apple's devices and an expanding number of Android gadgets, Gartner analyst Mark Hung estimated.
Gartner Research had projected last year that the value of mobile payments by 2017 would be $721 million globally, with only 5 percent coming from NFC payments.
"The economics of NFC implementation for the issuing and acquiring communities have been a challenge, resulting in slow adoption of the technology," industry association Smart Card Alliance said in a report published in November 2013.
(Additional reporting by Amrutha Gayathri in Bangalore; Editing by Saumyadeb Chakrabarty)