Apple enters mobile payment fray with Apple Pay

Apple has finally decided to throw its weight behind mobile payments. In its unveiling of the iPhone 6, iPhone 6 Plus and Apple Wallet, the tech giant confirmed it would be offering a mobile payment option it’s calling Apple Pay, starting October 2014.

Apple Pay: The low-down

Apple Pay will be built into the iPhone 6, iPhone 6 Plus and Apple Watch.

photo of apple payIn short, you’ll be able to add your payment cards to Apple’s Passbook. If the store you’re shopping at has terminals enabled with near field communication (NFC), you can select the card you want to use, hold your device a couple inches from the terminal and complete the purchase with Touch ID (which verifies your identity via your finger print).

Now let’s zoom in on some details:

  • Apple Pay uses NFC technology: NFC is often described as “tap-to-pay” technology. It works with any devices that contain NFC chips — phones, payment cards, hotel key cards and a slew of other things. Whenever the NFC-enabled device is in close proximity to the reader, the device and reader communicate wirelessly. In the case of mobile payments, the phone communicates with the payment terminal, and the payment is charged to the card you’ve selected from your digital wallet. Before the iPhone 6, iPhones couldn’t be used for NFC contactless payments (unless you had a special NFC case); the technology was available only on devices running Android or Windows operating systems. Notable pioneers of using NFC for mobile payments are Google Wallet and Softcard (formerly called Isis).

    Encrypted card information will be housed in a secure element, a chip within the iPhone 6 and Apple Watch. This makes Apple Pay’s NFC different from the variation Google Wallet is using. Google Wallet uses host card emulation, which stores encrypted card info in the cloud. Backers of secure-element hardware for NFC (including Softcard, which uses a secure-element SIM card) argue it’s more secure, and it seems Apple agrees.

  • Adding cards: You can get started with whatever card you already have in your iTunes account. If you want to add more, you can photograph the physical cards in your wallet with your phone and add them to Passbook.

    Apple has partnered with Visa, MasterCard and American Express (a CreditCardForum advertising partner), as well as a number of issuers that it says make up 83 percent of credit card purchase volume. Those issuers include Citi, Bank of America, Capital One, Wells Fargo and Chase. PNC, Barclays, USAA and more are scheduled to be added.

  • NFC symbolWhere you can use it: You can use Apple Pay at any stores that already have NFC terminals — that’s any terminal displaying the symbol to the right.

    In-store NFC technology is nothing new, but Apple Pay goes a step further by integrating itself with various other mobile apps. This means an Apple Pay button will appear when you’re using a partner app. For example, you can use it to order an Uber car or pay the check via OpenTable. It will also be built into various companies’ online shopping apps, so you’ll be able to check out with one tap via Touch ID without entering your card number.

  • Touch IDSecurity features: The first layer of security is the fact that Apple Pay uses Touch ID. Your phone can make sure it’s really you making the payment – not a thief (who would obviously have a different finger print).

    Second, card numbers themselves are not stored within the secure element. Information is encrypted into a “Device Account Number.” So, if your phone is stolen, in theory, you won’t have to cancel cards.

    Finally, when you buy something, the payment is processed with that Device Account Number as well as a dynamic security code unique to the transaction. Dynamic transactional data is also what makes EMV payments secure – and what makes it more difficult for thieves to clone cards from information stolen in a data breach.

Can Apple Pay beat the competition?

During the product unveiling, Apple CEO Tim Cook made it clear what Apple is out to do.

“Our vision is to replace this,” he said, referring to the wallet.

But Apple isn’t the first to try. Mobile wallets have been around for several years. Google and Softcard went the NFC route, while others (like PayPal and Square Wallet) side stepped NFC entirely by allowing customers check in with their phones and open a digital tab whenever they entered a business. Wal-Mart, meanwhile, rejected NFC outright, vowing to create its own mobile payment solution with other merchants.

Yet Cook had some fighting words for those who have come before, saying their mobile payment solutions have failed to reach critical mass because they were blinded by “self interest” and “tedious at best.” Whether that’s a fair assessment is up for debate. But Apple made a calculated move to wait for its competitors to jump in first (in fact, it surprised many by snubbing NFC in 2012 with the iPhone 5). Here are some reasons that wait-and-see strategy might pay off:

  • Interest in mobile payments is growing: Although mobile payments have yet to hit critical mass, the technology has demonstrated potential for growth. According to March 2014 data released by the Federal Reserve, 17 percent of all smartphone users have made a mobile point-of-sale purchase in the past 12 months (up from just 6 percent in the previous year’s report).
  • EMV migration could encourage upgrades: Migration to EMV gives merchants a reason to update their equipment. While not all EMV-compatible terminals have NFC capabilities, many do. In fact, several major payment processors are pushing “future proof” terminals that incorporate both technologies.
  • Apple has a ton of cards on file: Apple has 800 million credit cards on file for iTunes, according to Business Insider. Rather than having to add cards to a mobile wallet (a hurdle some may not want to clear), Apple can seamlessly allow consumers to use the cards they’re already using for iTunes. Plus, Apple’s large customer base may help Apple Pay to quickly scale where other mobile payment ventures faltered. Square, for example, ditched its mobile payment app entirely in May 2014 after failing to get enough merchant and consumer adopters.
  • The watch could bolster adoption: Apple Watch becomes available in early 2015 – right on the heels of Apple Pay. People who are comfortable wearing a device that measures their heart rate and reminds them when they’re near something they’ve pinned on Pinterest is probably technologically adventurous enough to use the watch to pay for coffee.
  • Issuers seem supportive: Apple Pay has a decent list of issuers that want to make their cards usable in the app — and that seem eager to play along in making the app a success. Wells Fargo and Citi emailed their cardholders with an introduction to Apple Pay. And Capital One just released a new mobile wallet of its own, which, it has made clear, functions with Apple Pay.

Those advantages aside, it will be interesting to see how Apple Pay competes – and coexists — with other options. PayPal has been retooling its mobile payment app and is rumored to be incorporating Bitcoin mobile payments. Starbucks has had success with its own mobile payments app based around its loyalty program. Softcard and Google Wallet offer other NFC options. And remember Wal-Mart’s promise to create a non-NFC mobile payment option? Just last week, it announced CurrentC, a mobile wallet and loyalty payment option that avoids NFC (transactions make use of scanned codes) and is scheduled to roll out at big-box pharmacies, convenience stores and retailers in 2015. In fact, CurrentC partner retailers have been rumored to be switching off their terminals’ NFC capabilities.

It will also be interesting to see how Apple plans to make money from Apple Pay. Rumors are swirling that that it negotiated a rebate on the interchange fees issuing banks collect from merchants’ banks, but those details remain secret. It’s also entirely possible that Apple Pay will initially act as bait to get people to switch to the pricier iPhone 6.

So are mobile payments finally going to take off?

Phones that enable mobile payments (which have already existed for several years) aren’t enough to make credit cards go extinct. There have to be more advantages to consumers and merchants than speed. As much as Cook tried to make audiences think otherwise with a humorous video showing how cumbersome card payments are, in reality, mobile payments save a few seconds at most. Apple pay in apps

That may not be enough to justify the hurdles of trying a new way of paying – and eschewing your wallet for something that could run out of batteries. And indeed, as found in a recent survey, there’s significant adoption reluctance: More than 40 percent of respondents said they’d “never” use their phones to pay for items.

But Apple is doing some things that could lower that reluctance. Apple Pay is built into the phone and the watch that people will be lining up down the block to get. There’s no requirement to download an app, and, if you already have a card tied to your iTunes account, you don’t have to add any other cards. The second you get your phone or watch, you can use it to pay.

Then there are those partnerships Apple has with mobile commerce apps. When consumers use those apps for ordering food and shopping online, they’ll often find that Apple Pay has already been integrated (see the image above). That could win some adopters — and continue Apple’s pattern of intertwining various features so that new things surreptitiously become familiar and indispensable.

Updated Oct. 25, 2016

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