Apple may be in the process of creating a better climate for mobile payments to succeed in the United States.
The payment sector is watching to see if Apple and its popular iPhone can get consumers to adopt near-field communication (NFC) methods to pay for things. NFC technology enables devices, like a point-of-sale terminal and a mobile phone, to communicate without contact. And just in case Apple Pay (and NFC) take off, all of the major U.S. credit card companies and payment processors — like Stripe, Square, and Braintree — are saying that they’ll support it.
But others have attempted this same feat before with little success. You know the players: PayPal, Google Wallet, and the unfortunately named Isis (now, in the wake of events in the Middle East, renamed Softcard — also not a great name).
Google Wallet had issues with major carriers, who said that the application was harmful to their networks because it required integration with a proprietary piece of hardware called the “secure element.”
Meanwhile, AT&T, Verizon, Sprint, and T-mobile were all collaborating on their own NFC mobile payment solution called Isis, which also required the secure element. The mobile payment tug-of-war has resulted in a stalemate.
PayPal’s mobile app has shown the most promise. According to an IDC mobile payments report in April, 58 percent of respondents who use mobile payments said they used PayPal. Still, that’s small consolation for PayPal, because only 37 percent of respondents said they use mobile payments at all.
But this hasn’t deterred Apple — it actually seems to have inspired the company. And the notion that Apple is somehow late to the party, because it’s only now developing a digital payment method several years after early innovators, is wrong. In fact, I’m pretty sure that Apple is the one throwing the party.
Before even announcing its new payment platform (reminder, it’s not even available yet), Apple struck up a series of partnerships.
These deals include confirmations from all major U.S. credit card companies and some key merchants that they will participate: Macy’s, Duane Reade, McDonald’s, and Whole Foods (all which already support NFC payments).
In addition to a strategic invite list, the iPhone maker timed Apple Pay’s roll out just as credit card companies are gearing up to switch over to chip and PIN cards in the U.S. Credit card companies are pushing retailers to switch over their payment systems to chip and PIN readers by October 2015 or else be liable for any fraudulent charges resulting from older card-swipe systems. That means merchants are going to be updating their card readers regardless. It’s reasonable to think when merchants upgrade to new card readers, they will opt for systems that are both EMV- and NFC-friendly. (EMV stands for Euro, Mastercard, Visa and is global standard for use with chip and PIN credit cards.)
Apply Pay is also launching amid an increasing number of security breaches at major retailers like Home Depot and Target that have led to compromised credit card data. The new payment method wisely hinges on the use of tokens to secure credit card information. Apple Pay assigns a randomized code to your credit card and then encrypts and secures that number in your phone. Every time you make a purchase, Apple Pay issues a one-time secure transaction code, making it incredibly difficult to track your credit card number. Couple that with biometric touch security and you have a pretty secure transaction.
“I would say the fact that your credit cards aren’t being exposed to skimmers and that the credit card is not being given to the retailers increases the security. [Your credit card] is just held in the phone as a representation and it’s not being held by the merchant,” says Aaron Cherrington, a senior threat analyst at FireEye. He co-authored a blog post heralding Apple Pay’s security measures.
Apple also makes a point of not storing your credit card data in its servers. Of course, others say Apple Pay’s security is questionable (i.e., if a hacker were to replicate someone’s biometrics, replacing a finger poses some problems). Ultimately, all things being hackable, Apple Pay will likely succumb to some sort of infringement at some point. Still, using secure transaction codes is a major improvement from swiping a credit card at a terminal.
Unfortunately, security doesn’t sell products. Apple will still have to find a way to get customers onboard with Apple Pay.
Consumers are going to be the toughest sell of all. One of the main reasons that Google Wallet and Softcard (née Isis) struck out is because contact-less payments don’t solve a consumer problem.
“The issue has been that swiping a card at checkout is one of the easiest things they’ll ever do,” says Bill Ready, the CEO of Braintree. While some have security concerns, consumers aren’t the ones paying for fraudulent charges on their cards, so they don’t really care about securing them. Besides, most people are just as likely to have their phone on them as their wallet.
Except, of course, when don’t you have your phone or wallet on you, like when you’re taking your dog for a walk or maybe when you’re out for a long run. Enter the Apple Watch, which is compatible with Apple Pay even without a paired iPhone nearby. Say goodbye to the days when you stuffed cash into your sports bra just in case you needed something while you were out. Being able to pay for things with a wrist device solves a real consumer problem and may be the most compelling reason to buy one of those watches.
And Apple already has lots of credit card data stored in iTunes. In a recent earnings call, Tim Cook said iTunes had amassed 800 million accounts. PayPal, by comparison, only has 152 million active online accounts, according to Statista.
Some retailers, including Walmart and Best Buy, have already said that they have no plans to adopt Apple Pay. Merchants have the burden of having to buy expensive NFC card readers, which can cost upward of $250 each, and must deal with installation and infrastructure costs. But they may have to eat the cost of new readers, anyway, for the chip and PIN era.
Other retailers are less reluctant.
“We’ve had mobile payments on our radar for some time, so we were excited when Apple came to us with this,” said Julie Bornstein, makeup retailer Sephora’s chief digital officer. “What makes Apple Pay so appealing is that it doesn’t require consumers to adopt a new form of payment. It uses the iPhone they already have and leverages pre-established NFC technology, making it simple and convenient for our customers.”
Bornstein emphasized that she’s been watching mobile payments for a while, waiting for something to emerge that she thinks consumers will get on board with. Merchants are going to want to be compatible with a payment method that takes off.
Still, Sephora is a resource-rich company. Smaller companies, or those with tighter budgets, might have a hard time implementing expensive EMV- and NFC-reading hardware.
But what if it were easier or cheaper? Square is working on a contact-less payment solution so it can integrate with Apple Pay, though details on what that means are scant. And it would be interesting if companies known for their small business solutions built hardware that made the installation both easy and cheap — and worked with EMV and NFC.
Ultimately, Apple has positioned itself better than its predecessors by having more control of the hardware (unlike Google) and by giving consumers a reason to want to use mobile payments (unlike PayPal).
Like Apple, PayPal did forge a number of partnerships with restaurants and retailers. But PayPal may not have had enough customers onboard to begin with. Apple potentially has 800 million credit cards on file through iTunes, giving it more than four times the reach of PayPal.
And Apple did one more thing. Even if mobile NFC payments don’t catch on via iPhone, because it’s just as easy to use a credit card, the Apple Watch gives people an excuse to run out of the house without a wallet and still buy something.
So sure, Apple may have waited longer to launch its own mobile payments party. But when it did, it gave everyone it invited a better reason to attend.