APPLE’S NEW ECOSYSTEM: THE IMPLICATIONS OF APPLE PAY
Today, October 20, Apple launched Apple Pay with the release of their iPhone iOS 8.1 version of the device operating system. This new payment system is scheduled to go live with 220,000 merchants today for users with iPhone 6 or 6 Plus. I wrote about these new devices here. When the Apple Watch is released in 2015, which I wrote about here, it will support Apple Pay as well. See the list of merchants at the end of this article. *
While the iPhone and Apple Watches are innovative, I believe the real excitement is in the new ecosystems Apple is creating. Ecosystems are built around devices with software and services. This is one way for customers to enjoy using a number of Apple devices in a more easily integrated environment, encouraging them to buy more Apple products and upgrade to new devices when they come along.
Who is starting with Apple Pay?
The first was the Apple Store itself, where Apple employees were recently trained to help customers use it. The first app I updated after upgrading to iOS 8.1 was the Apple Store app. Soon followed like Panera, OpenTable and Uber. Others are jumping onboard quickly, including McDonald’s. The big questions that consumers will have is: what about security and privacy?
McDonald’s already has thousands of locations with NFC (Near Field Communications) POS terminals (Point of Sales). McDonald’s examined the security mechanisms that Apple Pay is using and were impressed enough following their end-to-end testing that they’re not using any safeguards beyond those provided by Apple and their backing financial payments network.
Other merchants like Best Buy and Walmart have quickly and vocally opted out of this program. Sears, Kmart, BP, H&M, Coach, Belk, as well as Bed, Bath & Beyond have said they will not be participating or have no plans at this time. A number of fast food restaurants are not yet part of the program: Pizza Hut, Chipotle and KFC.
Why Apple Pay can win big
- Apple controls over 40% of the US smartphone market and has complete control over what goes into its devices, unlike Google which primarily OEMs its Android OS to device manufacturers. Apple can get its payment into the hands of millions of users faster than anyone else.
- Apple enjoys advantageous relationships with carriers. Verizon, on the other hand, was able to effectively block Google Wallet back in 2011.
- Other Apple ecosystems have been successful in the past. Over 800 million people have iTunes accounts. iTunes along with the App Store generates $20 billion annually.
It was rumored that the previous two iPhones would have NFC chips for mobile payments and indeed, MasterCard began experimenting with NFC chips on credit cards throughout its PayPass program back in 2003. This did not happen until the iPhone 6. But there is another reason why this is the right time for Apple to launch their
The Perfect Storm of Wireless Payments
Banks and financial institutions like Morgan Stanley are behind it in ways we’ve not seen before. Apple is not competing with credit cards, it is leveraging that system:
“By reducing fraud, improving data security, and increasing credit/debit volumes for issuers and networks, while protecting the value of the existing payments value chain, we believe Apple Pay has a high chance of success” -Craig Hettenbach, Morgan Stanley
Visa does not see Apple Pay competing with them, even though they partner with other systems like Softcard and Google Wallet. “Having a partner like Apple really was like catching lightening in a bottle,” said Visa EVP of Technology Rajat Taneja. His company dedicated 750 employees for the last year to perfect the system. Other credit card companies made similar, secret investments starting in the Summer of 2013.
Finextra blogger Dan Eckstein wrote:
“Apple Pay is entirely based on credit cards. That means it is not a new payment method. It looks more like Apple will become one of the biggest resellers of the credit card industry. They will only facilitate the use of credit cards, and in our industry players like that have a name: payment facilitators.”
- The largest iPhone launch in history with 10 million in the first weekend and reportedly 20 million pre-ordered for China means a huge number of devices that will be able to use this system immediately.
- The propitious timing of the EMV (Europay, MasterCard and Visa) mandates set forth by credit card brands requires retailers to switch their existing payment devices for new hardware capable of supporting EMV payments within a year. EMV is the regulatory standard in almost all other countries and is a more secure standard for processing credit card payments that makes use of an embedded chip on the credit card to securely encrypt transactions — I’ve seen this used in France for over a decade. Some 9 million retailers need to swap out their existing hardware for EMV-capable hardware by October 2015 when many will likely upgrade to NFC compatible machines. If don’t upgrade they’ll be required to the cost of fraud liability, which is a burden the card brands are no longer willing to bear.
- A new kind of security. Apple purports that they don’t capture the identity of the buyer, what he buys, where he buys it, or how much he spends. (Apple does know about your original credit card that you already use with iTunes, along with over 800 million other users.) The system uses Device Account Numbers instead of storing credit card numbers and keeps all payment information in a dedicated chip on the iPhone, called the Secure Element. This is done by employing a tokenized and biometrically verified transaction system — each transaction generates a unique one-time-use cryptogram that the issuer ascertains is associated with the card token. If all checks out, the purchase is approved in less than a second.
- Apple has widely partnered with the leading credit card companies: AMEX, MasterCard and Visa initially, as well as credit and debit cards from AMEX, Bank of America, CapitalOne, Chase, Citi, and Wells Fargo. Apple will not add an additional charge to the end user, but they will capture from the credit card and bank companies 15 basis points, or 0.15%. This works out to 15 cents per $100 of transactions. My bank has been advertising Apple Pay for over a month at their ATM. The secure process that Apple Pay uses will lower the incidence of credit card fraud that banks are obligated to cover. And the ease of wireless and cardless transactions could mean more transactions. Ka-ching!
How it Works
Using the new Passbook & Apple Pay setting on the iPhone 6, a user can set up the credit card they already use for iTunes, or a new one.
The credit card shows up in the Passbook application on the iPhone as seen in the example from 9to5mac below.
Once set up, the iPhone 6 is held within range of the NFC POS “sled” and then the user touches the Touch ID button on the device. No need to pull out of your wallet and expose the credit card, reveal the security code on the back of the credit card, or show photo ID. Users are concerned about where their credit card information is kept, or rather not securely kept. Witness the phenomenal drop in sales during the Christmas shopping season after retailer Target was hacked.
At the Apple Store, for example, for security purposes, receipts for items purchased with Apple Pay will no longer show the customer’s contact information or credit card number. Only the last four digits of their iPhone’s unique Apple Pay device ID will be shown. Another change: customers will not be required to provide their name or email address at checkout to receive a receipt, unless they’re buying a service like AppleCare.
Who Could Lose?
- Google Wallet will feel the impact. It launched in 2011 with partners McDonald’s, Walgreen and Staples among others — but did not get sufficient traction to achieve escape velocity.
- PayPal has, since the Apple launch in September, announced that they’re splitting from eBay.
- Square, the startup that used a hardware attachment to the iPhone, then a sled for iPads will feel the pinch.
With Apple Pay, Apple has an opportunity to sidestep the internecine fighting between credit card companies, banks, phone companies and phone manufacturers who have strived for years to divert a “piece of the action” their own way from among the hundreds of million payment transactions a year. The new iPhone 6 and upcoming Apple Watch will be the devices that make it happen, but Apple Pay is the revolutionary part of Apple’s recent product launches.
Thanks for coming along.
* The current and list of Apple Pay retail partners is as follows, with recent additions in bold:
Apple Pay support at launch:
- BJ’s Wholesale Club
- Champs, Chevron
- Foot Locker
- House of Hoops
- Kids Foot Locker
- Ladies Foot Locker
- Office Depot
- Urban Outfitters
- Sports Authority
- RUN by Foot Locker
- Panera Bread
- Whole Foods
- Disney Store
Support later this year
- Free People
- Urban Outfitters
- Walt Disney