By: Johnna Kerr, Director of Strategic Partnerships
Apple Pay and its impact on payments
“They might not invent things, but when they do things, they do things better than anyone else.” Jason Oxman, CEO Electronic Transactions Association speaking about Apple at the 2014 Western States Acquirers Conference
On September 9th, Apple announced the October 2014 launch of Apple Pay – a new, secure payment method allowing consumers to pay via their iPhone’s using near-field communication. Since this announcement, it seems like the question on everyone’s mind is: will Apple Pay finally be the catalyst that accelerates the transition to digital payments?
Nobody can predict the future, but there are a few things that need to be considered with any new payment method: technology, security and consumer markets.
What is Apple Pay?
Apple Pay is Apple’s foray into payments. It uses tokenization to secure payment data by assigning a random code to your credit card and then encrypting it in your phone.
Apple has secured valuable partnerships with major credit card networks as well as obtaining key merchant support – approximately 220,000 merchants based on their press release. While Apple Pay does not require proprietary hardware integration from the merchant’s standpoint, it does require them to have a contactless reader in order to process transactions.
Apple has over 800 million iTunes accounts already in existence and roughly 40% of the smart phone market in the U.S. However, in the global smartphone market, Android still retains the majority share – 78% to iPhone’s 18%.
Will this be enough to truly impact payments?
Is it Secure?
Apple has stated that no PII will be stored in their servers and merchants will not see your name, credit card number, or security code…it will all be encrypted. Every purchase gets its own, one-time, protected transaction code. A fingerprint scanner will then be used to verify and process the payment.
Using near-field communication (NFC), payment methods are able to communicate without actual contact. Instead of personal card information, the transaction code is sent to the bank, which then uses an algorithm telling the system where the money needs to go.
Are there limitations?
Consumers: Apple consumers will love the idea of Apple Pay: it is sleek, has a high “cool” quotient, delivering on the seamless user experience that Apple users expect. Given the heightened consumer awareness raised by recent retailer data breaches, the secure technology of tokenization coupled with fingerprint authentication will be especially attractive in the U.S. market. However, the hype surrounding the advanced security measures does not translate equally outside the U.S. Most other countries have already adopted EMV; therefore their POS transactions are already more secure than in the U.S.
Consumers will also face some limitations with Apple Pay:
- At launch it will only be available in the U.S.
- Apple Pay only works on new iPhones, which is an initial cost to the consumer
- With only about a dozen U.S. issuing banks supporting Apple Pay, not all cardholders will be able to use their cards
- A limited number of merchants will be accepting Apple Pay at launch
Merchants: As noted in the Apple press release, 220,000 U.S. merchant locations – representing roughly 5.5% of retail locations in the U.S. – will be accepting Apple Pay at launch, including Disney, McDonalds, Sephora, Staples, Subway, Walgreens and Whole Foods. A key benefit for U.S. merchants is the added security /tokenization of the transaction. However, adoption could be slow due to costs associated with upgrading POS hardware, retraining resources, low consumer demand and no clear ROI related to Apple Pay or NFC transactions. By October 2015, U.S. merchants will have to support electronic EMV credit card transactions, which is already leading to merchant upgrades and investments in terminals with NFC capabilities.
- Issuers will share in the current cost of Apple Pay transactions, although merchants could potentially see future rate increases
- Balance the demand and the cost associated with supporting mobile applications with no clear ROI
Apple has realized billion-dollar revenue for more than a decade, and they have proven to be – in consumers’ eyes – a pioneering force in technology. But will Apple Pay live up to its hype?
Only time will tell, but one thing is evident: the payments world is changing. Brands such as Apple, Amazon, PayPal and Google are entering the payment market with a readymade client base of consumers and suppliers in ecommerce. Apple Pay may have momentum and potential in the U.S. market, but there are many limitations and challenges that need to be addressed. Consumer behavior and demand will continue to be a key driver for contactless payments and merchant adoption of mobile payments.