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September 12, 2014

How Will Apple Pay Change Mobile Payments?

Posted by Narayan Sivaram (View Profile | View All Posts) at 11:58 AM

Apple Pay is here to transform mobile payments [Source: http://www.youtube.com/watch?v=Om-YRgPtdZw]

So the much anticipated Apple's take on Mobile Payments, Apple Pay, has finally arrived like a superstar on stage. It has taken the payment industry by storm through a cameo appearance alongside an impressive array of unveilings. According to Apple, it is as momentous as the Mac or iPod or iPhone launch from years past. With more than 800 million iTunes accounts, it has always been source of endless 'what-ifs' for the payments industry buffs. So we now have more clarity on Apple Pay to ruminate and to prognosticate.

Speaking of what we know, Apple Pay uses near-field communication (NFC) technology to complete payments with a wave. Also in the package, an inventive approach that doesn't require card information on the mobile device instead a digital token is stored. Even if the mobile phone is stolen, the card details are safe. The digital token resides on a secure element on the mobile device. This is clearly Apple doing what it does best. Other 'wallets' experiments have been listless at best. Among the many difficulties there was this pesky question of who controls the secure element - the carriers or the payment networks or the wallet provider. Well, not for Apple. They make the device and they control it.

In the digital age, many advancements have seen exponential growth governed by the eerie prediction of Moore's law. Microprocessor, memory capacity, and many other advancements have all exhibited exponential growth over time. However, the Cards and Payments industry's magnetic stripe has endured many decades, bearing witness to all these changes, like a living fossil! It was an interesting juxtaposition when only a day before Apple's announcement there was a story about how swipe is not really broken and that the promised digital wallet is yet to show any sign of life. Clearly, the moment was right for Apple to make a grand entrance. Now Apple hopes it will not only change the face of payments, but it will succeed where its rivals have stumbled.

Google has offered a contactless payment system with a modest record of success. And retailers like Starbucks have been aggressive in encouraging their customers to use such systems. But that has been hampered by lack of widespread acceptance beyond their franchise. It helps that Apple's announcement included naming some of the retailers that will accept Apple Pay: blue-chips like Macy's, McDonald's, Target, Whole Foods, and Walgreens.

We are yet to learn how Apple will make money from this endeavor. Apple has reportedly struck deals with American Express, Visa, and MasterCard on its virtual payments system. And if Apple even gets a small share of each purchase on Pay, it opens up a potentially huge, new revenue stream.

One of the challenges for digital wallets has been that of security. Apple itself was recently front and center in a celebrity photo-leak scandal. And mega-retailer Home Depot is just the latest chain to suffer an enormous leak of sensitive customer information because of hackers. The point here is that it's a heck of a time to be introducing Apple Pay. To be sure, Apple has been chomping at the bit to find another way to monetize all of its credit card information that it has accumulated because of iTunes and the App Store. It has tried to assure the market that what we all used to call the iWallet until this week is more secure than other contactless payment systems, many of which have been underwhelming.

At the very least, the Apple Pay system has two things going for it. It integrates Apple's Touch ID fingerprint scanner. That alone makes Apple Pay more secure, I think, than an American credit card. American banks, as you probably know, have trailed the rest of the world's financial services institutions by not including security microchips into their plastic credit cards.

The second benefit of the Apple Pay system is that this is the first time the creator of the contactless payment system also makes the actual device that runs it. Some analysts have said that the chink in Google Wallet's armor was that certain wireless carriers could block the system if they wanted to. The only way you can block Apple's Pay is by not selling the iPhone 6. And you'd be pretty clueless as a carrier or retailer to do that! Apple has smartly been waiting in the wings to install NFC technology into its products. It has watched its competitors to see what has worked with NFC and what hasn't. Apple's more considered approach is sort of an affirmation of NFC among high-end users. The company is telling the world that it has learned from others' mistakes and is offering a premium product that is part of a larger contactless retail system.

What's at stake here is the overall concept of the mobile, contactless wallet. What we're talking about is an entire ecosystem that's up for grabs. As with any new technology, it's going to take a while to gain widespread acceptance by (in this case) retailers. Just two months ago, Amazon.com unveiled the Fire Smartphone for $199. It was hailed as a bargain for consumers and a brilliant way by founder Jeffrey Bezos to connect them instantly to any product for sale on Amazon. Now, however, just two months later, Amazon has announced that consumers can get Fire for a two-year activation for just 99 cents.

Although the new 99-cent price tag is not an admission of defeat, the Fire didn't exactly blaze a new trail. Apple's move into this area, however, is not unlike a superstar taking the stage after a short absence and showing upstarts how the game is really played. Virtually overnight, Apple Pay has taken mobile payments and made it fully legitimate. By virtue of its accessibility, affordability, speed, and acceptance by the ecosystem, we will see more firms accepting this form of payment in the future. If Apple fails in this experiment, one will be left to wonder what to make of mobile payments. Perhaps then we need to admit that the swipe is not broken after all.

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