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Broadband and Mobility

Apple Mobile Wallet Vigil Finally Comes to an End: Meet Apple Pay

Alongside the headline-grabbing Apple Watch and the new, improved, and enlarged iPhone 6 and iPhone 6 Plus, comes the most eagerly-awaited news for those in the payments and retail space: Apple Pay. Apple has sat aside and watched while major competitors got a several-years-long jump on the mobile payments marketplace, only to founder and generate very little traction. As is its custom, Apple strategically assembled all necessary pieces of its planned product first and then waited for early market entrants to test the waters and move necessary infrastructure into place before launching its own product.

Not surprisingly, Apple has its mobile payment ducks in a row:

  • Touch ID integration – the biometric security feature will make consumers more comfortable using their phones to process financial transactions. It is also rumored that this additional layer of security has resulted in Apple negotiating “card present” payment processing rates with several card issuers, rather than the higher “card not present” rates typically charged for e-commerce transactions.
  • Payment tokenization—instead of exchanging users’ payment card account numbers at check-out, Apple Pay authorizes each transaction with a one-time unique number. This approach prevents hackers from skimming account numbers and using them for other purchases. Payment tokenization will limit the potential for and impact of Target or Home Depot-style security breaches.
  • iTunes integration—iPhone owners can pay using the payment card linked with their iTunes account or by loading a new payment card directly into the Pay app. With 800 million iTunes accounts, Apple Pay dwarfs its next-largest competitor, PayPal, which has 150 million users.
  • Payment network support—MasterCard, Visa, and American Express will all support transactions made using Apple Pay.
  • Major merchant support—at launch, over 220,000 merchant locations will accept Apple Pay, including major retailers like Macy’s, Walgreens, Staples, Subway, McDonald’s, and WholeFoods.
  • E-commerce functionality—Apple Pay is not online a Brick & Mortar play, but will also enable frictionless online/mobile payments through a one-touch check-out button that links back to the wallet. Target, Groupon, Uber, and OpenTable are enabling this functionality in their apps.
  • Apple Watch payments – riding the buzz being generated by the other major announcement today, Apple Pay will also be available via the Apple Watch. However, given that the Watch requires the iPhone to function, it remains to be seen what the Watch adds to the Apple Pay experience.
  • Near-Field Communications (NFC)—for those following the development of the mobile payments market, Apple’s decision to integrate NFC may be somewhat surprising. NFC had been all but declared dead in the water when the NFC-based Google Wallet and Softcard (formerly Isis) apps struggled to find a user base, and other major payment players (e.g., PayPal) moved to a location-based check-in approach. However, NFC has always had several key advantages that made it an attractive communication standard in the first place. It requires the phone to be very close (a few millimeters) to the payment terminal to function, thus inhibiting transmission interception. It does not require a mobile Internet connection, meaning it will work even in cellular dead-spots in the middle of the mall. It requires very little battery life to function. More merchants are deploying NFC-capable point-of-sale systems due to incentives rolling out in 2015 from Visa and MasterCard. Finally, it mimics current consumer check-out behavior almost exactly – only, instead of swiping a card, consumers tap their phones to pay. By using NFC, Apple Pay will not face the steep learning curve and behavioral inertia that other more disruptive approaches must overcome.


Industry Impact

No current industry player has committed nearly enough resources to educating consumers about mobile payments. NFC, in particular, has suffered from this lack of consumer knowledge. Now that Apple has finally integrated NFC into its handsets, many Samsung, HTC, Nokia, and BlackBerry users will be surprised to learn that they have had this functionality all along.

Furthermore, Google Wallet and Softcard can only be helped by Apple Pay. Neither app was available for iPhone users anyway, so Apple Pay will not cut into their respective user bases, and the marketing power Apple will bring to the mobile payments space will grow consumer use of such wallet apps across the board. With Apple Pay, Apple again appears to have pulled off being both late to the party and, very likely, the start of it.

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