Is Apple Pay a Banking Trojan Horse?
While the spotlight during Apple's annual product
announce-ment was primarily focused on Apple's new hardware offerings (the
iPhone 6, iPhone 6 Plus and the Apple Watch), Apple Pay just might prove the
more revolutionary announcement over time.
By Jim Marous, Partner at The Financial Brand and Publisher
of the Digital Banking Report
Over the past 24+ months, Apple has opted to remain on the
sideline instead of offering an integrated mobile payments solution. During
this period, Apple introduced components of a potential payment solution,
including the Passbook application for storing coupons, tickets and
loyalty cards, the Touch ID fingerprint scanner with an API paving
the way for more secure applications, and the iBeacon for location-based information and offers.
Like they did with music labels for iTunes and cellular
carriers with the iPhone, Apple reached out to many of the biggest
partners ahead of introducing Apple Pay –
the major card carriers (American Express, MasterCard and Visa), the six
biggest issuing banks representing 83 percent of credit card volume in the
U.S., and major retailers like Macy’s, Bloomingdales, McDonald’s,
Walgreens, Nike, Staples and Disney (with 220,000 stores).
Instead of payments disruption, Apple’s initial foray into
payments appears to be focused on improving the experience between the
consumer and the merchant … removing friction and improving the security of
each transaction. In other words, instead of replacing the incumbent
payments network, Apple decided to leverage what was already in place,
building partnerships with key players.
“Any calls for Apple to disrupt banking or payments has proven
to be premature, considering that Apple prefers status quo more than it’s
fans,” said Cherian Abraham, mobile commerce and payments lead at
Experian.
Evolution Not Revolution
Using near-field communications technology, Apple Pay
will enable consumers to make payments at participating outlets with
a swipe of an iPhone 6, iPhone 6 Plus or an Apple Watch. Apple Pay uses the
Passbook app, the Touch ID, NFC, and a secure element to process payments.
Apple Pay will also support online purchases with a
one-touch checkout. This process will eliminate common online shopping
hassles, like entering credit card information and typing out a billing
address. Private information will be secure since it will not be shared
with the merchant. A bunch of merchants are already on board with Apple Pay
online, including Uber, Disney, Sephora, Starbuck, Groupon, Target, Staples,
Tickets.com, Panera Bread, and more.
NFC at the point of sale will be categorized as card-present
transactions for interchange fee purposes, and in-app purchases will be
considered card-not-present transactions with fees aligned with more
secure forms of card-not-present.
NFC payments are far from being new. In fact, they have been
part of the Android ecosystem for years. The concept of a mobile wallet that
stores payment credentials is also not new, with PayPal, Venmo, and even the on
again, off again Google Wallet paving the way. Yet, Apple always makes what
others have done before them more exciting. Despite not being first with either
a payments app or mobile wallet, Tim Cook unabashedly ended the Apple Pay
segment of his presentation with a prediction: “ApplePay will forever change
the way all of us buy things.”
“The tech giant [follows] a familiar pattern: let the first
movers flail with the earliest versions of some product or service, then
release a more polished version of the same idea. The mobile wallet in 2014 is
a lot like the MP3 player in early 2001, just before the launch of the iPod, or
the smartphones available in 2006 ahead of the first iPhone. The tools now
exist for fully functional mobile wallets, just not in a way that has won over
the shopping masses.” – Bloomberg
Focus on Security
The debut of the plastic replacement Apple Pay solution
comes as another wave of ‘bad news’ over digital security is part of the
daily news cycle, with another major retailer data breach being announced
and an iCloud hack that exposed nude images of celebrities.
To address security concerns, Apple is storing cards
securely by encrypting the information and storing multiple credit cards in
Passbook. Each card gets a device-only account number, so the actual card
number is never stored or shared. As a result, a cashier never sees an account
number or name. Apple Pay also replaces the three-digit code on the back of
credit cards with a dynamic security code.
Apple Pay can either use the card currently stored on
an iTunes account, or the consumer can add a card by taking a photo of another
card and easily add it to Passbook. Apple Pay will leverage TouchID/fingerprint
technology to authorize transactions, with the company emphasizing the
relative speed/convenience of this one-touch payment method.
“We’re totally reliant on the exposed numbers, and the
outdated and vulnerable magnetic interface — which by the way is five decades
old — and the security codes which all of us know aren’t secure.” – Tim Cook,
Apple CEO
Rumors leading up to today’s announcement suggested that the
company had used its enhanced security and anti-fraud features to negotiate
unprecedented discounts on the already low “card present” rates applied to
traditional in-person credit card transactions. If true, that could eventually impact
the balance of power a bit between merchants, banks and Apple.
Regarding security, Tim Cook told USA Today, “This is
something that the merchants believe in, and the banks, because they love fraud
plummeting. There’s that moment when a consumer’s card gets rejected
for fraud (by a merchant) and they can’t pay for what they’re
buying. When you combine all that, it’s like striking a match. It’s going to
spread and spread fast.”
Finally, Apple will not collect consumer transaction data as
once anticipated. This reduces the threat to the current ecosystem and to
financial institutions in general.
The Power of Apple
Apple has over 800 million registered iTunes accounts, some
portion of which will upgrade to the iPhone 6 devices. Though that shift may
not happen overnight, eventually users will upgrade as their contracts expire
and Apple continues to release new features that draw users in.
That, in fact, is Apple’s biggest advantage in entering the
mobile payments market where competitors like PayPal, Google and the mobile
carriers themselves already offer their own mobile payment solutions, some of
which also involve NFC technology.
The power of Apple also will be seen almost immediately with
the relationships struck with card companies, financial institutions and
retailers. Beginning in October, Citi and several other of the largest
financial institutions will provide cardmembers the option to pay with their
eligible credit or debit card using their iPhone 6 and iPhone 6 Plus. Whether
they are buying in stores or online from merchants in apps, organizations will
promote their partnership with Apple by stressing the simplicity and security
of using Apple Pay.
Announcements similar to the one below from Citi will
become commonplace.
“Citi has a long history of delivering choice and value
through innovation that meets our cardmembers’ needs. We are looking forward to
delivering to our cardmembers another way to simply and quickly make payments
for a broad range of purchases such as buying a coffee, groceries or purchasing
digital music.” – Barry Rodrigues, Head of Enterprise Payments at Citi
Impact on Payments Players and Use
NFC wallets have struggled for adoption, and one reason was
because merchants didn’t have point of sale terminals equipped with the
capability (and some merchants turned off the NFC functionality). But as
merchants upgrade their terminals for the October 2015 deadline for EMV-chip
card acceptance in the U.S., those new terminals will likely have NFC
functionality.
“Overall, it’s still going to be the breakthrough experience
tied to phone and watch that we’ve been waiting for … this will be huge and the
naysayers will be proven wrong.” – Bradley Leimer, Mechanic Bank
Apple Pay should definitely accelerate the timeline for
mobile payment acceptance in the US. While only about 20% of merchants accept
NFC (tap & go) today, Apple’s move should tip the industry to upgrade
point-of-sale terminals.Products such as eBay’s ‘One Touch PayPal‘ could also have a positive impact.
Analysts believe that Apple Pay will have a positive
impact on the card networks and certainly the terminal manufacturers with a
possible negative impact on issuers and acquirers. And while Apple’s
sizable smartphone market share, loyal users and iTunes card accounts could no
doubt make it a significant player in the mobile wallet marketplace, it is
believed that it may actually increase the opportunity for PayPal (and
other payment players) in the near term.
Notably absent among the list of launch partners are the
world’s largest retailers like Wal-Mart, Safeway, Target and CVS as well as
thousands of convenience stores that have fought heavily against recent
attempts to regulate interchange fees under the Durbin Amendment.
The Merchant Customer Exchange (MCX) comprising as many as 110,000
locations and has just introduced their CurrentC mobile wallet.
If Apple wants ApplePay to become truly ubiquitous, both
in-person and within mobile apps, it will eventually need to convince these
holdouts that it adds more value than it takes away (through any fees).
Denée Carrington, Senior Analyst at Forrester Research
said, “Apple Pay will ignite consumers’ interest in mobile payments by
providing a seamless, secure, and easy way to pay both in store and on the go.
By partnering with the leading merchants across retail, grocery, drugstore, and
dining, consumers can use Apple Pay with merchants they shop every day — which
will accelerate the growth of mobile payments in the US.”
Finally, many believe Apple’s new payments service
may eventually challenge carrier-backed ISIS — soon to be renamed to
“Softcard” — Coin, and even Square.
A Potential Trojan Horse?
While the introduction of Apple Pay eliminated much of the
‘doom and gloom’ discussion within the banking community, the industry may not
be in the clear just yet. This is because there were several notable missing
components to the initial announcements by Apple that could have a significant
impact on consumer relationships with their financial institution.
In the wave of announcements, there was no mention of
increased NFC functionality for the future versions of the iPad. Without NFC
capabilities, plugging in a Square payments dongle won’t allow merchants to
support ApplePay. While this may be on the drawing boards, Apple could take an
alternative partnering position with smaller merchants.
Before the introduction of Apple Pay, there was significant
discussion around the integration of Apple’s iBeacon solution (based on
Bluetooth Low- Emmission, or BLE technology) to deliver targeted, actionable
offers to consumers. Building a rewards network directly with merchants using
this technology could significantly alter the balance of power with consumers
as product/behavioral insight could still be collected without connecting
the data to specific payment information. Much like a closed ad network,
this capability could be the Holy Grail of payments revenue.
Finally, a more subtle, yet potentially game changing
observation mentioned by Karen Webster, CEO of Market Platform Dynamics, is how
Apple chose to name its payments capability Apple Pay as opposed to iPay or
iWallet. “Apple wants the consumer association with Apple first and foremost.
Sure, card brands and network brands are visible, but Apple Pay will make every
other brand subordinate to it because that is how the consumer and the merchant
will view it,” said Webster.
“That means that the power, at least in the iOS ecosystem,
is likely to accrue over time to Apple. And with 800 million registered
accounts, well, it might not need that much time,” continued Webster.
And what does that power mean when you look at person to
person payments (P2P) that also was left out of the presentation by Apple?
A Future View
Apple will begin rolling out Pay within a month, and it will
be accompanied by an iOS 8 update. American Express, Bank of America, Capital
One Bank, Chase, Citi and Wells Fargo will be the first banks to offer Apple
Pay with additional banks coming quickly thereafter including Barclaycard, Navy
Federal Credit Union, PNC Bank, USAA and U.S. Bank.
Large and otherwise impressive companies like PayPal,
Google, Amazon, Square, and Stripe, have all tried to tackle this problem
before with limited success. But as is the case in most categories it enters,
Apple has a way of delivering ‘mass’. This is why bank and credit union
executives should expect ApplePay to be accepted and move the needle rather
quickly.
“While it’s too early to know the business model
implications (as Apple has been very secret about the back end agreements,
though issuers and networks seem to be on the winning side), the industry will
finally see whether what it has bet on is true: that only Apple can change user
behaviors significantly,” says Yann Ranchere,
director at Anthemis and finance 2.0 blogger.
source: the financialbrand.com
by Jim Marous
http://www.buyetail.com
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