Apple’s Big Move

The iPhone maker will finally allow developers to access the device’s NFC chip and secure element. Will this trigger a payments bonanza in Cupertino?

Ten years after the first iPhone with an NFC chip to enable Apple Pay launched, Apple is opening access to the chip to third-party developers. Apple Pay debuted in 2014 with the iPhone 6 (the next iteration is the iPhone 16 coming this autumn), with a tightly controlled NFC chip to hold the secure element and sensitive user data.

Calls for Apple to open up access to this closely guarded data harbor were finally heard in August, when the tech giant said an upcoming version of its iPhone operating system would enable U.S. third-party developers to access the secure-element component.

Since its 2014 launch, Apple Pay, and associated Apple applications, have accessed the secure element to enable payments. The next version of the iPhone operating system, iOS 18, is expected in coming months, though as of mid-August Apple had not disclosed a timeframe for the 18.1 version.

Developers in Australia, Brazil, Canada, Japan, New Zealand, and the United Kingdom also can use the APIs with additional locations to follow, Apple says.

Opening the secure element—doing so was recently mandated in Europe—will only improve adoption of tap-to-pay on Apple devices, says Cliff Gray, senior associate at Omaha, Neb.-based TSG, an advisory firm.

“Many commercial use cases warrant direct access to the NFC chip, keeping the user in-app. Payment-app development on Android platforms has proved this model, even against the greater popularity of Apple devices in merchant environments,” Gray says.

In the Cloud

Access to the secure element will further boost Apple’s presence in the ecosystem and among consumers, says Jonathan O’Connor, senior manager at Auriemma Research, a New York City-based advisory firm.

“For Apple,” he says, “this move strengthens its ecosystem by making the iPhone even more central to users’ daily lives. It appears to be a push towards innovation, with Apple aiming to maintain a competitive edge in the mobile-technology market.”

A payoff for users may be more and better apps for the iPhone. “This move is likely to attract more developers, resulting in greater variety and better-quality apps for its users,” O’Connor says. “While Apple Pay may face increased competition, the overall adoption of contactless payments on iPhones could rise, potentially benefiting Apple Pay as the device’s trusted and integrated option.”

For its part, Apple points to in-app contactless transactions for in-store payments as a possibility, along with car keys, student IDs, closed-loop transit, home keys, hotel keys, and merchant loyalty and rewards cards as benefiting from this move. Government ID will be supported in the future, Apple says.

Android devices have long had this capability for third-party developers. But, unlike Apple’s devices, they rely on cloud technology called host card emulation.

This allows banks and other issuers to create NFC wallets without the secure element, which is controlled by the device manufacturers or mobile-network operators. Instead, payment credentials are managed in a cloud configuration controlled by the issuer.

That path has seen mixed performance, say some observers. “That’s been available for a long time,” says Steve Klebe, a retired independent payments expert who built and managed Google’s payment-service-provider partnership program. “Banks all over the world have tried to launch, and to the man, have all been shut down because they didn’t get any traction.”

Lengthy And Expensive

But while access to Apple’s secure element could work for third parties, there could also be many significant challenges. “It’s the online and app piece where individual payment service providers and merchants will have to do a bunch of work to integrate the buttons,” Klebe says. Whether opening the secure element will be successful or not comes down to the use cases, he says.

In the United States, Klebe says, a payments service like Paze, an online checkout platform backed by some of the nation’s largest banks, could add host card emulation and Apple secure element support and make do with a common button that some percentage of the market would be compelled to adopt and support.

Klebe refers to his own experience, however, to caution that this will likely be a lengthy and expensive project for Apple. “Having built and managed the PSP partnership programs at Google,” he says, “getting even the top 20 to do this work would be six to 18 months under the best of circumstances and probably [would require] a big bucket of cash,” Klebe says.

The true value in this move lies in the secure element’s role in verifying and authenticating an iPhone user’s identity, says Richard Crone, founder of Crone Consulting LLC.

“NFC and secure element are nothing more than a dumb pipe. The payload and the value is in accessing Apple’s proprietary federated identity services,” Crone says. “The secure element is nothing more than a path that beats only to Apple’s federated identity’s door, even if they open it up to others. It works in the same way as opening up the iOS App Store to outside developers.”

PayPal Holdings Inc., with long-time ambitions to find an in-store payment-acceptance foothold, could be a candidate for this new access, Crone says. In a well-known instance, The Home Depot Inc., in 2012, rolled out PayPal in-store acceptance at almost 2,000 stores. Retail e-commerce sales make up 15.9% of all U.S. retails sales of $1.8 trillion in the first quarter, the Census Bureau says.

“PayPal was definitely the big winner here, but not for the obvious reasons,” Crone says. “The big upside is it brings social commerce, social payments, to the in-store platform. The reason that’s so important is nearly [85%] all purchase value is in-store.” Social payments and commerce use promotions to reach individual shoppers often while they are in-store and in the aisle.

“PayPal already has Honey, which gives them access to consumer and packaged-goods advertising inventory,” Crone says. “All they need to do is to be able to prove their platform generates sales.” Honey, acquired by PayPal in 2019 for $4 billion, helps consumers find offers and deals on popular e-commerce sites.

‘The Real Upside’

For PayPal, in-store transactions, also known as offline activity, are still desired. “Finally, consumers who love PayPal for online purchases are also telling merchants they want to use PayPal for their offline purchases,” Alex Chriss, PayPal president and chief executive, said during an earnings conference call following Apple’s acquiescence to the EU mandate.

“We continue to drive the adoption of our card products and we’re making it easier to add PayPal and Venmo branded cards to Apple and Google Wallets on mobile devices,” Chriss said on the call.

“We are also looking forward to launching even more ways for consumers to use PayPal any time, any place with NFC technology starting in Europe,” Chriss added. “Expect to see more from us in the coming quarters to enable and incentivize our customers to use PayPal online and in person.” PayPal would not comment directly on the Apple news.

When asked earlier this year during an April earnings call about European regulations forcing access to the iPhone’s NFC hardware, Chriss said PayPal “must play in an omnichannel world… We want to be able to deliver a PayPal service for customers everywhere, any time, every purchase.”

Chriss said where NFC is open to PayPal, “that obviously becomes a very easy opportunity for us to provide a wallet in an Android or iPhone operating system and we will be ready. If there are environments where it’s not available, we will still operate in an omnichannel [environment].”

Apple will monetize access to the secure element, Crone says. Developers must sign a commercial agreement with Apple and pay applicable fees for use of the NFC capability and secure element platform.

What these fees may be is unknown. Apple assesses 15 basis points per Apple Pay transaction to card issuers, while it takes a 30% cut for apps and in-app purchases in its App store. Crone suggests secure-element access will be priced somewhere in that range.

“That’s where Apple will make its money,” he says. “They start with 550 million active users of Apple Pay.”

Still, “the real upside,” he continues, “is from the identity and all the new applications that will require biometric access and multifactor authentication identity. NFC is simply a rail, a pipeline for carrying a more valuable payload. And that payload is identity, authentication, and biometric validation.”