Digital Transactions Authoritative, insightful and timely information for payments professionals
Payments 3.0
What Is Apple Pay?
Apple Pay sticks to Apple Inc.’s basic device-centric model, putting the functionality in the thing purchased from Apple and eschewing re-selling information about the buyer/user. As with any other iPhone or Mac (or the Lisa for that matter), the company’s profit comes from selling the device, not from providing information services to third parties.
Among many things that Apple has been waiting for, getting to a critical mass of credit cards registered with the iTunes store was a gating factor for the timing of ApplePay. Six hundred million people are pre-enrolled and need only buy the new iPhone 6 or 6 Plus. Adding new cards simply by taking an image of them is pure Apple customer-focused cleverness.
What Apple Pay is not is a new payments system. It’s a MasterCard-Visa-American Express payment initiated via existing near-field communication (NFC) technology. Apple Pay isn’t new in the way PayPal was or Bitcoin is trying to be. Apple is not only re-selling the banks’ and card schemes’ years of investment in the network, they’re getting the banks to pay them for doing it.
Is Security The Real Selling Point?
Apple has always emphasized security, even when that security was only a matter of being a smaller target. Touch ID is not foolproof, but it’s more secure than a PIN.
Why The Lash-up With The Card Schemes: Does It Limit Apple Pay?
How does the late-to-the-game player catch up? By free-riding on another’s infrastructure of existing global network, rules, processes, personnel, anti-fraud regime, regulatory-compliance capability, body of law, etc. The cleverest trick was arranging to get paid for using it. Only an entrant with Apple’s built-in user base and cachet (and chutzpah) could have pulled this off.
The second benefit of Apple’s approach is it side-steps the issue of competing with the banks and card schemes for their payments bread and butter. Apple has essentially become a reseller of the card system and may even add net new volume.
Whether or not the card schemes have an exclusive on processing the transactions with Apple (and whether or not such a deal would stand up if challenged), one has to wonder if, at some point in the future, Apple Pay payments could be routed directly to the payer’s demand-deposit account for settlement on either the current or a future, faster-clearing automated clearing house network, for example with Apple becoming a Payment System Provider under the new European Union payments law.
Will Merchants Play?
Merchants have resolutely resisted penetration by new payments methods. PayPal Inc. has only a tiny penetration of physical-format merchants. The ACH’s Secure Vault Payments system remains a Web-based, e-commerce-only system. But Apple Pay seems well-positioned to get merchants on board because of its almost instant user-base penetration and its re-use of the nascent (in the U.S.) but proven and available NFC system.
Closed-loop, merchant-issued payments systems have proven that people will rapidly adapt to NFC even in the U.S. and, once equipped with an NFC signal generator (wristband, etc.), will seek to use it elsewhere than with the original provider, despite the frustration of finding the loop is closed. Apple Pay will coattail-ride on the wristband systems’ acceptance and cool factor.
The Holy Grail for merchants is speeding up the checkout process. The soon-to-be-ubiquitous Apple Pay system gets the mess of “PIN or signature?” and card-swipe failures out of the way for far less than the cost of converting to EMV. Using a physical-format plastic card pulled from and returned to a physical wallet may be headed the way of using a check at checkout.
Still Early Days
Yes, it is still very early days for Apple Pay. But one needs only to recall the number of times a new Apple product was launched that wasn’t thoroughly ready to live up to high expectations to realize that early days with an Apple product are usually characterized not by problems but by rapid adoption. It’s been a long time since the Lisa.
George Warfel • george.warfel@edgardunn.com
