Apple wants to make plastic credit cards obsolete.
As widely speculated, the Cupertino, California company on Tuesday announced a new payments service called Apple Pay that–according to an onstage video demo–could reduce paying at the register to the tap of a device (that is, the iPhone 6, iPhone 6 Plus, or Apple Watch when it launches this spring). Not exactly novel technology, but perhaps Apple can finally get the masses to adopt mobile payments. It already has a great head start with some 800 million iTunes accounts and stored credit cards.
“You have to start with the fact that Apple is Apple,” IDC research director James Wester tells Fast Company. “As an analyst you try not to jump on the bandwagon. In this case, they haven’t reinvented anything. They’re using technologies that have been used by Google Wallet and ISIS [recently renamed Softcard to avoid confusion with the terrorist group].”
The difference, though, lies in the user experience, which just so happens to be Apple’s forte. “You can’t underestimate how important user experience is, and that’s something Apple does really, really well–that very quick, very easy, very seamless experience they can provide.”
Key to Apple Pay taking off is adoption, which is why Eddy Cue, senior vice president of Internet software and services, rattled off such a long list of partners. On the financial services side, it counts American Express (its president recently admittng the adoption of mobile wallets has been “fairly limited“), Visa, MasterCard, and six major banks–in total representing 83% of the credit card purchase volume in the U.S. Merchants using Square, which last year processed an estimated $15 billion in transactions, will be able to accept Apple Pay as well.
A number of retailers are also on board, including McDonald’s, Whole Foods, Walgreens, Duane Reade, Sephora, Staples, Target, Subway, Disney, Bloomingdale’s, and, of course, Apple retail stores. “What makes Apple Pay so appealing to us, is that it uses the iPhone that consumers already have–it’s convenient, easy to use, and familiar,” says Sephora chief digital officer Julie Bornstein.
The merchants Apple lined up span across a number of categories “where mobile payment happens to be a natural fit,” including drug stores, dining, fast food, and retail, says Forrester Research senior analyst Deneé Carrington. “In order to be successful in payments you need to have scale and you need to have a large number of merchants that use it,” she says. “The scale on the consumer side, the pipe of partners, the merchant partners they launched with differentiate [Apple Pay] from the rest of the market.”
Given the recent iCloud celebrity hack, security is an issue fresh on consumers’ minds. Apple took a number of measures to beef up safeguards around mobile payments. Credit card information is stored on a dedicated chip called Secure Element, and each transaction is authorized with a one-time token instead of a security code. “When you go to a physical location and use Apple Pay, Apple doesn’t know what you bought, where you bought it, or how much you paid for it,” Cue said. Cashiers, likewise, will no longer see the customer’s name or credit card information.
By incorporating biometrics using Touch ID, Apple believes it’s able to lower the risk of fraudulent transactions–a fact that reportedly helped it negotiate lower processing fees, even for online purchases. (Typically, a transaction where the credit card is present is charged a lower fee because of the reduced fraud risk compared with online or keyed-in transactions.)
With Touch ID key to the Apple Pay experience, it’s crucial the company nail it down perfectly every time. For many people–Wester included, who says he turned off the fingerprint scanner long ago–Touch ID is still fraught with unreliability. “If it becomes difficult for people to use, they will not give it another try,” he says.