A key feature of Apple’s iPhone 6 is the NFC chip which enables a new service called Apple Pay. It’s a service that many consumers have hoped for for years: A way to pay for most anything using your phone instead of a credit card, and using the Touch ID feature for online payments. A robust mobile payment solution could also make electronic payments more secure. It’s an interactive payment system that can take into account your location, respond to your behavior, and know where you’ve purchased items in the past. “Rather than having to wait until you receive your credit card bill at the end of the month, to see if you’ve amassed any reward points, a lot of this can shift to real time,” says says Brett King, CEO of Moven and a best-selling financial services analyst. “It’s about reducing friction around day-to-day interactions with the financial system.”
But it’s a service that has been tried by others before. Can Apple succeed where Google Wallet and PayPal have not?
We spoke to two of Apple’s partners who believe Apple has got mobile payments right and to find out what it’s like working with the most secretive company in the world to build the digital wallet of tomorrow.
Tangible evidence that Apple had been paying close attention to mobile payments first came in 2013 when the iPhone 5s shipped with a fingerprint authentication sensor built into the Home button. “The mobile payments area in general is one that we’ve been intrigued with,” Tim Cook said during Apple’s Q1 earnings call this year. “It was one of the thoughts behind Touch ID.”
If done well, mobile pay has the opportunity to be a new, best first line of defense against escalating levels of credit card fraud, which now surpasses $15 billion a year globally. Credit card fraud, which includes debit cards, has been a particular challenge in the United States. Though the country only handles 25% of the world’s card transactions, it accounts for 51% of the fraud. The reason for this primarily comes down to the fact that the U.S. has previously failed to adopt the EMV chip and pin technology that the rest of the developed world has been using for a decade.
Apple Pay is even more secure than your traditional EMV chip and pin technology cards. With Apple Pay, a user’s card information gets stored in an electronic wallet simply by taking a picture of it using an iPhone. That picture captures the 16-digit personal count number (PAN) on the front of the card, along with the expiration date.
Apple Pay then applies an algorithm that “tokenizes” the PAN. Using your fingerprint to confirm your identity, the token is passed from your iPhone to a retailer or website, thus completing the transaction. The retailer or website never sees your PAN number, and if the token representing it is intercepted, it is totally useless. When you consider that the majority of credit card thefts occur because a thief steals those 16 digits, it’s then evident how much a system like Apple Pay could help thwart the $15 billion worth of fraud that happens annually.
Apple’s unique use of biometric identification and PAN tokenization makes Apple Pay “between five and six times” more secure than existing card payment systems, according to Barry McCarthy, president of Financial Services at FirstData. And he should know because not only is FirstData the largest payment processor in the world, it was also among the first companies Apple partnered with for its mobile payment platform.
“Our involvement with Apple started with a conversation explaining the role that we play in the payments ecosystem,” McCarthy says, rather humbly considering that whenever anyone anywhere uses a credit or debit card, chances are that FirstData has had a role in that transaction. “Upon understanding what we did, Apple invited us to participate with them under very strict non-disclosure agreements.”
In order to launch a service like Apple Pay, many have speculated that Apple had to have been working on the service for years. Whether that’s the case from a project management and software development perspective isn’t known, but it appears that Apple began seeking out its partners much more recently. When asked how far back the deal with Apple began, McCarthy says that FirstData has been an “Apple collaborator for many, many months already.”
A spokesperson for JPMorgan Chase bank, one of Apple Pay’s most prominent partners, confirmed that the process started even earlier: “We’ve worked with Apple since the summer of 2013 on this announcement and we have a long-standing history with them.” Of the 400-plus employees who worked on the highly secretive project, only about 100 knew the mobile payments partner was Apple.
Apple is famous for dictating strict terms while setting up sales in the iTunes Music Store, and the company behaved in a similar manner while establishing Apple Pay: insisting that all its partners (including major banks like JPMorgan Chase) use code names to mask Apple’s involvement. Meetings took place in windowless office rooms.
“Our first codename was Yosemite,” McCarthy says. “Later on when we found out that was also the name Apple had selected for its new OS, we changed it to Project Acadia, after another U.S. national park. We weren’t allowed to use or even say the name of the technology company we were working with–which was of course Apple.”
Nonetheless he was impressed by the company, which he describes as being full of “incredibly bright individuals who understand mobile payments [more] than any other folks from other industries I’ve met before. What they really understood was what users would want from this, and how they’d like to interact with a payments system. They had a really clear vision of what they wanted to achieve.”
Google Wallet launched in 2011 to great fanfare; Google payments VP Osama Bedier calling it “one of the biggest investments” the company had ever made. On paper, Google Wallet had several advantages working in its favor. It was first for one thing, and it let users pay with any credit card they wanted. Furthermore, Google’s data-driven approach to mobile payments opened up new possibilities for personalizing the payment process. But the project faltered nonetheless amidst poor execution and other competing mobile payments systems, which meant that it never really got its foot in the door.
Apple, for its part, has proven more successful at entering new business areas in a way that has proven financially viable–although even Apple doesn’t have a flawless record when it comes to new markets. For instance, it has singularly failed to claw back the e-book industry from Amazon–not helped by a lawsuit targeted at the company for its pricing model.
So why can it succeed this time?
Apple decided not to reinvent the technological wheel, and is instead focusing on the user experience. “Everyone was waiting to see what Apple was going to do in terms of providing us with an industry standard,” says King, CEO of Moven. But that standard isn’t a new type of technology. Indeed, Apple Pay works via NFC–a communications technology that is over a decade old. Instead, says King, “The genius of what Apple is doing in this scenario is that they are innovating on the consumer experience of payments. They are not innovating in terms of the core [technology or] of how payments are processed behind the scenes. It’s all about how the consumer initiates and experience the payment process.”
“I was in a taxi this morning in New York, and I paid using my iPhone 6,” continues FirstData’s McCarthy, who was sent one of Apple’s next generation handsets following Tim Cook’s announcement, with the express aim of testing Apple Pay. “It’s so much easier than reaching into my pocket to get my wallet, and then fumbling around to get the cash out. I was already using my phone to check my emails. I simply tapped the NFC reader in the back of the taxi and paid like that.”
Then there’s another major point working in Apple’s favor that relates to a legally stipulated transition to EMV “chip cards” in 2015 which are set to finally begin replacing the magnetic stripe cards that have been used in the U.S. for decades. Although magnetic stripe cards are far from secure (they’ve been all but replaced in the majority of other developed countries) up until now the argument against replacing them came down to the idea that it’s cheaper to pay off the fraud committed each year than it is to replace every point-of-sale terminal in the U.S.
From next October, however, a policy shift will mean that the liability will lie with merchants, rather than banks, if a fraudulent purchase is initiated and they do not have an EMV terminal. That will be a major incentive for merchants to upgrade their point of sale terminals. Companies like FirstData are additionally making it easy to add NFC on top of EMV–driving merchant adoption in a way it never has been done before.
“The time is right for this change to take place,” says McCarthy.
If Apple Pay is the mobile payments solution we’ve all been waiting for, could this mean the end of plastic credit and debit cards? Not according to King–at least not anytime soon.
“While I can definitely imagine a world that is completely cardless, I think in the short term what Apple is doing is accelerating the number of payments that will be made electronically versus those with payment forms–talking about cash or checks. The number of electronic transactions is going to greatly increase.”