NEWS ANALYSIS: The upcoming Apple Pay NFC system will complement, not disrupt, the current card and mobile ecosystem by using current infrastructure.
Apple's Sept. 9 introduction of the Apple Watch and the two new, larger iPhones was big in the device world, but the most important long-term news clearly was CEO Tim Cook's announcement of Apple Pay.
"Every day between credit and debit, we spend $12 billion. That's more than $4 trillion a year, and that's just in the United States," Cook said in introducing the new payment system at the company's Sept. 9 launch event in Cupertino, Calif. "We think we have a better way to handle those transactions."
If Apple Pay works, it can be a major game-changer in the U.S. economy. Devices like smartphones and watches come and go, but a payment method that is simple to use and cuts security problems off at the knees could be around for a long, long time.
Apple Pay (shown in photo)
is an NFC (near-field communications) payment system that uses a special chip to send a radio signal between the device and the point-of-sale receiver, which is usually a computer terminal at a cash register. It requires either an iPhone or Apple Watch to touch the device; a biometric (fingerprint) second ID is also required. There is no card number entry and no need to type addresses. No personal account information is shared with the merchant or with Apple. The transaction data—and it's all encrypted—remains between the bank and the buyer; the merchant simply ends up with the money in his/her account.
Progress in Mobile Payment Industry Has Stalled
This is a huge step forward from the now-simplistic plastic, magnetic-stripe credit/debit cards that have been breached innumerable times in their 50-year history. Other providers, such as PayPal, Google Wallet and Square, have reached a certain level of success in the mobile payment market, but progress has been stalled for lack of widespread participation in the retail industry.
The gravitas that Apple, arguably the world's most profitable and successful company, brings to the table changes the environment in great measure.
Apple Pay will not disrupt the payment business to a great extent, as some people fear. It's being set up as another easy-to-use channel for consumers to buy what they want. Apple Pay will rely on existing infrastructure rather than creating a new one of its own; it will simply be a lot more secure and easy to use.
Happy with this approach, all the major U.S. banks already have bought into it (do they have any choice?), and leading retailers such as Disney, Target, McDonald's, Whole Foods, Subway and a list of others are already making accommodations for it.
In the Apple Pay scheme, participating card issuers will pay Apple a small fee per transaction, so they stand to make slightly less money than a regular 2 percent credit-card swipe at the cash register. But Visa, MasterCard, Amex and Discover, et al, plan to more than make up that Apple Pay fee as the number of new, simplified electronic payments is expected to increase.
"It's not like someone has to lose for Apple to win," True Venture partner and IT analyst Om Malik, founder of GigaOm.com,
said Sept. 9 on the "Bloomberg West" cable show.
It's Theory at This Point, but Still Promising
However, this is still theory at this point. A lot of evangelizing needs to be done; Apple Pay stations will work only in stores where merchants have upgraded their equipment to accept the NFC touch system, and that will take some investment on their part. Will enough merchants buy into Apple Pay to make it a daily occurrence on Main Street? Nobody knows for sure, but the major first-mover financial-service companies are betting on it.
Thus, Apple realistically is looking at 2016 or 2017 for this to begin to make a difference in the point-of-sale (POS) and online transaction world.
Does Apple also stand a chance to replace the first-move e-wallet providers, in the face of several other worthy competitors who have been spinning their wheels for a few years?
"I hope so, it's high time," Malik said. "I was amazed by the Apple Pay announcement; it is seamless. They've done a great job and brought in all the right partners. The ecosystem is already there. What Apple has done is give the mobile payments system a massive jump-start."
Visa, MasterCard, American Express, Facebook, Twitter, Pinterest, Nike, BMW, Starwood (hotels) and a list of other lesser-known companies are already developing their own systems for this device. The credit-card companies have been looking for something, anything, to replace plastic cards for years; perhaps this is the break they need. After all, the less friction involved with making a payment of any kind means more sales, more payments taking place over electronic networks and fewer cash transactions.
Getting the Transactional Friction Out
"We use it [credit- and debit-card payments] so many times a day and there's so much friction in it," Piper Jaffray analyst Gene Munster said on the Bloomberg show. "Apple's in a unique place to take a lot of that friction out and also in a unique place to capture a small fraction of that payment processing. What they're doing in payments is going to be game-changing."
In 2014, credit and debit cards represent more than half of the purchases made for retail goods and services in the United States. Cash, as it always has, is the most-used in small transactions. A recent Federal Reserve consumer survey reported that cash represented 66 percent of transactions under $10 and 58 percent of transactions under $25. When the transaction was more than $50, cash was used in less than 20 percent of the payments.
Those numbers will change drastically over the next few years if systems like Apple Pay become daily routines.