Apple Pay to propel mobile money into the mainstream

Apple’s new mobile payment system is yet another attempt by the tech industry to digitise payments. Jules Gray asks whether the firm has finally cracked it?

Apple Unveils iPhone 6 including Apple Pay
Apple Unveils iPhone 6 including Apple Pay. Even former rival Bill Gates is heralding Apple's move into mobile payment as a game changer for the industry 

For a number of years now, many people within the technology and finance industries have been predicting the demise of a world where cash was king. Carrying around bundles of crumpled notes and dirty coins has not yet been made obsolete by the numerous plastic cards that sit in people’s wallets. However, if many of the world’s leading tech firms have their way, even credit cards will be a thing of the past.

Mobile payments have long been talked of as one of the next big innovations for consumers, freeing people from their bulky wallets and condensing their money within their smartphones. However, adoption of the technology has proven more difficult than first thought, with users wary of the security implications of storing their money on an easily stolen phone. Various attempts have been made to kick start the mobile payment industry but, until now, few have succeeded.

Once again, however, it has taken technology giant Apple to grab an idea created elsewhere and catapult it into mainstream use. In September, when Apple unveiled its latest range of iPhones, the company also announced its own payment system known as Apple Pay. Tied to the company’s iPhone and its Touch ID security system, the new platform will allow users to pay for items with a simple tap of their phones.

Apple Pay will allow users to pay for items by quickly waving their iPhones over a Near Field Communications (NFC) terminal. The users’ card details will be securely stored in the Passbook application on the iPhone, and placing a finger on the Touch ID button on the phone will authorise the payment. Apple Pay will essentially be a digital wallet, storing users’ bank cards, which will then allow the phone to be used to pay for items.

The company has signed up a number of partner organisations for its initial US launch, including McDonalds, Subway, Walgreens, and Whole Foods. The first wave of locations that will allow use of Apple Pay will amount to 220,000 stores, but this is expected to quickly grow as adoption accelerates. It has also signed up a number of US banks to the scheme, including Bank of America, Chase, Citi, Wells Fargo and American Express, as well as partnerships with MasterCard and Visa.

Once again, it seems that Apple has taken a technology with huge potential and turned it into a mainstream proposition

Nothing new
NFC is hardly a new technology but, as ever with Apple, it is one that is set to go mainstream as a result of their entrance into the market. NFC chips have been in a number of smartphones for a few years, while London’s transport network has used its NFC-based Oyster Card payment scheme for many years now. Contactless payments with bank cards have also become widely used throughout Europe in recent years, although the US has been surprisingly behind the curve with this technology.

However, condensing all your payment methods into a single device is something that few have achieved. Indeed, mobile payments are something many of technology luminaries have been trying to crack for a number of years now. Nick Holland, a senior analyst at California-based Javelin Strategy and Research, recently told Forbes that the mobile payments business was a notoriously difficult one. “I have counted hundreds of these initiatives over the years, but none of them were there. A lot of businesses in this space have crashed and burned.”

Will Jones, analyst at industry research firm Monitise Insights, wrote in a note in September that adoption of NFC technology has been disappointing up until now, largely as a result of a lack of an industry standard. “Outside of iOS, there were already 400 million NFC-enabled mobile handsets set to ship this year. Yet actual adoption of NFC-related mobile-payment services has been slow to date for a variety of reasons.

“In some cases it has proven difficult to get the consumer experience and the value proposition just right. In others, it has not always been possible to satisfy all the players in the value chain. Mobile NFC has, so far, been limited to certain issuers, certain operators or on certain phones, so it has not yet achieved critical mass. Even high profile services like Google Wallet and Isis have struggled due to the lack of a de facto standard in the market.”

Apple’s advantage going into the mobile payments space is its existing database of customer credit cards. The company says that it has more than 800 million cards on record, meaning that it already has an incredibly large user-base from the start. Jones believes that this could help to spur on adoption of the technology by consumers, leading to the rest of the market taking off. “Apple also have 800 million credit cards on their records, as well as the announced partnership with Amex, MasterCard and Visa in their payment strategy. Apple Pay, if it persuades consumers to buy goods with their handsets online and in physical shops, could have an energising effect on the whole market; forcing financial institutions, merchants and developers to align and focus their efforts.”

How does NFC work?

NFC devices share a core technology with radio-frequency identification tags, contactless payment cards and inductive coupling

NFC can operate in three modes:

  • Reader/writer mode – this can collect and write information on a smart tag
  • Peer-to-peer mode – two NFC devices can exchange data between each other
  • Card emulation mode: an NFC device appears to a reader like a contactless payment card or contactless transportation card

Microsoft founder and technology behemoth Bill Gates has even come out in support of the firm he once did battle with. In an interview with Bloomberg, Gates described Apple Pay as an innovative new way of making smartphones a cheaper form of payment, and that Apple were the firm that was likely to push the technology towards the mainstream. “Apple Pay is a great example of how a cell phone that identifies its user in a pretty strong way lets you make a transaction that should be very, very inexpensive.

“So the fact that in any application I can buy something, that’s fantastic. The fact I don’t need a physical card anymore, I just do that transaction and you’re going to be quite sure about who it is on the other end, that is a real contribution.”

Competing ideas
Twitter founder Jack Dorsey launched his Square platform in 2010, which would allow debit and credit cards to be accepted on a small mobile device that was attached to a smartphone. However, the project has not been smooth sailing for Square, which had to abandon its three-year old Square Wallet application earlier this year. Despite this setback, Square recently raised $150m in additional funding and has been valued at more than $6bn.

One firm that has been in the market for a lot longer than many of its rivals is PayPal, the online payment platform owned by eBay. Launched in 1998, the firm has become one of the most widely used and secure online payment platforms around the world. In September it was announced that the company would be spun off by eBay in an effort to become more independent and make a greater push into the physical retail space. Around the same time the company announced it was partnering with Apple’s great rival Samsung to offer a similar service to Apple Pay, where smartphones could be used to pay for items.

PayPal’s scheme is part of the FIDO Alliance, which includes a number of other technology firms that have come together to make a standardised security platform. It is this deal, however, that reportedly stopped PayPal from being one of Apple’s partners in its Apple Pay platform.

Other leading tech businesses have been looking at mobile payments too. August saw Amazon launch its own service in the form of Local Register. Similar to Square, the small card reader is aimed at retailers that allow people to make fast payments for a few items. Facebook is even believed to be getting in on the trend with a rumoured payment feature being added to its Messenger application. Google has also attempted to crack the mobile wallet space with their Google Wallet platform. However, this has been more like PayPal than a physical payment method.

As all of these companies try to carve out a big chunk of the mobile payment market, they are all trying to differentiate themselves from each other by offering various incentives to customers. Apple has decided that it will take a different approach to Square by agreeing to take a 0.15 percent commission from banks, rather than retailers.

Gates believes that regardless of which company makes the biggest success of the technology, mobile payments are going to be increasingly found in all portable devices. However, he says it is Apple that is most likely to tip the industry over the edge, from niche market to wider adoption. “All the platforms, whether it’s Apple’s or Google’s or Microsoft, you’ll see this payment capability get built in. That’s built on industry standard protocols, NFC. And these companies have all participated in getting those going. Apple will help make sure it gets to critical mass for all these devices.”

Making the mobile payment industry a coherent and mainstream proposition for businesses and consumers has taken a while because of so many competing standards. However, it is Apple Pay, which is attempting to bridge the two technologies by storing card details, like PayPal, and turning phones into methods of payment, in a similar way to Square. Tying the system to its highly secure Touch ID enabled devices means that many of the concerns over mobile payments have been eliminated, while tapping into the 800 million iTunes account holders means that the company already enjoys a huge initial user base.

Once again, it seems that Apple has taken a technology with huge potential and turned it into a mainstream proposition, further pushing the world towards a future without crumpled bank notes and grubby coins.