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Apple's Mobile-Pay Vision Cuts Banks Out of the Picture

US Banker  |  April, 2010

Apple Inc. has the power to make mobile payments huge, but not quite in the way bankers hope.

Several recently unveiled patent applications indicate that the Cupertino, Calif., company has a comprehensive vision for incorporating near-field communication chips — widely considered a crucial element for mobile payments — into its iPhone.

Many bankers have quietly hoped that Apple would take the leap — the tech giant has repeatedly demonstrated that it has the clout to upend the marketplace, and payments execs say that an NFC-capable iPhone would be a game-changer for mobile payments in the United States.

However, details from Apple's patent filings suggest that its mobile commerce plans are very different from the payments structure touted by financial companies, and some observers are now wondering whether bankers should be more careful what they wish for.

"Almost certainly they don't care what the banks think," said Aaron McPherson, a research manager for payments at the Framingham, Mass., research firm IDC Financial Insights. "Why should they? What do banks have to offer them?"

When several patent filings from Apple were published this month, they shed light on the company's plans to transform its iPhone into a payment device that relies not on credit or debit cards but on a beefed-up version of Apple's own iTunes digital media store.

Apple's vision also has the phone initiating transactions. But instead of providing access to an open-loop, general-purpose card account, an NFC-ready iPhone might link to Apple's proprietary iTunes service, largely cutting banks out of the equation. Apple also typically aggregates many purchases into a single transaction, limiting the interchange fees paid to banks.

With NFC, the iPhone could extend iTunes' influence to the point of sale.

In its patent application for a "Concert Ticket +" system, Apple spells out, transaction by transaction, how an NFC iPhone and the iTunes digital storefront would work within a strictly controlled ecosystem — and without bank input.

Apple sees consumers as initiating transactions, such as buying tickets to a concert or sporting event, through iTunes.

At the venue, the iPhone would become a mobile payment device, according to the filing No. 20100082491 with the Patent and Trade Office. A button "labeled 'Buy/Prepay Extras' may enable a user to toggle to another screen to prepay for certain benefits associated with the event … for example, an option to purchase recent albums by the artist associated with the event, to prepay for a live recording of the event or to prepay for certain concert attire to be obtained at the event."

The application never mentions the word "bank," and it mentions credit cards only once (in parenthesis), as one of many types of data to which the mobile device could supply access.

Another Apple patent application, No. 20100082444, is even further from bankers' vision of the mobile wallet. It casts the iPhone as a personal price scanner that would let shoppers ring up products with their phones before completing a transaction with conventional payment methods.

A third application, No. WO/2010/039337, filed last year with the World Intellectual Property Organization, describes how the iPhone could provide person-to-person payments, a service that several payments companies are already testing or providing.

Though these patent applications make clear that Apple has a mobile payments strategy, none of the concepts seem imminently realizable.

Apple is expected to introduce an iPhone model this summer, and the tech-gadget blog Gizmodo.com published a detailed look at its inner workings Monday that did not appear to contain an NFC component.

The next iPhone operating system, which Apple announced April 8, also did not appear to support NFC.

So if Apple does make a move into payments, "it's next year, if ever," IDC's McPherson said.

In this episode of Breaking Banks: American Banker's Innovator of the Year, John Hope Bryant of Operation Hope; Richard Brown and Charley Cooper of the blockchain consortium R3; and Ravi Srinivasan, who describes India's drastic move to stamp out cash.