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

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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.

Numerous payments companies have developed NFC systems that can turn phones into versatile financial tools, but few have gone beyond the pilot phase because phone makers and wireless carriers have been reluctant to incorporate the chips into their hardware.

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?"

The iPhone famously transformed the mobile phone market, with Apple bucking the carriers' longstanding insistence on controlling the software that runs on handsets.

"Their whole business philosophy is, they have total control over the hardware and software," McPherson said, and this could certainly include payments applications.

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.

Financial companies have been pushing the idea that NFC-enabled phones would become mobile wallets, store payment card account data and function as contactless credit or debit cards.

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.

ITunes is another Apple creation that has disrupted an established market. Because it was initially developed to focus on small-value sales, such as 99-cent songs, Apple 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."

Much of the patent addresses the purchase of digital goods, such as music, but it also describes using the iTunes system to handle the sale of physical goods.

"Expecting to be thirsty and wanting a concert souvenir, the user may prepay for refreshments … and concert attire," as well as parking, the application said.

Consumers could use the NFC-phone to charge these purchases to their iTunes accounts. People might also be able to initiate transactions using a bar code displayed on the phone; such systems are already in use at a handful of merchants.

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. Apple did not return calls requesting an interview for this article.

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.

Both applications were submitted in 2008 and made public by the PTO this month.

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 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.

Nick Holland, a senior analyst at Aite Group LLC in Boston, said that when Apple does make its move "the party that really will be cut out is the banks."

If it wants to move ahead with any partner, Apple may choose eBay Inc.'s PayPal Inc., which already handles some payments within iTunes and offers a mobile payments application for the iPhone.

PayPal's early success in online payments stemmed from its ability to simplify the process of handling transactions in what was then a new digital environment where banks were slow to adapt. PayPal declined to comment for this story.

However, even if Apple's NFC plans are not quite what bankers want, it could still help them deliver the mobile wallets they have been touting for years.

"Bear in mind also that, if Apple drops a technology into a device, others will quickly follow suit," Holland said. "Alt-payments providers should be licking their lips."

Allen Merrill, the president of the Americas unit of the Singapore contactless payment software provider Cassis International PTE Ltd., said that financial institutions are "all sort of wondering about Apple," but he stressed that, even if Apple goes against what banks expect, its actions may eventually work to banks' advantage.

Much of the progress that has already been made in mobile payments happened because Apple rewrote the book on smart phone software, he said.

"There is a sense that what Apple, in particular, has already done … has already been an impetus toward the broader trend that will progress toward mobile payments," Merrill said.

And though Apple likes to go it alone, it cannot do so in the heavily regulated world of payments, he said. "Even Apple is going to have to play by rules that are not of its own making."

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