Does Apple Pay <i>Really</i> Change Everything?

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This article is from the annual FinTech Forward special report.

It's a difficult decision for bankers: Jump on the Apple Pay bandwagon, or hold out for a more bank-friendly alternative?

At stake is the future of fees to be derived from the 200 million times each day Americans swipe, tap or type a credit or debit card number as part of a slew of spending totaling $4 trillion annually.

Apple Pay went live October 20 on the latest iPhones and brought some instant coolness to virtual payments. A million consumers signed up for Apple's mobile wallet in the first 72 hours. Though mobile payments predate it, the service has the potential to do for payments what Apple's iTunes store did for music: simplify a process that's clunky for consumers and the companies that take part.

Apple Pay stands to benefit from the participation of a significant segment of the payments community. The service has buy-in from 500 banks, nine of the 10 biggest credit card issuers, MasterCard, Visa and First Data.

Add in the some of the largest retailers, from Macy's and McDonald's to Walgreens and Whole Foods, plus 220,000 more merchants who accept virtual payments already and four million more point-of-sale terminals tied electronically to the network, and the sweep of Apple Pay begins to emerge.

Of course, there's also Apple itself, whose iOS software runs more than 40% of smartphones in the U.S., and whose iTunes store has 800 million accounts, each connected to a payment card. The company has a track record of turning out devices that consumers cannot resist and blending hardware and software seamlessly.


"Payments is an activity that by necessity issuers, merchants and processors share," said Jim Smith, executive vice president for digital channels at Wells Fargo, the nation's fifth-biggest credit card issuer and one of the first banks to sign on to Apple Pay. "The reality is that you're dealing with multiple owners, so how do you manage that process in a way that's secure and that's efficient and that all the parties can trust?"

Though competition abounds, Apple Pay seems poised to benefit from what may turn out to be impeccable timing by its backers. The service arrives just as U.S. merchants are upgrading their tills to accommodate credit and debit cards that incorporate EMV chips (named for the Europay, MasterCard, Visa standard). Starting next fall, merchants that cannot accept chip cards face greater liability for losses from credit card fraud.

Seeing that they have to upgrade or buy new terminals to be EMV-compatible anyway, persuading merchants to make their equipment work with near-field communication, or NFC — the transmission technology relied on by Apple and Android devices — may become easier.

"Our message to merchants is that because of the liability shift, why not have a device that can do even more for you," said Barry McCarthy, president for financial services for First Data, which supports the Apple Pay security software.

Apple Pay also addresses the vulnerability of conventional credit and debit cards to fraud, a concern that went mainstream last December after hackers infiltrated terminals at Target and made off with data from as many as 110 million cardholders. This fall, Home Depot said that thieves may have swiped numbers for as many as 56 million cards from its payments systems.

Apple Pay converts the 16-digit primary account number for payment cards that consumers store in Apple Pay into a digital token that sits in the iPhone's secure memory and passes wirelessly to the till when a shopper touches the phone's fingerprint reader. "The number that appears on the front of your card will not be stored on your phone and will not be shared with the merchant," explains Tom Trebilcock, vice president of digital at PNC Bank. "In a sentence, that's important."

Online merchants also can accept Apple Pay as a way to let customers avoid typing a credit card number, billing address and other information each time they check out. "Imagine a one-click program with many merchants where you've never enrolled," said McCarthy.

The rise of mobile devices plays a part, too. Mobile payments, which totaled about $900 million last year in the U.S. and Canada, stand to hit $175 billion in North America by 2020, according to Strategy Analytics, a research firm. About 29% of all retail sales in the U.S. will be transacted via smartphone or tablet by the end of this year, Forrester Research finds.

Wearable devices from Apple and others, including the Apple Watch slated to ship in 2015, are expected to serve up mobile payments as well. "In 10 to 20 years, everyone will be paying with a device," said Brett King, CEO of Moven, a startup that offers banking exclusively by smartphone.

Apple may fuel that momentum. "You can argue all you want that Google helped to build the market, or that Android got there first, but none of that really matters," wrote the blogger who goes by the name Michael H. in a post on, a site about wireless technology. "Being first to market has never been as important as being the first to capture the attention of consumers."

That knack may help the industry surmount its chicken-and-egg problem, in which merchants have little reason to accept virtual payments until customers begin using mobile wallets.

"We've been proponents of mobile payments for years, but we've said the market has to evolve to a point where everything interoperates," said Dominic Venturo, chief innovation officer at U.S. Bank.

Though many banks also support mobile payment platforms from Google and others, Wells Fargo's Smith agreed that Apple Pay could prod such payments in a new way.

"I expect we will start to see more convergence in the solutions, leveraging NFC, leveraging industry rails, because customers and merchants will demand it," he said.

Retailers may be drawn to the cachet of Apple products. "Some merchants want the affluent audience that Apple brings," said Cherian Abraham, who advises on mobile technology for Experian. "It differentiates their brand from the rest, which is ironic, because payment was never as sexy as that."

Abraham pictures online merchants, airlines and others using Apple Pay and other mobile wallets to stimulate sales. "If I can make it incrementally easy for my customer to buy tickets or other things on the flight, then conversion will reflect the fact of making it easier to buy," he adds.

Abraham and others also say they envision issuers provisioning payment cards directly to a customer's phone, skipping the plastic.

"There was not previously a need for real-time account generation for credit until this solution came about," notes Randy Hopper, vice president of credit cards and business optimization at Navy Federal Credit Union, which is offering Apple Pay. "Once the need exists, we have to build the rails."

That's not to suggest that Apple's rivals are conceding anything.

Like Apple and Google, Softcard, the telecom consortium formerly known as ISIS, offers a mobile wallet backed by AT&T, Verizon and T-Mobile that uses NFC to transport virtual payments. Samsung is reportedly partnering with PayPal to develop a watch that will make payments as well.

Meanwhile, Best Buy, Wal-Mart and other retailers are sponsoring the Merchant Customer Exchange, a proprietary payment service featuring a digital wallet known as CurrentC that promises to run on iOS or Android devices. Some MCX members refused to accept Apple Pay during its debut. CurrentC offers a merchant-dominant take on payments, by refusing to accept costly credit cards and by giving merchants a wealth of payment data that used to be the purview of the credit card companies. "The service could out-Apple Apple," said Richard Crone of Crone Consulting, a payments advisory firm.


Banks likely will continue to experiment with payments systems as they learn what customers want.

"I think a number of banks are planning to pursue complementary strategies," said James Anderson, senior vice president for mobile product development at MasterCard. "Banks should understand that Apple Pay creates a great new way to engage with their customers, but they also have great new ways that Apple Pay does not diminish."

JPMorgan Chase, the country's largest payment card issuer, is an early backer of Apple Pay, but it's not betting all its chips on the platform.

"We've been doing this for a couple of years, and we've learned a lot of things, including not to try to predict the future," said Tom O'Brien, general manager of mobile payments for JPMorgan Chase. "Customers will choose what they choose for their own reasons. We intend to be available wherever they want to connect with us."

New ways of interacting with customers include the prospect of offering mobile payments directly from bank and retailer apps. "Thinking about this as payments only is too narrow," said Venturo. "If you think about letting app developers develop on the platform, we'll see innovation happen around that payment experience. If it adds value, it will drive behavior."

Still others see a source of profit in the information that mobile wallets can offer. "Your guiding principle is 'the one who enrolls is the one who controls,'" said Crone, who estimates the advertising and promotional value of a mobile wallet platform to be $300 per year.

Crone, who likens banks' turning to Apple Pay to their scramble to be available via online services such as AOL and CompuServe two decades ago, said Apple reminds banks of the need to capture customers' attention.

"If mobile banking is your primary user interface, it's important that you play by the user-interface game rules, meaning you have to constantly refresh, enhance and add new functionality to maintain customer loyalty and usage," he said. "The safe bet for a bank is on its own brand, its own account and its own app."

Apple Pay also preserves opportunities inherent in issuing payment cards. According to Abraham, that may mean giving customers information about their spending and creditworthiness. "I don't see Apple wanting to become a bank ever," he said. "For banks, this offers an opportunity to serve the customer's needs before and after the payment."

Some bankers agree. Payments are a component of what consumers expect, notes PNC's Trebilcock. "The part that PNC plays is wrapping the value that we bring around the payment," he said.


Nine days after Apple Pay debuted, Capital One, the nation's fourth-biggest issuer of credit cards, released a wallet app for iOS that reportedly can deliver details of Apple Pay purchases connected to Capital One credit and debit cards in real time.

Apple Pay is "a component in this overall payment and commerce solution," said Randy Koporc, who heads payments and commerce for Fifth Third, which is exploring whether to sign on to Apple Pay. "Our objective is to link consumer behavior with what our merchants and commercial clients want."

All that activity likely will benefit in part from the bargain that Apple struck with issuers. In return for allowing Apple to take a fee — reported to be 15 cents on each $100 in purchases — the banks got Apple to refrain from drawing on the data that millions of transactions will generate.

"Apple doesn't know what you bought, where you bought it or how much you paid for it," Tim Cook, Apple's CEO, told Charlie Rose in September.

"Apple realized they couldn't get broad support from issuers if they went down that path, so they co-opted issuers, saying 'you'll get massive decreases in fraud…and be able to do something special with data you get through the network because we're going to focus on making the in-store experience as easy as possible,'" said King.

All this leaves banks with some things to think about. One is the prospect of a divide between banks that have resources to experiment with modes of mobile commerce and those that don't.

What matters for all banks is having a strategy for virtual payments. "You can't stand by and be a fast follower here," said Crone. "You will lose out. Leaving it to Apple and not having a plan is not having a plan."

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