Why Banks Are Buying In to Apple Pay
Apple is betting that tokenization systems offered by payment processors will provide a security boost to its new Apple Pay system at a time when consumers are wary of Apple's cloud-based services.September 9
The bankers involved don't want to talk about it. But listen closely and read between the lines, and you can see why they might be willing to sacrifice some fees to participate in Apple's mobile payment platform.
Press reports citing anonymous sources said the large financial institutions involved in Apple Pay agreed to either deeply discount their interchange fees for transactions initiated on the platform or give the tech giant a cut. While the parties have not disclosed the terms, in interviews and public statements the banks involved said Apple Pay's enhanced security features, intuitive user experience and brand name made the platform attractive. Several participants also called the timing fortuitous, as merchants are under pressure to upgrade terminals to the EMV chip-and-PIN standard (which makes them more likely to also retrofit for mobile communication).
And of course, if Apple Pay takes off, the banks could make it up on volume.
"It's about driving transaction volume in credit for everyday purposes and displacing debit and cash," said Tom Noyes, a former Citigroup and Wachovia executive who is now CEO of a startup called Commerce Signals.
The banks are "hoping they can drive increased credit card usage," said Noyes, who predicted that the issuers would give up some fees for Apple in a blog post last week. (While the platform works with debit cards, consumers are more likely to have stored their credit card numbers on iTunes, and Apple is expected to make it easy to load information it already has on file to the new platform.)
Apple is pitching its new payments platform as a physical wallet killer. But John Shrewsberry, Wells Fargo's chief financial officer, suggested that the bank was unsure whether consumer behavior would change so radically, and is participating as a kind of hedge.
"If you roll the tape forward, and people aren't carrying their phone in one hand and their wallet or their cards in the other hand, if they're only carrying their phone, we want our cards to be in that phone," he said at a conference in New York Wednesday. "And we'll all see together whether carrying a card in addition to a phone is more than people can bear, once they get used to operating through their phones."
In the bigger picture, bank executives also suggested that they are confident that Apple could not disintermediate the incumbent players in payments.
"What I want to remind you of is, don't get mixed up between the channel and the banking role," said Richard Davis, the CEO of U.S. Bancorp, said at an investor conference Tuesday, as all eyes were on Apple's product announcements. "It doesn't matter if you're using your phone or if you're using a wand you still need a merchant to transact the money and you need a bank to move those items between the two. So the merchant acquirer doesn't lose its position."
To the extent that a mobile platform like Apple's increases payment volumes, Davis said, "a bank like ours gets paid most often on the number of transactions. It doesn't change the role of the banks, it just changes the speed."
Aside from Wells and U.S. Bancorp, Apple's financial institution partners include JPMorgan Chase, American Express, Capital One Bank, Citi, Bank of America, PNC Bank, USAA, Navy Federal Credit Union and Barclays. The MasterCard, Visa and American Express networks will support Apple Pay when it's live. The platform will allow users of Apple's newest smartphone and smart watch to pay for goods at retailers like Whole Foods and Macy's.
The mobile payment platform relies on a technology that has been around for years but is hardly a household name: near field communication, which lets devices transfer encrypted data when they are in close proximity to one another. To mitigate fraud, Apple Pay includes an NFC antenna across the top of the phone, the TouchID fingerprint scanner and a secure element in the device to store tokens that represent consumer card credentials. The system will also assign one-time codes to process payments in a bid to outdo the security of static codes displayed on physical debit and credit cards.
The tokenization and one-time codes were a selling point for JPMorgan. "We want to allow consumers to pay securely," said Marc Massar, senior vice president of enterprise product and emerging solutions for Chase Paymentech, the bank's merchant processing arm.
Consumers will be able to take pictures of their cards to add them to Apple Pay instead of typing in all that payment data on a tiny screen. The issuing bank will get a request from a customer to load the card into Apple Pay and the bank will confirm the person is who he or she claims to be.
U.S. Bank has experimented with mobile payments for several years. But Dominic Venturo, the bank's chief innovation officer, said the technology is ready for prime time now.
"Mobile payments have been evolving," he said. There are "enough parts of the puzzle put together" to commercialize the capability. "This is not a pilot This is not a test."
The Apple Pay experience is simple and secure, said Venturo. Merchants, for example, will no longer be privy to all the sensitive data associated with physical cards.
Venturo said he could also see using Apple Pay later on to enable the payment parts of its other banking apps like Peri, a mobile shopping app.
Contactless payments have long been a dream of many companies including Apple rival Google, but beyond Starbucks, none has achieved sizable traction. The technology has often been called a solution without a problem, as swiping a plastic card works well enough. On the eve of Apple's big announcement, even an American Express exec said industry efforts to get consumers to pay with their mobile phones have faltered.
Forming merchant partnerships and persuading them to upgrade their terminals has been an uphill battle for financial institutions. (This is changing, however, as the liability for fraudulent point-of-sale transactions shifts from issuers to merchants that don't adopt EMV-compliant equipment. Many will feel pushed to upgrade.) Another challenge has been explaining to consumers why they should switch their payment habits when a swipe is already quite quick.
"I guarantee I can swipe my card [faster] than tap the phone," said Noyes, who is also a managing partner at advisory services company Starpoint LLE.
Noyes said he was "underwhelmed" with Apple's Apple Pay demo video as it neglected to show how the use case was better than paying with plastic. Apple will need to also win over more of the everyday merchants.
The timing is awkward for Apple to introduce a payment system. In early September, the tech company suffered from a major iCloud breach that exposed nude photos of celebrities.
Still, Apple is perceived as a company that creates stellar customer experiences that drive new consumer behaviors.
Steve Schultz, chief operating officer at Check, a unit of Intuit that provides a mobile app for bill payment, views the deal as something that will accelerate mobile payments. "If anyone can do it, Apple can," said Schultz.
Kevin Wack and Robert Barba contributed to this story.