Why The New York Times Is Wrong About 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.
It took less than 24 hours for The New York Times' Neil Irwin to declare Apple Pay, the tech company's new program designed to help consumers use their phone or smartwatch as a payments device, a dud.
"'Apple Pay' looks as if it may be one of those offerings that doesn't live up to the company's hype," Irwin wrote.
His reasoning is tied mostly to Apple's own video touting Pay, which relied heavily on the idea that using a credit card is somehow a difficult process. Irwin said it reminded him of an infomercial "in which actors manage to horribly bungle the most basic tasks until some new product solves a nonproblem."
In that, at least, Irwin has a solid point. Apple's attempt to portray the credit card as a difficult-to-use device was a major misstep in an otherwise compelling presentation. But Irwin goes further, declaring that Apple is attempting to essentially solve a problem that isn't a problem.
He lists a series of flaws that come with using Apple Pay, including an inability to use a friend's phone to purchase goods even if it is lent to them (because of fingerprint identification) and that a smartphone can lose power, potentially leaving a consumer stranded if they don't have a backup payment method.
"Capitalism has long made it easier to buy and sell things, with a centuries-long evolution from barter to metal coins to paper money to the credit card," Irwin writes. "But each of those represented a major advance in convenience over its predecessor. If Apple Pay or competing mobile payments products are to succeed, they'll need to convince us they have a better way."
While I agree that Apple could've done a better job selling its own idea, Irwin is wrong to be so complacent about the efficacy of the current system. The fact is, there are major problems in the system issues that Apple Pay might help address and they are becoming clearer all the time.
The primary one is security. Irwin gives a nod to this, saying "Apple Pay does appear to be more secure than plastic credit cards" before quickly moving on. But this is no small thing. Given the sheer number of hacks and data breaches now, it's clear that the current system is scarily vulnerable. It's a significant issue for financial institutions, retailers and consumers.
Apple Pay, at least in theory, has the promise to be considerably more secure. It relies on tokenization to replicate consumer card credentials and assign each account a randomly generated number in the cloud, which is then stored on the device securely. That's a technical way of saying that the merchant never sees the credit card information the consumer is using when buying items using Apple Pay.
The implications of this are massive. Breaches at Target and Home Depot wouldn't happen if the companies didn't have consumer credit card information in the first place. With Apple Pay, they won't. It will save banks money on replacement cards, and consumers the hassle of constantly receiving a new card.
To be sure, Apple still has to prove that its system is secure especially to those who remain skeptical following the leak of nude photos from its iCloud service (though whether that skepticism is borne more of perception than structural weakness is another question altogether). But with cyberattacks and security breaches showing no sign of abating in fact, they're all but guaranteed to get worse the promise offered by Apple Pay is a welcome step in the right direction. And while the use of chip and pin technology and other payment methods, like digital currency, have the potential to also put a dent in this issue, Apple can dramatically speed up the process if Apple Pay is widely adopted and used (and, of course, works as advertised).
It's also worth noting that at least one of Irwin's stated flaws of Apple Pay isn't actually a flaw. The fact that you can send "an intern to pick up coffee" and pay with the boss' credit card is a bug, not a feature, of the current system. Indeed, it's a good example of how security around credit cards has become incredibly lax. Retailers are supposed to ensure a signature on a credit card matches the one on the back and even ask for identification they just don't. This is one of the reasons why obtaining credit card information is so valuable. Crooks can easily use hijacked numbers to buy goods.
Again, however, Apple Pay proposes to solve this issue. The authentication needed to make the transaction is a thumbprint on the phone. True, there's no way for that intern to buy coffee on the boss' card, but there's also no easy way for a crook to use a stolen phone to buy whatever he wants (and no, possession of the boss' thumb won't work). Apple can even remotely wipe a stolen phone, ensuring no sensitive information can be taken.
And while it's true that running out of battery on a phone could leave a consumer stranded, it's not like the current system is flawless in that area, either. I recently shopped at a store where the credit card system failed, forcing everyone to buy with (shock and horror) actual cash. I already carry cash as a backup. If I buy an iPhone 6, it seems safe to assume that I'll continue to carry cash and/or a real credit card just in case. Frankly, however, I relish the idea of storing multiple cards in my phone (which I've got on me, anyway) and just carrying one actual card in case of emergencies. Anything Apple can do to thin out my physical wallet, even if it doesn't eliminate the need for it entirely, is welcome.
Ultimately, credit cards are a 20th-century technology that are looking increasingly outdated in the 21st. Apple Pay wisely doesn't try to eliminate them, so much as digitize the card and make the process more secure. If it works as advertised, it could be a powerful innovation that will fundamentally change how we make payments. To dismiss it out of hand would be a major mistake.
Rob Blackwell is the Washington bureau chief of American Banker. The views expressed are his own.