Apple Teams with Square to Make Amends to Retailers

Apple Pay's launch was seen as so bank-focused that some retailers griped or outright rebelled against the Apple mobile wallet. But today, Apple made a major peace offering to the merchant community — and it's working with Square to make that happen.

One of the major issues with Apple Pay was its reliance on Near Field Communication for contactless payments, something that is unlikely to be in place at the small merchants that use Square and similar mobile card acceptance devices. But this fall, there will be a Square reader specifically designed for contactless Apple Pay transactions, bringing Apple Pay to the small stores flea-market sellers that were previously left out of the Apple Pay deployment.

Another concern, held by larger retailers, was Apple Pay's reliance on banks for enrollment and its lack of any guidance to the consumer over which card to use for which purchases. As a merchant with a closed-loop branded card, "we know that our card likely would not be the default credit card at the top of the Apple Pay wallet," said Troy Carrothers, senior vice president and general manager of retail payment solutions and digital sales and services for Kohl's Department Stores, during SourceMedia's annual Card Forum and Expo in April.

Cupertino heard his concerns, and the Kohl's brand was among those featured when Apple announced support for closed-loop retailer cards and loyalty cards within its Wallet app (formerly Passbook).

Unlike many mobile wallets, Apple Pay did not have a built-in loyalty program at its launch; by adding support for retailers' cards, Apple sent signaled that it is not trying to override or disrupt merchants' loyalty strategies. Indeed, forcing a new loyalty system as part of a mobile wallet could spark a strong backlash, as happened to the mobile wallet maker Bling Nation back in 2011.

Another sign of Apple's strengthening ties with the merchant community was the April announcement that Best Buy, a longtime supporter of the rival CurrentC mobile wallet, would begin accepting Apple Pay in its stores. This news came directly from Tim Cook during Apple's second-quarter earnings call.

When Apple's Wallet app (formerly called Passbook) is loaded with store-branded loyalty cards, it will detect which card to use and "automatically present the right card," said Jennifer Bailey, the Apple vice president overseeing Apple Pay, during a June 8 presentation at Apple's annual Worldwide Developers Conference. A similar feature in Google Wallet uses the phone's location technology to determine when a shopper is near a particular store.

When it comes to loyalty incentives, Apple is in an awkward position. On the one hand, Apple knows that it needs to give shoppers concrete reasons to use any mobile payment, given that it's a new behavior. Offering discounts and special perks is the best way to sharply increase mobile payment acceptance. But offering an Apple Pay-specific loyalty program could further expand the chasm between Apple and retailers.

Apple's initial loyalty move seems destined to quiet retailer concerns, at least for now.  Despite the fanfare around Apple Pay's launch, the product has not revolutionized the point of sale. Apple devotees are steadily adopting Apple Pay, but the plastic card is also attracting renewed interest, and any account that gets added to the Apple Wallet must first be issued as a plastic card. Apple has apparently concluded that to grow its base of shoppers, it must first make nice with its retailers.

Apple Pay is also expanding to the U.K., with more than 250,000 merchant locations lined up to accept Apple Pay in July. The Apple mobile wallet will also be supported by London's transit system, and will work with cards from M&S Bank, Bank of Scotland, Halifax, Ulster Bank, Natwest, American Express, Santander, RBS, Nationwide, HSBC and first direct.