Apple’s 'App and Pay' Model Could Ease U.K.'s Security Woes

LONDON—Even though Apple Pay hasn't yet launched in the U.K., experts in the EMV-compliant nation are eager to bring over Apple's mobile wallet to improve card-not-present security.

"Taking a $600 phone and making it emulate a 50-cent piece of plastic is a very uninteresting business model. The breakthrough is that Apple has taken the card-present EMV into the in-app space," said Dave Birch, global ambassador at Consult Hyperion.

Apple Pay's security includes a fingerprint sensor, EMV technology and tokenization (which replaces sensitive account data with a secure value called a token). Though much of Apple Pay's marketing has focused on its use at the point of sale, it is also used for in-app purchases made through Apple devices.

"It's not about tap and pay; it's about app and pay," Birch said during a panel discussion at the Payments Forward Afternoon Tea Discussion on Apple Pay on January 19.

According to Nick Kerigan, managing director of strategy, intelligence and emerging payments at Barclaycard, 25% to 30% of payment volumes are electronic. Out of that batch, in the U.S. 25% to 30% is mobile commerce, and in the U.K. 5% to 10% is mobile commerce, he said.

Indeed, the real opportunity for Apple Pay may be less about the point of sale and more about the security of in-app payments. Even in the U.S., where Apple Pay launched in October, there hasn't been a significant uptick in in-store contactless payments, said Phillip McGriskin, managing director at WorldPay Futures, a new entity of WorldPay formed to bring innovative payment services to market.

Card-based Near Field Communication technology is already familiar to U.K. residents. Londoners can use the Oyster contactless payment card for transit fares, and the city recently began allowing use a bank-issued contactless cards as well. This allowed Transport for London to step away from taking cash for bus fares.

Barclaycard, which supports Apple Pay, has also implemented a range of contactless payment technologies. Even though Barclaycard and its telco partner Orange shut down the Quick Tap contactless mobile payment service in October, the bank has been aggressive in supporting other contactless payment initiatives including contactless stickers, wristbands and gloves.

Quick Tap shut down because its model of working with multiple parties and integrating contactless technology phone-by-phone was not a scalable solution, Kerigan said. Because Apple controls the hardware and other factors, Apple Pay will be more consistent and in turn scale quickly, he predicted.

Biometric security has also been a topic of interest in the U.K. In October, MasterCard partnered with Zwipe, a Norwegian payment technology provider, to launch a contactless card with a built-in fingerprint sensor in the U.K. Apple and other companies, including Samsung, are also building fingerprint sensors into their devices.

"Biometrics is here to stay," said WorldPay's McGriskin. In the next few years, banks will start giving customers biometric authenticators similar to how contactless cards proliferated, he predicted.

But McGriskin wonders what comes after this security push. As well as a hardware manufacturer, Apple is a big-data company, he said. While Apple has said it's not going to sell customer data, it could find some way to monetize the payments and identity data it is collecting, he said.

But there may not be enough data yet to build a business on. According to Infoscout, only 10% of iPhone 6 users have tried Apple Pay.

The mobile wallet market "is a generation away from ubiquity," said Mark Davison, managing partner at Partners Andrews Aldridge. Though, Davison said, a generation in this space is three to four years, given the fast pace of technology.

Apple Pay is likely to overtake Google Wallet's market share in the next month, said Davison, citing data from ITG Market Research. This momentum is quite significant, given that Google Wallet launched in 2011 and Apple Pay has been around for less than half a year, he said.

But in the U.K., Apple Pay might still face challenges due to the already exceptional penetration of contactless products and the less lucrative interchange model compared to the U.S.