Apple's Headphone Plan May Unplug the Mobile Payments Market

Apple's plan to introduce a new Lightning connector for headphones, potentially replacing the standard 3.5mm jack, could give mobile payment companies a major hardware headache.

Robert Walsh, manager of platform accessories at Apple, unveiled the Lightning headphone module last week during Apple's worldwide developer conference. Several reports indicate that Apple could nix the 3.5mm jack, which companies like Square rely on for connectivity, rather than let it coexist with the updated Lightning port.

"Any company trying to build a product around the outside of the Apple case [for iPhones or iPads] stands a significant risk of having that capability diminished by whatever Apple chooses to do," says Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm.

Many companies faced the same problem when Apple eliminated its 30-pin connector to introduce the original Lightning port for charging and data connectivity for the iPhone 5. Apple's decision to move the headphone jack to the bottom of the phone in its iPhone 5 design, putting it in close proximity to the Lightning port, may have been an experimental first step toward combining the functions of the two ports.

The companies that make mobile card readers would have to license Apple's technology to either add a Lightning connector to their product designs or provide an adapter. This would put pressure on the business model of companies like Square, which places a strong emphasis on making its device free.

Apple's decision may unintentionally hasten the mobile payments industry's push to accepting EMV-chip cards. In regions where EMV cards are more widespread, devices such as the PayPal Here reader double as a PIN pad and use a wireless Bluetooth signal to communicate with phones.

Bluetooth can be used on iOS, Android, Windows and Blackberry devices, allowing mobile payments companies to avoid splitting their product lines into Lightning-compatible readers for Apple devices and 3.5mm-compatible readers for all other hardware.

Square and Apple did not respond to requests for comment by deadline.

Apple's plans for its headphone jack may also signal a strengthening of the wall around its ecosystem, Mott says. The only choice for companies that want to somehow be a part of "that pristine and lucrative community of Apple users" is going to have to work directly with Apple, he says.

Such a scenario may exclude a number of smaller players who do not have significant negotiating power with Apple, Mott adds.

"When you think of what Apple is capable of doing, they don't really need a four-party payment system and particularly don't need acquirers or other parties to get in the middle of a transaction," Mott says. As Apple defends its walled garden and refines its ecosystem, the company eventually starts excluding "a lot of these startups that sort of piggy-back on the system they have," he adds.

The headphone jack redesign also fits with Apple's recent acquisition of headphone maker Beats Electronics. Many tech sites report that Beats is developing a set of headphones to work with the Lightning connector.

If Apple removes the current headphone jack on future iPhones, it would free up space for other internal technology. Apple Insider speculates that Apple could add a more powerful battery to deliver a high-resolution display if it had more room in the handset.