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With Apple Pay, Mobile Payments Have Arrived in the US

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The vision that Apple’s founder Steve Jobs once had of a new type of mobile phone that could become so instrumental and integrated into people’s lives that consumers would rather leave their wallet at home than their iPhone is starting to take shape.

After years of speculation and numerous rumors, Apple officially made its entry into the US mobile payments’ ecosystem as it unveiled Apple Pay at its recent product launch event. Mobile payments, which has long been promised for its potential to revolutionize the entire consumer shopping experience has so far struggled to gain much traction from retailers and consumers. Now a brand with a proven track record of changing consumer behavior has joined the movement.

“As it turns out, most people who have worked on this have started by focusing on creating a business model that was centered around their self-interest rather than focusing on the user experience,” Apple CEO Tim Cook said at the Apple Pay announcement. “We love this kind of problem. This is exactly what Apple does best.”

Apple’s payments play

Apple’s new mobile payments system, Apple Pay, will leverage the short-range technology known as Near Field Communications. NFC, which has sputtered at times itself, has long been considered one of the leading technologies for eventually powering proximity mobile payments. Apple, which was the last NFC holdout among mobile phone device manufacturers, will embed the chip into its upcoming line of smartphones, the iPhone 6 and iPhone 6 Plus, and its new line of wearable devices, Apple Watch.

As part of its new mobile payments system, Apple announced that it is partnering with Visa, MasterCard and American Express as well as issuing banks that handle 83% of all credit card purchases. Although the banks were not named, Apple’s presentation did include logos of JP Morgan Chase, Bank of America, USAA, Citigroup, US Bank, Barclays and Capital One among others. Apple Pay will be available at 220,000 US merchant locations that accept mobile payments via NFC. Apple specifically highlighted that is working with retailers, including Duane Reade, Macy’s, McDonald’s, Staples, Walgreens and Whole Foods. McDonald’s is even adding Apple Pay to its drive through, enabling the consumer to tab his or her phone at pick-up.

Users will be able to fund the mobile wallet using the credit and debit card they already have on file in iTunes. In addition, users can load additional cards to their existing iOS Passbook app by taking a photo with the phone and then going to the bank’s mobile app to verify the card. Apple’s Touch ID sensor will be used to authenticate the payment. In addition, the card details are not stored on the phone, but users are assigned a randomly generated number in the cloud. That number, or token, is then stored on the device’s secure element. This concept known as tokenization eliminates the need to send payment card numbers between a POS terminal and a merchant’s transaction systems. Lastly, if a consumer’s phone is lost or stolen, a user can use Find My iPhone to cancel all transactions.

Apple Pay also can be used for online transactions to enable a one-touch checkout experience, which is similar to a one-touch payment product recently unveiled by PayPal. There’s no need for a user to enter a card number or personal information. A number of businesses are already incorporating this one-touch functionality into its mobile apps. Baseball fans can instantly buy tickets through MLB.com. OpenTable has integrated with Apple Pay to enable diners at participating restaurants to pay for checks with just a single touch.

Apple has long hinted at a payments play

Apple has long been one of the best positioned tech companies that could enter the payments space thanks to several factors, including its loyal consumer base and recent product launches. Over the years, Apple has been slowing lining up the payment puzzle pieces without ever a mention of their potential payment application at the product launches.

First and foremost, Apple has such a loyal following that its product alone could take mobile payments from just being a pipe dream for many in the payments industry to mainstream in just a matter of months.  Apple’s move into this space alone will create increased awareness of mobile payments and their potential benefits to improve the customer experience. The unveiling of Apple Pay means that millions of consumers and retailers will likely be introduced to mobile payments for the first time and drive a potential behavioral shift in the way that consumers pay.

Over the years, Apple also had gained considerable experience in the retail space first through its e-commerce site, iTunes, and later through its more than 400 bricks-and-mortar stores. Apple has been selling songs, movies and iPhone apps to its 800 million users for years and could easily transition that experience into other digital transactions. As a result, Apple has a depository of card details for all these users, which makes mobile payments a natural next step.

Lastly, Apple made hints at a payments’ play came with the introduction of Passbook and its Touch ID sensor in recent years. In June 2012, Apple introduced Passbook, an application that was first released as part of it iOS6 operating system. Passbook has the ability to store boarding passes, movie tickets, retail coupons and loyalty cards with updates in real time. The application also has geolocation capabilities, which enables the app to automatically pull up the proper card or pass when the consumer is in the relevant venue. In September 2013, Apple unveiled a built-in fingerprint scanner called the Touch ID sensor, which was integrated into the newly designed home button of the iPhone 5 model. Besides unlocking a user’s phone, this added functionality will enable users to purchase apps, music, books and other digital material Apple sells through iTunes all with the tap of a finger. Earlier this summer, Apple opened up the Touch ID sensor to third-party developers, which means that the fingerprint scanner can now be incorporated into mobile banking or payment apps.

Apple opted for a wait-and-see approach

Apple is well-known for its disruptive tendencies and ultimately chose a wait-and-see approach for mobile payments. Apple didn’t invent the first PC, the first music player nor the first smartphone. In each industry, it waited for the markets to mature a bit and then disrupted them by ushering in an improved customer experience that eliminated a consumer pain point.

In the case of mobile payments, it has allowed other companies — and even competitors such as Google — to come to market first with mobile payments products and stumble. Instead of rushing a product to market, Apple observed the hurdles that held back adoption, including consumer fears around privacy and security, an uninformed consumer base, an absence of the needed infrastructure to execute such payments and the convenience of already established payment methods.

One of the reasons that NFC-enabled mobile wallets have struggled in the past is because merchants didn’t have POS terminals equipped with the necessary technology to accept such payments. Apple introduced an NFC-platform at an ideal time. That is because as merchants upgrade their terminals to meet the October 2015 deadline for accepting EMV chip cards, these new terminals will likely have NFC functionality.

What Apple Pay provides is more of a complete solution that brings together several different mobile payments options from different retailers within a single app. In addition, all this will be integrated into the already existing Passbook app, which has become popular with marketers wanting to target their consumer base. This is an important aspect. Ultimately, mobile payments must be as cheap, safe and easy to use as traditional payment methods to even be considered a viable option. Merely making mobile payment infrastructure ubiquitous likely won’t be enough to entice a broad consumer base, however. In order to encourage wider adoption and ensure high usage, mobile payment players will have to provide a value add, which could come in many forms, including monetary savings, improved security, ease of use or increased loyalty. Apple Pay will marry the mobile payments functionality with the marketing elements that exist in Passbook today for the type of experience that could challenge existing payment methods.

Apple may not have been the first mover into mobile payments, but today’s move will likely be remembered as one of the defining moments for mobile payments adoption, especially in the US. To date, no other mobile payments system has been announced with so many partners, including numerous card networks, bank issuers and retailers on board. The integration of so many different retail partners within the same digital wallet will likely be a boon in terms of consumer adoption as it will essentially train consumers as to how to use Apple Pay. Given that Apple Pay will only be available to those in the Apple ecosystem, it will cut out Android users that make up the other half the mobile user base in the US. That being said, if any brand can change consumer behavior to the point that a consumer pays for an in-store purchase with a mobile phone versus cash or even a credit card, it is Apple.


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