Apple Pay
Somnath Banerjee, April 14, 2015
Introduction
Apple Pay was launched last year (Oct 20, 2014) for the US market. This has far reaching significance in the way we live and transact. In particular, the hospitality industry presents very interesting opportunities. In this article we review the basics of Apple pay and explore ways how it might shape the future.
Executive Summary
- Works with iPhone 6 and 6+
- Needs iOS 8.1
- NFC radio antenna built across the top provides contactless payment
- TouchID provides convenience and security
- Secure Element Chip stores device-specific card numbers
- Passbook stores digital credit cards
- 800M Credit Cards already on file in iTunes + any new card
- All 3 Credit cards, 500 Financial Institutions, 220,000 merchants to support
- Should work with Apple Watch
Apple Pay story
- Pain to manage a bunch of cards
- Cards are also not secure
- Scan all debit and credit cards into iPhone
- In any of the 220K stores, wave phone near terminal to pay
- Transaction is SECURE, and PRIVATE
- No need to deal with cards, just carry phone or watch!
Setup
Consumers can scan credit & debit cards with a camera, manually enter or reuse the existing iTunes card on file. Please review the GigaOm Article for details.
Financial Institutions
Apple Pay is supported by 3 credit cards: Visa, MasterCard and American Express - these cover more than 90% of the market, based on 2012 data from CardHub.
Also, whoever issues the card — typically the bank — has to support Apple Pay as well. Apple added 500 banks since September.
All of the major payment processors — like Stripe, Square, and Braintree — are committed to support it.
Merchants
Key merchants to participate: Macy’s, Duane Reade, McDonald’s, and Whole Foods (all which already support NFC payments).
Note: 220K merchants is still 5.5% of the whole market
Retailers, including Walmart and Best Buy, have already said that they have no plans to adopt Apple Pay. Merchants have the burden of having to buy expensive NFC card readers, which can cost upward of $250 each, and must deal with installation and infrastructure costs. But they may have to eat the cost of new readers, anyway, for the chip and PIN era. It is reasonable to think when merchants upgrade to new card readers, they will opt for systems that are both EMV- and NFC-friendly. (EMV stands for Euro, Mastercard, Visa and is global standard for use with chip and PIN credit cards.)
Security
Apple Pay assigns a randomized code to your credit card and then encrypts and secures that number in your phone. Every time you make a purchase, Apple Pay issues a one-time secure transaction code, making it incredibly difficult to track your credit card number. Adding biometric touch security to that should make a very secure transaction.
A year ago, 110 million credit cards were stolen from Target. In Apple Pay system credit card numbers will not sit in a merchant’s DB; rather, a device-specific number is tied to credit card number as well as to device. In other words, the credit card scanned by Apple Pay is not used to complete transactions. Instead, the issuer generates a different, device-specific number that is stored in the iPhone's hardware (secure element). The issuer receives that number for transactions and connects it to the card number on file for your account. That means even if someone hacked Target and collected these numbers, they would be of no use, since new numbers are tied to specific iPhones.
There's no concern about people accidentally activating purchases if they happen to be too close to the NFC reader: Transaction will happen until Touch ID is activated.
Security at a Glance
- 2-factor authentication with TouchID
- Card number is not stored or shared with merchants
- Instead of actual CC or Debit numbers a UNIQUE number is created, assigned, encrypted and stored on Secure Element.
- Each transaction generates a 1-time dynamic payment number
- If phone is stolen you can SUSPEND using Find-My-Phone
Privacy at a Glance
- Apple does not collect consumer Purchase data
- 3rd parties cannot snoop on your credit card number
Momentum
Apple already has lots of credit card data stored in iTunes. In a recent earnings call, Tim Cook said iTunes had amassed 800 million accounts. PayPal, by comparison, only has 152 million active online accounts, according to Statista.
Apple Watch
When we don’t have a phone or wallet on us, like taking the dog for a walk or may
be going for a long run. Enter the Apple Watch, which is compatible with Apple Pay even without a paired iPhone nearby. No more stuffing cash into your undergarments just in case you needed something while you were out! Being able to pay for things with a wearable device solves a real consumer problem and may be a very compelling reason for Apple Pay adoption.
Who is paying for the system?
Apple is not charging consumers or merchants to use Apple Pay. Anyone can buy a Verifone POS (Apple uses a PAYware Mobile e315) and use it for his or her business. The company does have a commercial agreement with participating banks, but has yet to comment publicly on exactly what those terms are.
Apple Pay adoption rate might be faster due to the following reasons:
- There is no charge for merchants and users for Apple Pay.
- Payment gateways will pay Apple per transaction but investments for fraud handling should be reduced as Apple Pay has better security built in.
- Retailers without NFC terminals will need to upgrade to accept payments.
Competition
Google Wallet had issues with major carriers, who said that the application was harmful to their networks because it required integration with a proprietary piece of hardware called the “secure element.”
Apple Pay and Google Wallet share features, like hardware-level security and ability to hold multiple credit cards. However, Google Wallet currently has no fingerprint recognition integration. Google requires a PIN that you can share with someone else using your smartphone to complete transactions. But Apple Pay won’t work unless user is holding the phone and touching the Touch ID pad with a registered finger.
Sample Applications
Apps who currently have users enter credit card details or have users authorize any transaction by entering CVV will benefit by integrating Apple Pay. Apple Pay does not require any merchant to handle any credit/debit card details of their users and also users do not need to provide their card details to merchants. Moreover, neither a merchant or a user has to pay any fee to Apple for using Apple pay. This is a win-win solution for both Merchants for customer.
Apps that already has Apple pay integrated are:
- Passmarket http://www.imobile3.com/passmarket/
Apple Pay in Hospitality
Restaurants including McDonald’s, Starbucks, Chipotle, and Panera have announced Apple Pay integration. Panera announced integration with Apple Pay. Utilizing the Panera Bread iOS App, guests will be able to place an order from their iPhone 6 or iPhone 6 Plus and check out with Apple Pay using Touch ID, allowing them to more quickly order ahead and have their order ready for pickup or delivery. Panera Bread will accept Apple Pay in all participating bakery-cafes in the United States once Apple Pay hits the market. Panera will install VeriFone payment terminals in all bakery-cafes across the US to support contactless payments.
“At Rubio’s, we take the guest experience very seriously and are always looking for ways to improve it,” said Marc Simon, CEO of Rubio’s. "The Apple Pay function provides our guests with a streamlined option to pay for their order directly from their iPhone 6s or Apple Watch devices. By simplifying the transaction process, guests are now able to focus on enjoying their food.”
iBeacons and location proximity will make contextual offers and smart marketers will get those offers to the guests closer to location and at those moments of need. And Apple Pay will make accepting those offers even more convenient. Apple Pay will provide interesting opportunities to promote and convert last minute impulse ancillary offers.
One-touch payments should be way simpler than a written signature. With OpenTable supporting Apple Pay, restaurants should witness a higher adoption.
Conclusion
Over the years we have witnessed several attempts to replace the consumer’s wallet with a mobile phone. There are three key facets to this: ease of use, adoption by the overall ecosystem and most importantly security and fraud prevention. It seems Apple will get good scores on ease of use. Also, unlike other contenders, Apple is not trying to disenfranchise the other members of the ecosystem. Their central approach is not to break up the pie, but to expand the pie and keep a share of the enhanced piece. Finally with Security, it seems with Secure Element and tokenization and TouchID Apple has a much solid chance. However, time will tell whether Apple can win over the trust and confidence of the consumers and the ecosystem. Apple pay does present very unique opportunities in the travel and hospitality space and potentially closes the gap of the last mile between viewing a contextual offer and consummating the transaction.
Appendix
- Apple Introduction
- Apple pay vs. Paypal or Visa. Article
- Apple pay vs. Google Wallet. Forbes Article
- Apple Developer Getting Started Guide
- Stripe - Collecting Card Information
- Who will pay for the ecosystem - cnet article
- Setup - GigaOm Article
- Cnet Comparison Video - Here
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