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Will Apple Pay Finally Be The Game Changer Mobile Payments Need?

CenturyLink

As early as October, proud owners of the new iPhone 6 will be able to ditch their cash and credit cards at many brick-and-mortar stores in favor of Apple Pay, a feature that allows users to simply hover their Apple devices within range of a payment terminal to pay for goods and services.

The new payment solution is based on a relatively mature technology called near-field communication (NFC), a fast, easy and secure way to wirelessly exchange data between the point-of-sale (POS) system and the consumer.

Apple is certainly not the first player to have introduced a mobile payments solution. The technology has been around for about a decade, yet less than 10 percent of merchants support it, as the Wall Street Journal recently reported. But, while others have promised to replace our physical wallets with digital equivalents, none has managed to muster mainstream success.

"I have counted hundreds of these initiatives over the years, but none of them were there," said Nick Holland, senior analyst specializing in payments at Javelin Strategy and Research, based in California. "A lot of businesses in this space have crashed and burned.”

According to Holland, these products have failed to produce sufficient consumer interest. And while mobile payments are clearly a boon for retailers, technological impediments have prevented merchants from fully supporting NFC, a critical first step in making the technology ubiquitous.

Google, one notable example, launched its NFC-based Google Wallet system back in 2011, but the company has faced challenges bringing it mainstream with retailers and consumers, according to Holland. Isis, now known as Softcard, has faced similar challenges.

However, Apple's recent announcement of Apple Pay is breathing new life into NFC-based payments, as vendors prepare to implement the technology in the iPhone 6, iPhone 6 Plus and Apple Watch.

Indeed, many believe that Apple will be the catalyst for mobile payment success.

What's Been Holding Back Digital Wallets

The mobile payments space has been plagued with a lack of consensus surrounding technologies and ownership of security credentials. But several other key factors have also combined to hold it back.

For one thing, not enough merchants support NFC to make it mainstream. Upgrading a terminal with NFC readers is expensive, regardless of whether it's a mom-and-pop shop, or a national retailer. Best Buy and 7-Eleven, for example, had installed NFC scanners, but removed them earlier this year, in part due to relatively high costs associated with the technology.

In addition, said Holland, consumers and retailers alike are concerned about security and privacy issues. “I think retailers were distrustful [of Google Wallet] because they knew Google was after consumer data on retail customers,” he noted.

Will Apple Be a Catalyst for Change?

The issue is not that merchants don't want to support mobile payment systems. If anything, the technology can help them increase their throughput—something that's particularly helpful to higher-volume businesses. Touchless payments can also provide better customer experiences—for example, by enabling merchants to pair payments with loyalty programs, as restaurant chain Subway is doing with its new app.

What's holding merchants back is a lack of technological infrastructure required to accept these forms of payments, Holland said.

But Apple Pay is launching at a fortunate time, when retailers in the United States are moving toward the EMV payment system. First implemented as the “chip and pin” system, EMV enhances the security of payment cards by making them nearly impossible to clone when compared with traditional magnetic stripe technology. EMV is now implemented using NFC, so as retailers buy new terminals , they often get NFC in the process, according to Holland.

"From a hardware perspective, that part of the situation will have been cracked," he noted.

Apple already has more than 220,000 merchants on board. These include McDonald's, which will use the technology at its drive-through windows, as well as retailers like Whole Foods, Staples, Macy's and Walgreens. Banks and credit card companies, including MasterCard and Visa, are also signed up.

While Apple's name and huge installed base alone will no doubt have a big influence in moving the needle toward mobile payments, the company is also working to ease security and privacy concerns.

Indeed, Apple is implementing what MasterCard's James Anderson calls the most secure ecosystem for mobile payments.

"Apple wanted to deploy the safest and most secure payment option, and saw an opportunity in that space," said Anderson, group head, Mobile Product Development at MasterCard.

For example, said Anderson, the technology uses EMV to encrypt the transaction. EMV is much more secure than the magnetic strip, developed more than 50 years ago.

Cards are also tokenized, noted Anderson, so that the real number on the card is different than that stored on the Secure Element chip on the iPhone.

"That means if that number on the phone is compromised, we can break the association at any point in time," he explained. "And there's a very low risk of compromise being initiated from the iPhone side and producing financial harm."

Finally, Anderson said, Apple's use of Touch ID provides a robust way to identify consumers with biometrics—technology that consumers have become familiar with and that adds an extra layer of authentication.

"Right now [biometrics is] the most secure form of technology deployed at MasterCard," said Anderson.

Javelin Strategy and Research's Holland believes Apple Pay will also resonate where other payment systems did not by virtue of Apple's business model.

"Unlike Google, which is after consumer insights, Apple is fundamentally about selling devices, and there’s greater trust there with both consumers and retailers," he said.

Apple's Pull

But Apple's greatest asset in this area is perhaps its ability to create seamless, enjoyable user experiences and to educate the market on best practices.

It also doesn't hurt that Apple already has a huge collection of credit cards—over 800 million registered iTunes accounts, most linked with credit card accounts—that can be seamlessly imported by users into its Passbook app to start using Apple Pay immediately.

Startups in the space also believe that Apple's entrance will be good for the payments industry at large.

“Just the fact that Apple uses the same ergonomics of holding your phone close to a terminal to make a payment will benefit the entire industry, since mobile users will be educated by those around them," said David Shalaby, CEO of a Toronto-based NFC startup called TapTrack.

Robert MacGregor, CEO of mobile payments company nTrust, based in Vancouver, echoed similar thoughts: "Enabling infrastructure and commitment to protocols creates innovation that will be great for everyone."

While Apple seems to have found innovative solutions to mobile payments, Holland said retailers still have some work ahead of them and will need to aim higher when it comes to in-store payments in the years ahead to ensure a strong customer experience.

"The holy grail," he said, "is to create something where payment is totally in the background and frictionless."