Apple Pay may be game-changing play
NEW YORK — The fledgling mobile payments industry faces a crucial test this month as Apple unleashes Apple Pay to its army of new iPhone owners.
Apple is trying to succeed where Google and others so far have largely failed: getting consumers to cast aside physical wallets and use their phones to pay at the checkout counter.
When it launches in the next few weeks (Apple has not confirmed a specific date) Apple Pay will let U.S. owners of the iPhone 6 and 6 Plus models — and eventually folks who have an Apple Watch — use those devices to transact.
Apple is an important catalyst for mobile payments — perhaps the biggest catalyst. With sales of more than 10 million new iPhones, the company is seeding lots of consumers with handsets that can double as digital wallets.
"It's clear that the era of digital payments is upon us," eBay CEO John Donahoe said after announcing this week that PayPal and eBay would be spun off into separate publicly traded companies next year. PayPal is a pioneer in the mobile payments arena but may find itself on the defensive as the Apple Pay launch nears.
By 2018, mobile proximity payments in the USA, which include payments made using a phone to make a physical transaction at the point of sale, will reach $118 billion, up from $3.5 billion in 2014, according to eMarketer.
The appealing promise, which has hung out there for years, is that you won't have to fumble for cash or a plastic credit card while standing at the register. Some consumers are quite comfortable using their phones to pay for coffee or a taxi ride, and many mobile pay customers are motivated by reward points and discounts. Millions buy music, movies, books and apps that they pay for and download directly onto their devices.
Why stop at the phone, or even a smartwatch? How about your refrigerator or your car? "We think every (consumer) device you have is going to be a commerce device," says Ed McLaughlin, the chief emerging-payments officer at MasterCard. "Our lives are moving to these intelligent connected devices and what we do and how we interact and transact moves to them also."
None of this will happen overnight. Only the latest iPhones will be compatible when Apple Pay launches. If you have an older iPhone, an Android handset or another smartphone, you're out of luck, at least under Apple's new system.
OVERCOMING OLD HURDLES
Google Wallet launched in 2011 with a single Sprint Nexus S handset. More phones were added, but for a variety of reasons, Wallet has flopped, though Google hasn't given up.
What's more, shoppers have been paying with cash and plastic for decades, and changing consumer behavior is daunting.
The market has been highly fragmented. Tech and financial giants and under-the-radar startups all jockey in the rush to make paying via cellphone mainstream.
Google has struggled. So has the rebranded Softcard, which recently gave up the name ISIS Wallet because it shared a moniker with a militant group. It was formed in 2010 by a joint venture among AT&T, T-Mobile and Verizon.
"There's no silver bullet, no definite winner out there," Dan Schulman, then of American Express and now the guy who will become PayPal's new CEO after the PayPal-eBay split becomes official, told me in an interview in 2011.
Until proved otherwise, his statement rings true.
Jim McCarthy, global head of innovation and strategic partnerships at Visa, says, "It's just been the Balkans out there, people competing over the wrong things. Historically, Visa competes with card competitors like MasterCard and American Express, as an example. But we don't compete by confusing merchants and customers at the point of sale."
Consumers fret about security, even though a system such as Apple Pay appears to be way more secure than handing your credit card to a waiter. More than 40% of active users surveyed by the Kurt Salmon global management consulting firm worried that their personal information is at risk when making mobile payments.
"I think it's reasonable for people to always have questions about anything that's new and want to understand it. That's healthy and good," says Phil Schiller, Apple's senior vice president for worldwide marketing. "I hope that what everyone sees is that we have done more to try to create something that meets what customers most want."
The new iPhones include a "secure element" chip where credit card information (but not your actual credit card number) is stored as a Device Account Number used to process your payment. Apple verifies your ability to pay with a participating bank. When you go to pay, a dynamic number is issued to the merchant, which can be used only for that one-time transaction.
The merchant doesn't have your actual credit card number, and Apple doesn't know what you bought or how much you spent. To complete an in-person transaction, you must hold the phone within a couple of inches of the point-of-sale terminal while pressing against the Touch ID fingerprint scanner on the phone.
Consumers can store credit cards and review recent transactions in the phone's Passbook app. If your phone is lost or stolen, the fingerprint scanner prevents a crook from using it to pay. You can remotely shut down Apple Pay on your device through the Find My iPhone feature. There's no need to cancel your actual credit cards.
LAUNCHING IN THE REAL WORLD
The system worked fine in a demo, but a crucial question — still unanswered — is how smooth the launch will go in the real world.
"A lot of it hinges on not so much Apple but the merchants that are out there and whether or not that consumer is going to have a good experience the first time they try to use Apple Pay," says eMarketer analyst Bryan Yeager. "That's been one of the key issues that every mobile payments provider has struggled with."
Apple has partnerships with MasterCard, Visa and American Express, along with leading banks that handle more than 83% of U.S. credit card transactions. The merchant list includes Macy's, Bloomingdale's, Disney, Walgreens, Staples, McDonald's, ToysRUs and Whole Foods. Apple relies on NFC (Near Field Communication) technology built into the phones and compatible point of sale terminals. Apple says more than 220,000 locations in the U.S. will be able to accept such payments.
Will Graylin, CEO of the LoopPay mobile payments startup, says it will be difficult persuading tens of millions of merchants to assume the expense of upgrading point-of-sale systems. Graylin says even though there are 270 million NFC-capable smartphones in the market, he cannot find a single Google or Softcard user that relies on their mobile wallet for everyday payments. "Putting NFC on the iPhone 6 will likely not get them to change either," he says. One incentive for businesses to upgrade terminals: an October 2015 deadline for companies to shift to a chip-based smart card standard called EMV, lest they assume liability in the case of fraud.
LoopPay sells a key fob and card case that lets consumers with an iPhone 5 or 5s, and certain Android models, pay with their devices at stores that use "magnetic stripe" point-of-sale terminals that have been around for years. It's an inelegant solution.
Apple itself had eschewed NFC before introducing Apple Pay. Why the change? The company has actually been working behind the scenes on this for a while.
"What we tend to do at Apple is typically get a vision for what we think customers would love — in this case the idea of starting to not need to carry an old-fashioned wallet around filled with plastic — and then work on what are all the right ways to do that," Schiller says.
Even if Apple Pay is a monumental success, it'll be a very long time before anyone ditches the physical wallet. Where else for now to carry a driver's license?
Follow @edbaig on Twitter. Email: ebaig@usatoday.com