Recently, Apple unveiled two long awaited items, the new iPhone and the Apple Watch, to mass hysteria. Apple set a record for pre-orders by selling 4 million new phones in the first 24 hours of its release; and the most important part of this iPhone isn’t even the phone itself but rather the payment technology inside of it. This third product, Apple Pay, was released with much less hype and fanfare, but it has the potential to change the payments landscape.
What is Apple Pay? Is it Secure?
Apple Pay offers a new medium for consumers to make transactions and provides more convenience by saving you a step in the payment process: swiping your card. This is achieved by using an existing credit card from your iTunes account or adding a card by using the “iSight” camera and snapping a photo of the card to be imported into the software. Once scanned, card information is not saved locally or on Apple Servers. Instead, Apple coordinates with your bank or payment network and links your phone to your account with a Device Account Number. Instead of swiping, Near Field Communication (NFC) technology in the iPhone allows you to pass your device over a sensor at the terminal to transfer payment data to complete your purchase. Your identity is confirmed through your fingerprint by using Apple’s Touch ID biometric technology. The payment data contains nothing more than a random sequence of numbers, a token, which cannot be traced back to personal information.
Apple is touting this product as the future of payments and the most secure way of doing business. However, in light of Apple’s own iCloud security breach, that leaked the nude photos of celebrities, the question many are asking is “how secure is it?” Consumers trust Apple with a plethora of information from their location statistics and contact lists to their personal photos. Yet, the security that was supposed to protect this information was quite abysmal. If such information from a trusted company can be hacked, consumers will be very apprehensive handing over their financial data to Apple. Such uncertainty in the minds of consumers will have a negative effect on consumer adoption of Apple Pay. The ease of waving your phone to complete a transaction seems enticing but consumers’ adoption of this technology is based primarily on fraud protection. “Secure” is only a relative term used until a breach occurs.
Apple Pay will not replace Credit Cards
Apple Pay is in theory “card-less” but does not replace the need for physical credit cards since they are the underlying tool for the software. Financial institutions still need to be involved as the interchange of information from the merchant’s bank to the cardholder’s bank still occurs in the authorization process. Common mishaps with these delicate phones occur quite often, ranging from a dead battery to a broken/cracked screen. Apple Pay only works with a charged iPhone with a screen that can read your fingerprint. If the phone is out of charge or structurally compromised, Apple Pay no longer works. These limitations force the consumer to still carry their physical card as a backup, reinforcing the fact that credit cards will not vanish as a payment method.
Widespread Adoption not likely
The potential for Apple Pay seems enormous, but can it be readily adopted by merchants and consumers? Currently, you can only use Apple Pay at 220,000 retailers compared to the 9 million places you can use your credit/debit cards. Merchants will need to update their existing Point of Sale (POS) terminals to accept Apple Pay and this hardware is quite expensive. It becomes more costly when the front end terminal is linked to the back-end and/or inventory which could prove too much for most businesses to absorb. Apple will also collect a fee from banks to use Apple Pay, 15 cents per $100 transacted (0.15%). The impact of this fee will be passed down. Impacting the existing credit ecosystem will prove difficult for Apple Pay as financial institutions are already trying to improve security with EMV chips embedded into their own cards. Cards are easy and cheap to produce whereas Apple Pay has one basic limitation, the ownership of a new iPhone. This barrier will limit its use to only those who can afford an iPhone thereby placing it into a niche market for loyal Apple Fans.
Apple Pay opens the door for new possibilities in the way consumers make a transaction. However, it is not a game changer in the payment industry as that familiar piece of plastic is not going away any time soon.
image via Apple