Cover Story: Can Apple Save Mobile Wallets?

Though the Apple Pay service has drawbacks, Apple’s legendary marketing chops will probably, at long last, let wallets cash in.

What hath Apple wrought? At a hugely hyped event Sept. 9 near its headquarters in Cupertino, Calif., Apple Inc. unveiled the next iteration of its iconic iPhone—the iPhone 6 and its large-screen sibling, the iPhone 6 Plus—along with Apple Watch. But the computer maker and iTunes developer also confirmed rampant rumors that it was getting into the mobile-payments business with the unveiling of Apple Pay.

Never a company to make small plans, chief executive Tim Cook trumpeted Apple Pay as an “entirely new payment process.” Actually, for iPhone 6 users, the payment process will differ little from what he or she may already be doing at Starbucks or a few other merchants that have embraced mobile payments.

Under the hood, however, Apple Pay will draw on the iPhone 6’s near-field communication (NFC) antenna for short-range radio communication between the device and contactless point-of-sale terminals, facilitate tokenization of card numbers, and add in its Touch ID fingerprint biometrics to produce what Apple says will be a fast and secure transaction. The service is scheduled to go live this month as part of Apple’s new iOS 8 mobile operating system.

Merchants, says Apple, will not touch any cardholder data. Security became a sensitive issue for Apple just days before the event with revelations that celebrities’ nude photos stored on its iCloud service had been stolen, but Cook and his top executives managed to keep the attention focused on the iPhone 6.

As only Apple with its unmatched marketing prowess can, the company unleashed a torrent of media coverage about mobile wallets, previously an obscure topic mainly of interest to early tech adopters and zealots on the R&D floors of startups and payment processors.

Apple has 800 million users of its iTunes music and digital-content service, the majority of whom have registered a payment card to fund purchases, which means Apple can quickly marshal hundreds of millions of accounts for service in Apple Pay. Suddenly everyone was talking about mobile wallets, even editorial writers at staid newspapers such as the Chicago Tribune.

Barely a Blip

But can Apple succeed in a payments niche that, with the exception of PayPal Inc., which might exceed $40 billion in mobile volume this year, is just not feeling the love from either consumers or merchants? By some estimates, 200 or more mobile wallets from startups and big companies alike are in the market worldwide, few with notable success. Mobile wallets have frustrated some very large companies.

Visa Inc. recently took its V.me wallet into the shop, did some tinkering, and emerged with the more streamlined Visa Checkout. Plagued by an overly complicated operational model and supporting cast at its 2011 launch, rejection by telecommunications carriers, and underwhelming consumer interest, Google Inc. has given its NFC-based Google Wallet a major facelift and a few other nips and tucks along the way.

After lackluster adoption, merchant processor Square Inc. this spring dumped its Square Wallet and replaced it with the less-ambitious Square Order, which lets a consumer store payment cards to pay in advance for orders at cafes and coffee shops. Square had hoped its role as processor for Starbucks Corp. and its popular closed-loop mobile-pay service would lift Square Wallet’s fortunes, but that didn’t happen (“Is It Still Hip To Be Square?” September).

The retailer-controlled Merchant Customer Exchange (MCX) mobile wallet—recently branded “CurrentC”—still hasn’t rolled out after more than two years of development. And the telco-backed Isis, which has struggled with tepid interest by credit card issuers that have to pay to be in its NFC wallet, recently was forced into an unplanned name change—to “Softcard”—to avoid association with a brutal group of Islamic fighters known by one of several English acronyms as “Isis”.

Although consumers seem to be warming to the notion of mobile wallets, mobile-wallet volumes account for barely a blip on the payments screen. The Federal Reserve’s latest payments study estimated there were 251 million mobile-wallet transactions in 2012 worth not quite $9.5 billion (“The Fed Gets a Fix on Mobile Wallets,” September). The dollar volume represents a minuscule one-quarter of 1% of nearly $4 trillion in general-purpose credit and debit card purchases that year.

Admittedly, two years is a long time in the short history of mobile wallets, but with the exception of PayPal few if any of the general-purpose wallets have made significant headway since then.

Missing Merchants

But Apple’s Cook indicated he had diagnosed what ails mobile wallets.

“Most people that have worked on this have started by focusing on creating a business model that was centered around their self interest instead of focusing on the user experience,” he said. “We love this kind of problem. This is what Apple does best.”

Nonetheless, Apple has come up with a solution that offers no obvious incentives to either consumers or merchants, though merchants will be glad to know they won’t be paying extra to accept the service. Apple Pay does not have an offers or rewards program when the conventional wisdom has it that such perks are essential for mobile commerce, for example.

Also, according to an industry source, payment card issuers apparently will be paying about 15 basis points (0.15%) of the transaction to Apple for its role as a “token-assurance provider.” That will happen when the user charges an Apple Pay purchase to a digitized version of an issuer’s card that he or she has stored in Apple’s Passbook mobile application, through which the user accesses Apple Pay. So issuers will be paying Apple for digital security in addition to fees they also will be paying to Visa and MasterCard for their new token services.

Plus, the iPhone has lost market share in recent years as rival manufacturers such as Samsung have introduced popular smart phones running Google’s Android operating system. In 2013, iPhone users accounted for 40% of all U.S. smart-phone owners, according to market-research firm eMarketer Inc., although eMarketer estimates Apple’s share will rise to 41% in 2014. Android users comprised 50.5% of all U.S. smart-phone owners last year; New York City-based eMarketer estimates Android’s share to rise to 51.6% by year’s end.

Apple Pay already has enemies in the field. MCX, whose system is expected to move many transactions via the low-cost automated clearing house network, reportedly demands exclusivity by its merchants. While Apple has an impressive list of merchant acceptors, the list doesn’t include MCX members such as No. 1 retailer Wal-Mart Stores Inc., Best Buy Co., 7-Eleven Inc., CVS/pharmacy, ExxonMobil Corp. and many other national merchants.

MCX member Target Corp. will let its e-commerce site accept Apple Pay. It remains to be seen if the demand created by Apple Pay will be sufficient to change MCX’s policy.

“They’re missing some of the biggest merchants with the most volume, at least in the physical context,” says Jeff Crawford, manager of payment innovation and strategy at Annapolis, Md.-based First Annapolis Consulting Inc. “That’s something they’ve got to be thinking about.”

‘Brain-Dead Simple’

So can Apple save the mobile wallet? Despite Apple Pay’s apparent shortcomings, a number of executives within and around the payments industry say “yes.”

“If anybody is going to do it, it is Apple,” says Tim Sloane, vice president of payments innovation at Maynard, Mass.-based research and consulting firm Mercator Advisory Group Inc. “They’ve made it brain-dead simple.”

Henry Helgeson, chief executive of Boston-based processor Merchant Warehouse, refers to Apple’s tech-savvy customer base.

“It takes Apple users half as long to adopt technology as it does other brands,” he says. “It gives the concept of the wallet a lot of credibility.”

Sloane notes there is more to Apple Pay than just the gee-whiz NFC technology, which can facilitate provisioning of electronic offers, boarding passes, and other functions besides payments. (NFC is the core technology behind the Google and Softcard wallets and is built into many Android smart phones.)

What’s more, Apple Pay’s use of tokenization comes just as chip card payments based on the Europay-MasterCard-Visa (EMV) chip card standard are arriving in the U.S. to replace the outmoded and insecure magnetic-stripe payment card. EMV and NFC work hand in hand. In fact, the vast majority of chip-card-reading terminals now being deployed ahead of a major EMV deadline next October are equipped with NFC chips, which work with EMV terminals supporting contactless card payments.

Leading U.S. point-of-sale terminal maker VeriFone Systems Inc. reported with its latest quarterly financials that nearly 80% of its products shipped in the U.S. were EMV-capable, up from 70% early in the year, and that nearly all of its EMV hardware includes an NFC chip. VeriFone competitor Ingenico Group said 70% of its deployed terminals are contactless and NFC-enabled.

Just because a terminal has an NFC chip doesn’t mean it could take an Apple Pay, Google Wallet, or Softcard transaction, however. The terminal must have the right software and the NFC functionality activated. Not many merchants have done that yet. There are only about 220,000 live contactless merchant locations at present out of about 8 million U.S. card-accepting locations, and many of these NFC locations are vending machines. But clearly the foundation for contactless NFC payments is being laid.

Payment companies of all stripes expect Apple to spur further development of the mobile-payment foundation. Even other mobile-payments schemes are welcoming Apple Pay.

“This shift is going to happen fast,” says Kate Reynolds, head of research and development at LevelUp, a mobile-commerce offers and payment system from Boston-based Scvngr Inc. that counts 1.4 million consumer users and 14,000 merchant acceptors. “We’re excited about the Apple product because it’s going to expand our reach, it’s going to give us more exposure.”

Reynolds says that iPhone 6 users will be able load systems like LevelUp, not just general-purpose payment cards, into Passbook for use with Apple Pay. And though LevelUp currently uses QR codes to facilitate point-of-sale payments, it will be adding NFC capabilities.

Curiously, minutes after Cook and other Apple execs had cleared off the stage, even Isis/Softcard gave a thumbs-up for Apple Pay—a wallet within a wallet, so to speak.

“We think that today’s announcement by Apple to support NFC is very significant and sets the stage for rapid-scale adoption of mobile commerce,” chief executive Michael Abbott said in a blog post. “We would like to let you know that we are actively working with Apple to enable Softcard on the iPhone in 2015—using an integrated secure SIM-based hardware solution.”

The SIM, or secure identity module, is a chip in a mobile phone that identifies the device to the mobile network and is controlled by the carrier. Softcard is backed by AT&T Mobility, Verizon Wireless, and T-Mobile USA.

‘High-Quality Transactions’

One reason Apple Pay could vault to the head of the pack is its many partners at launch. The company is working with 11 credit card issuers that it says represent 83% of U.S. charge volume, including such biggies as Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., and American Express Co. “It looks pretty exciting and innovative,” says Scott Rau, director of mobile payments at Chase Card Services.

This is important because one of the factors holding back products like Google Wallet and Softcard is scant issuer support.

Other Apple partners include the Visa, MasterCard Inc., and AmEx general-purpose networks, with Discover Financial Services to be added soon. Six processors also are on board.

Apple approached MasterCard about 22 months ago about the possibility of a payments service, according to James Anderson, group head, platform, for emerging payments at MasterCard.

“They wanted to do high-quality transactions,” he says. “They wanted to not deal with the real card number in the device, hence tokenization.” He adds that an Apple Pay transaction charged to a MasterCard-branded card will be treated the same as a transaction involving MasterCard’s PayPass contactless cards.

Matt Dill, senior vice president and head of innovation and strategic partnerships at Visa, says few consumers realize how much technology goes into mobile payments. Visa this summer announced its Visa Token Service, a system that provisions tokens—digital replacements for cards’ 16-digit primary account numbers (PANs) that are useless to fraudsters—to smart phones.

“I think the Apple service is really pulling out the power of what’s happening below the water line,” Dill says.

Indeed, Apple Pay will generate a lot of activity below that digital water line. An iPhone 6 user can designate his or her payment card for iTunes as the default payment mechanism for Apple Pay. Or, the user can take pictures of another card with the iPhone’s camera for inclusion in Passbook. The data are transmitted to Apple, which in turn verifies it with the issuer. The issuer then requests that the card network generate a token for the PAN, to be placed on the iPhone’s secure element, which Apple controls.

During an in-store purchase, the user selects the card in Passbook that he wants to use and taps the iPhone on an NFC-enabled contactless terminal while holding the Touch ID button on the screen. Touch ID accesses his previously encoded digitized fingerprint. The system then generates a one-time-use cryptogram that the issuer ascertains is associated with the card token. If all checks out, the purchase is approved in less than a second.

By promoting the use of tokens and adding fingerprint biometrics with the iPhone 6 as another layer of security, Apple can justify charging issuers its fee of 15 basis points on each transaction, according to the source cited earlier. “It’s now a higher level of assurance, quite frankly, than our current world in which a person hands over a card,” says the source, who has spoken about Apple Pay with informed payments executives, most on the merchant-acquiring side. “You can’t ask for a person’s fingerprint at the point of sale.”

It’s not clear who would be liable if an approved transaction proves fraudulent, but in such a case the issuer would be justified in charging the fee back to Apple, according to the source.

Apple Pay also is configured for e-commerce purchases via an in-app system. Contactless payments with the coming NFC-enabled Apple Watch will use Passbook and tokenization, but not Touch ID.

Also beneath the water line, Apple Pay could spell trouble for rival wallets, including Google’s, that have adopted a new form of NFC called host card emulation (HCE). That technology allows issuers to download tokenized credentials directly to phones, bypassing the device-based secure element (“NFC’s Cloudburst,” June). As noted, the iPhone 6 will rely on a secure element to lock down and process the tokenized data, which means the phone will not be available for HCE.

HCE appeals to banks and other issuers because it lets them provision mobile devices without working out access arrangements on terms dictated by the organization—often the mobile carrier or handset maker—that controls the secure element. That leaves issuers not willing to play by Apple’s rules on the outside looking in and keeps Apple devices off limits for issuers that want to leverage HCE.

“Apple has opted to control the entire payments ecosystem on the Apple device,” says Doug Yeager, chief executive of SimplyTapp, the Austin, Texas-based company that developed HCE for KitKat, the current version of Android, in an email. “Android is leaving it open.”

‘A Multiyear Story’

While Apple dominated the mobile-payments news as summer faded, activity by other wallet developers has been furious of late. In July, Visa traded in its V.me wallet for the more streamlined Visa Checkout service for use in e-commerce payments. Visa simplified the checkout experience for users as well as the integration process for application developers, says Chris Boncimino, Visa senior vice president of digital solutions, developed markets. Now the network is giving Visa Checkout a massive marketing push, including social-network and network TV ads.

“We’re going to light up the channels,” says Boncimino, declining to disclose the campaign’s cost.

MasterCard’s MasterPass wallet platform, which banks can white-label as their own product, got a big boost in August when Citigroup Inc. revealed it was using the platform as the basis for its new Citi Wallet. MasterPass is now operating in 10 countries with “tens of thousands” of merchant acceptors and will be entering four more national markets by year’s end, chief executive Ajay Banga told investors in July.

“The wallet space is nascent,” says Vib Prasad, group head of MasterPass. “We look at a MasterPass as not a wallet; it’s a platform to connect to our digital-acceptance network. We think of every device as a commerce device—it’s really that vision of enabling these devices to connect to our acceptance network.”

Meanwhile, e-commerce leader Amazon.com Inc. quietly debuted a trial version of its Amazon Wallet in July. The free Android app is available on Amazon’s own App Store and on Google Play. It is also available pre-installed on Amazon’s new smart phone, the Fire.

While Amazon has launched a number of closely watched initiatives in payments— the company rolled out payments for physical stores for the first time in August with a point-of-sale service called Local Register—the wallet appears to be a modest effort, bearing more resemblance to Apple’s pre-Apple Pay Passbook app than to more ambitious offerings.

For the beta version, users can store gift, loyalty, and membership cards but not general-purpose credit and debit cards. The user’s Amazon Wallet is linked to his online Amazon account, where he can view and manage any cards loaded to the wallet as well as credit and debit cards he uses on the Amazon site. The online page also shows Shop with Points and Amazon Payments stored-value balances.

Back at Apple, with iWatch not rolling out until next year and the iOS operating system constantly being upgraded, Apple Pay could evolve rapidly and fill in some of the holes apparent at its rollout. And who knows what’s coming after that?

“This may be a multiyear story, rather than multimonth,” says Crawford of First Annapolis.

—With additional reporting by John Stewart and Kevin Woodward

 

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What’s in a Name? Mobile Wallets Search for the Answer

“CurrentC” and “Softcard.” Those are the new consumer-facing brands of the retailer-controlled Merchant Customer Exchange (MCX) and telco-controlled Isis mobile wallets, respectively.

CurrentC will not be available outside of testing until next year. First announced in 2012, MCX’s wallet aims to give participating retailers a service that eschews the traditional card networks in an effort to lower payment costs.

MCX had indicated long ago that it might use a brand apart from the obscure “MCX” when it goes live. The company declined to comment beyond a press release, which did not explain how it came up with “CurrentC.”

When at full scale, more than 110,000 merchant locations will accept CurrentC, said MCX. Some of the participating retailers include Wal-Mart, Target, Best Buy, Southwest Airlines, 7-Eleven, Shell, CVS, and Dunkin’ Donuts.

The Needham, Mass.-based organization says the wallet will be enabled for smart phones using Apple Inc.’s iOS and Google Inc.’s Android operating systems. The service relies on barcode scanning to complete a transaction. In addition to a payments function, the app also will store and automatically apply offers and track a consumer’s loyalty-program participation.

CurrentC transactions will be secured with a token that is used in lieu of sending cardholder data each time, MCX says. The app will use a barcode unique to a particular transaction and will not require additional hardware from consumers or most merchants.

The significance of the MCX announcement shortly before Apple Inc.’s unveiling of Apple Pay Sept. 9 can be read a couple of different ways.

“It’s a reminder that they’re still there,” says Mary Monahan, executive vice president and research director for mobile at Pleasanton, Calif.-based Javelin Strategy & Research. “We’re at the table.”

Even without many details, CurrentC’s announcement is significant, says consultant Steve Mott of Stamford, Conn.-based BetterBuyDesign. Some merchants are testing the service with actual transactions, an expansion from early activity. CurrentC also is using tokenization technology from Paydiant Inc., which is providing the mobile-wallet technology. And, it provides a preview of the benefit/value proposition with a larger focus on marketing than on payments, Mott says.

“Taken together, these steps verify the sustaining nature of this effort, which has already changed the conversation over how payments should be done in the future,” he says. “This announcement underscores the reality of an alternative to the legacy payments-system approaches to transacting.”

Meanwhile, Isis, which is backed by AT&T Inc., Verizon Wireless, and T-Mobile USA, has changed its name to Softcard. The new name and logo soon will festoon the enterprise’s Web site and mobile app. Isis said it would rebrand to disassociate itself from the violent Islamic group that has taken over large parts of Syria and Iraq and has several English-language acronyms, including “Isis.”

The rebranding after nearly four years of using the Isis name will be fraught with obstacles, observers say. Softcard declined comment beyond a press release.

“It’ll be tough to take all of that branding and start over,” Monahan says. “They poured a lot of money into [Isis] and now they have to start from ground zero.”

In an unscientific poll, Digital Transactions News recently asked readers how they liked Softcard as Isis’s new name. Fifty-four percent of respondents replied “not at all” while 27% clicked “I like it a lot.” Fifteen percent said “It’s OK,” and 4% had no opinion.

—Kevin Woodward

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Apple Pay’s Launch Partners

Networks: Visa, MasterCard, American Express.*

Issuers: Bank of America, JPMorgan Chase, Citigroup, American Express, Wells Fargo, Capital One, U.S. Bank, Navy Federal Credit Union, USAA, PNC, Barclays.

Processors: Chase Paymentech, First Data Corp., CyberSource/Authorize.net, Total System Services (TSYS), Stripe.

Merchant Acceptors

In-store: McDonald’s, Macy’s/Bloomingdale’s, Walgreens/Duane Reade, Disney (stores and parks), Staples, Subway, Whole Foods Market, Nike, Toys ‘R Us, Petco/Unleashed.

In-App/Online: Target, Groupon, Panera, Starbucks, Instacart, Tickets.com, Sephora, Uber, MLB.com, OpenTable.

*Discover is in talks with Apple

Source: First Annapolis Consulting, Apple, Digital Transactions News