M-Commerce: Passbook: Apple’s Passport Into Payments?

Jim Daly

Apple has rolled out its Passbook mobile app for storing and redeeming electronic coupons, boarding passes, and other digital content. Can full-blown payments be far behind?

No company is the subject of more speculation than the notoriously secretive Apple Inc. Lately, frenzied tongues have been wagging about what the computer and digital music and applications behemoth might do in electronic payments.

Speculation hit a fever pitch late last year after Apple unveiled the iPhone 5 with an application called Passbook for storing and using barcode-based boarding passes and movie and event tickets, redeeming loyalty points or electronic coupons, and related functions. Passbook doesn’t do payments itself, but it seems to get Apple oh-so-close to the payments door.

Keep in mind that Apple also has patents or patent applications for payments-related technology such as near-field communication (NFC). And don’t forget those estimated 400 million accounts on iTunes, Apple’s vast music, video, and digital-content site. (Cupertino, Calif.-based Apple reported on Feb. 6 that it had sold its 25 billionth song through iTunes.)

That’s a huge, ready-made customer base should Apple decide to wrap Passbook in a payments jacket.

“It creates a base of interest for transactions to occur,” says Jeff Orr, senior practice director, mobile devices, at Oyster Bay, N.Y.-based ABI Research. “Passbook is a service. If there is a critical mass of Apple device users that see Apple as a trusted portal … one logical extension is to do payments.”

‘There Isn’t Much’

But hold the phone. Some close observers of the mobile-payments scene caution not to read too much into Passbook, which is an application in Apple’s most recent upgrade of its mobile operating system, iOS 6. It’s usable on the iPod touch in addition to the iPhone.

“I look at Passbook as an extension of the iOS capabilities, but I don’t really look at it as a payment solution or as a wallet,” says Rick Oglesby, a senior analyst at Aite Group LLC, Boston. “It’s purely a container for somebody else’s payment solution.”

Adds David Kaminsky, an emerging-technologies analyst at Maynard, Mass.-based Mercator Advisory Group Inc.: “As far as what they have out there right now, there isn’t much.” But he quickly notes, “There is a lot of potential.”

True to form, Apple did not respond to Digital Transactions’ request for comment for this story.

The iTunes Store in mid-March displayed more than 900 apps for Passbook, up from only 25 a month earlier. Apple’s partners enable their customers to download the apps into Passbook, which is sensitive to both time of day and user’s location. Users also can add them through e-mail messages and the partners’ own Web sites. They can see when coupons expire, where concert seats are, and balances on linked retail accounts.

For example, Passbook’s several airline partners facilitate boarding-pass storage. An iPhone user about to take a flight will see his boarding pass with a barcode pop up on the phone’s lockscreen automatically when he gets to the airport. There’s no need to dig it out of electronic storage.

Passbook straddles the line between a holding place for loyalty applications and payments because it lets partners that offer payments work through Passbook. Among them is the Square Wallet from Square Inc., the high-profile provider of mobile payments for micro-businesses. Square Wallet lets consumers find and pay for purchases at Square-accepting merchants.

Another is Starbucks Corp., the leader in closed-loop mobile payments, which are facilitated when the user registers his or her prepaid Starbucks Card. A barcode appears on the user’s smart phone after the Starbucks app is opened for a purchase.

But it’s Starbucks, not Apple, that handles the payments after the Starbucks virtual card is placed in Passbook. (In a move up the merchant scale, Square now happens to be Starbucks’ merchant processor.)

A spokesperson for the Seattle-based coffee retailer says by e-mail that Starbucks has approximately 7 million active mobile-payment users globally, and 20% of them are using Passbook.

“We have seen great success with Passbook,” the spokesperson says. “From the Starbucks app, iPhone and iPod touch users simply need to tap ‘add to Passbook’ once, and just swipe their Starbucks pass in Passbook to pay at a Starbucks store. Passbook is time- and location- enabled, so the Starbucks Card will show on the device’s lockscreen automatically as soon as a customer enters their favorite Starbucks store.”

‘A Long Way To Go’

Another payments provider working with Passbook is Discover Financial Services, the No. 4 general-purpose payment card network by charge volume. Discover’s Passbook app, which went live Dec. 6, lets cardholders redeem rewards, in the form of digital certificates, that they have earned by spending with their Discover cards at 60 partner merchants. A certificate will open when the cardholder is in a partner merchant’s store.

“It gives them a seamless experience,” says Sanjay Gosalia, director of mobile at Riverwoods, Ill.-based Discover. He adds that Discover conducted an e-mail campaign for the new app that became “one of our most-opened e-mails in 2012.”

Discover personnel attending last year’s Apple developer conference first learned Passbook was coming. With the launch of the iPhone 5, Gosalia and his staff decided Passbook could enhance Discover usage and cardholder loyalty.

Discover claims to be the first financial-services company integrated into Passbook. (American Express Co. has an account-management app for Passbook, but it’s not as fully integrated with Passbook as Discover’s, according to Gosalia. AmEx didn’t respond to a Digital Transactions request for comment.)

“We were intrigued,” Gosalia says. “We pulled the trigger very quickly. We felt speed to market was very important.”

While Passbook redemptions do not directly produce revenue for Discover, Gosalia says “you’re able to engage the customer” through the app, and that translates into more cardholder and merchant interest in Discover. “It’s been a material success,” he says.

Passbook clearly has the loyalty and marketing aspects of mobile wallets down, and that, apart from further improvements and more Passbook partners, may be as far as Apple wants to take it. Still, Apple’s activity with patents and the prospect of NFC-based payments has observers thinking Passbook will take on more functions.

“I’m sure that’s where they will go eventually,” says Mary T. Monahan, executive vice president and research director, mobile, at Pleasanton, Calif.-based Javelin Strategy & Research.

Monahan, however, says “there’s still a long way to go.”

‘A Limiting Factor’

The first step is fixing the occasional bugs. Monahan recounts the experience of using a digital movie ticket she obtained through Fandango’s Passbook app. The theater’s ticket taker “did see the ticket on my lockscreen, which was really cool,” she says.

Then, however, the ticket disappeared briefly before reappearing in shrunken form, she says. Ultimately it did what it was supposed to do. “It did get me in,” Monahan says.

But the bigger picture includes at least two issues for Apple, according to Monahan. One is deciding if and how it will play the NFC game.

A second involves other technologies Apple already has that could be applied to loyalty programs. Monahan notes that in the iPhone 5, Siri, the famous technology that uses a female voice to answer questions after querying over the Internet, also easily retrieves apps. That could undercut Passbook as a differentiated service for loyalty apps in one spot. What’s easier than barking a command into a smart phone?

“I am having good luck having Siri pull up all the apps I want,” she says.

NFC, however, is the issue that is on many observers’ minds when they think about Apple, mobile payments, and other gee-whiz stuff. Many expressed disappointment that the iPhone 5 didn’t have it and hope the next version will. Samsung includes NFC in some of its mobile devices and has emerged as Apple’s main smart-phone rival in the U.S. Apple had 36.3% of the smart-phone market in December 2012 versus 21% for No. 2 Samsung, according to Reston, Va.-based research firm comScore Inc.

NFC is a high-capacity radio technology built on a special chip, typically controlled by the telecommunications carrier, that can easily handle loyalty programs and payments. But while the number of mobile phones with NFC is increasing, such phones are still in the minority.

Also, NFC payments would need point-of-sale terminals that can exchange data with the phone’s chip. Only about 300,000 such contactless terminals are in place in the U.S., which has about 8 million card-accepting locations.

The early leaders in mobile payments such as PayPal Inc. and Starbucks have eschewed NFC in favor of other technologies. Two prominent NFC-based systems, Isis, which is a joint venture of three leading mobile carriers, and Google Inc.’s Google Wallet, have struggled. Google’s Android is the No. 1 mobile operating system.

And Samsung, somewhat surprisingly, in late February introduced a non-NFC wallet somewhat similar to Passbook. The new wallet came just two days after the Korean handset maker had agreed to preload Visa Inc.’s NFC-compatible payWave application in its phones.

“Point of sale is now a limiting factor” for NFC payments, says ABI’s Orr.

‘There’s No Margin’

If Apple does adopt NFC in its mobile devices, which also include the iPad tablet computer, it would use the technology for “other stuff” than payments, predicts Aaron McPherson, practice director of worldwide payment strategies at IDC Financial Insights, Framingham, Mass.

“I don’t see them as being a mobile-payment competitor; they are a competitor in digital commerce,” he says.

Why not payments? Apple, according to McPherson, seems unlikely to enter a highly competitive field that isn’t nearly as profitable as the markets it’s already in.

“There’s no margin,” he says. “I think there is a lot of irrationality going on in the [payments] market right now.” He cites as examples “all these people trying to compete on these card swipers.”

Think of Square, Intuit Inc.’s GoPayment, and various offerings from independent sales organizations that give small merchants a card reader that plugs into their smart phone, enabling them to accept credit and debit cards without having a traditional POS terminal tethered to a checkout counter.

Even terminal maker VeriFone Systems Inc. operated such a service, called Sail. In December, however, VeriFone announced it would cease managing its Sail merchant portfolio because doing so wasn’t profitable, and revert to its more familiar role as a technology supplier.

“They’ve gotten out of it for the same reason Apple is staying out of it,” says McPherson.

Patently Speculative

Still, Apple is always doing something that hints at fascinating new products or services baking in the development oven. Late last year, reports surfaced in Silicon Valley publications that the company applied in 2011 for a patent on an intriguing NFC-based system that would allow an iPhone user who can’t find an ATM to send a request to nearby consumers for a small amount of cash. A friend could receive the request and lend the requester funds electronically, possibly through iTunes.

Aite’s Oglesby says Apple would be “horribly incompetent” if it were not testing NFC-related ideas, even if they don’t pan out.

“That they’re filing patents in an area is not surprising,” Oglesby says. “I think they have lots of ideas that they patent, but only a certain amount of them make it into a product.”

Clearly, Apple, whose high-flying stock took a hit early this year after the company failed to meet analysts’ expectations for quarterly financial results and iPhone sales—it sold a mere 47.8 million iPhones versus an expected 50 million—is being very deliberate about any entry into payments.

That’s especially true now that Apple observers are looking for any sign the company has lost its mojo without its iconic co-founder and former chief executive Steve Jobs, who died in October 2011.

“Their stance to this point has been they want to be able to showcase the technology and have an excellent experience though applications and services,” says Orr. If not, “the perceived value of that functionality goes down pretty quickly.”