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Acceptance of mobile wallets by consumers will rely on superior data security, shifting demographics and purchasing patterns among shoppers, the looming EMV deadline, and Apple’s ability to add more value-added services, says Steve Cadden.
It’s now been several weeks since Apple Inc. announced Apple Pay, and those of us in the payments industry have had some time to analyze the potential impact on how we do business. Apple Pay is a noteworthy addition to the industry’s emerging technologies and could prove to be a factor in merchants’ adoption of upgraded, more secure processing equipment and software options.
The security of transactions continues to be a high priority. Statistics from Intuit Inc. tell us that more than half of U.S. merchants don’t accept payment cards, and small businesses in particular are losing thousands of dollars per year in potential business to competitors that do accept them. Why do businesses continue to resist card acceptance? While there are different answers for every business, the continuous news reports of high-profile data-security breaches could easily make the case for a fence-sitting merchant to maintain the status quo and avoid cards. There are a number of solutions such as tokenization to help beef up security, but merchants can still be scared off by factors such as potential upfront and monthly costs and a need for equipment replacement.
The EMV Shift
Apple Pay’s tokenization technology works within the app and creates a security environment in which the customer’s mobile device—at this time only an iPhone 6 or 6 Plus or Apple Watch—manages the payment data. The device identifies the customer as the valid user with a thumbprint ID, and the app creates a token for the transaction that is not stored on the merchant’s processing equipment or software. If a merchant’s equipment were to experience a data breach, no Apple Pay transactions would be part of the stolen data.
One of the driving forces behind the adoption of new payment technologies is the payment card industry’s liability shift, which takes place in October 2015 and will directly affect acquirers, issuers, and merchants. By this date, the party that does not support processing equipment compatible with the Europay-MasterCard-Visa (EMV) chip card standard—either the issuer or merchant—will assume liability for counterfeit card transactions.
Apple Pay uses an EMV technology called near-field communication (NFC)—also known as “tap and go”—to transmit the payment token to a merchant’s processing equipment. The customer can wave his or her iPhone or Apple Watch near an NFC point-of-sale device and pay for a purchase; the payment data will not be stored on either the merchant’s equipment or the customer’s payment device. EMV compatibility includes both NFC and chip-and-PIN technology, so upgrading will enable a merchant to accept the soon-to-be-standard chip-and-PIN cards and the NFC technology that enables Apple Pay.
So the formula is simple: Processing equipment upgraded to EMV compatibility plus customers who use Apple Pay equals the potential for merchants to add more customers and increase data security. It’s a win-win, you would think.
Favorable Demographics
But mobile wallets like Apple Pay have been around for several years and have not caught on with U.S. consumers. A 2013 study by PricewaterhouseCoopers found that security and privacy concerns were two of the biggest obstacles to consumers’ adoption of previously released mobile wallets such as Google Wallet. In addition, a report from the Wharton School of Business indicates that many consumers simply do not think mobile wallets are necessary and do not see the advantage over more standard methods of payment card usage.
However, Apple hopes consumers will be confident in the Apple Pay solution, and its timing may be right on target. Not only should more merchants be adopting NFC and EMV payment technology in advance of the liability shift, but also there are other important issues in play.
First, there is the growing consumer market. According to the U.S. Census Bureau, there are currently more than 80 million millennials—adult consumers between the ages of 18 and 29—living in the United States, along with approximately 25 million teenagers. This media-savvy group already uses their smart phones for every aspect of their daily lives. The Wharton report indicated that more than half of respondents between 18 and 29 are more likely to use mobile wallets than those in older age groups. As millennials grow older and move into the larger-ticket purchase market, they will be replaced by post-millennials and their younger counterparts, whose usage of smart-phone technology will be even stronger.
In addition, Apple Pay has been introduced to the payments industry at a time when new hardware and software technologies are changing the way merchants accept payments from their customers. As customers have demanded more convenience, merchants are now being offered choices that include more mobile- and tablet-based payment apps and hardware, tokenization via third-party vendors’ software, and hosted payments.
Last, Apple wisely chose to partner its way into the market versus trying to disintermediate. This is a very important aspect of their offering. What this means is that the payment environment can build on the release of Apple Pay to drive ubiquity across the payment landscape. That ubiquity is key to market acceptance. It also keeps the payment brands in the role of standard setters.
We are several months, if not a year or two, away from knowing what impact Apple Pay will have on the payments industry. The iPhone 6 and 6 Plus have only been available for a matter of weeks and thus still represent a small percentage of the smart-phone market. And because merchants still have nearly a year until their equipment needs to be upgraded, there will always be a procrastination factor that will keep some from making the changes necessary until the last minute.
However, Apple Pay presents our industry with the opportunity to introduce a potentially easy, more secure payment option that may benefit both consumers and merchants.
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Steve Cadden is chief operating officer at TransFirst LLC, Hauppauge, N.Y.
