Though It Has a Small Share, the iPhone Rings Up Payments Innovation

Apple Inc.'s iPhone accounts for only a tiny fraction of the cell phones out there, but it's the undisputed headline grabber in the niche of mobile devices called smart phones that enable enhanced Web browsing, play music, and perform other gee-whiz functions. The iPhone also is the focus of intense effort by third-party software developers who have devised thousands of applications tailored for the sleek device, some of which include banking and payments. Apple's online App Store has at least 35 applications available for download that facilitate mobile-banking or payments, according to a review by Digital Transactions News's sister publication, Digital Transactions magazine, for an upcoming story about the effect of the iPhone and other smart phones on payments. Dozens more in the App Store, some free, help users keep track of personal finances but don't have a payments component. U.S.-based banks with iPhone mobile-banking applications include Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., and some smaller institutions. A number of foreign banks also have iPhone online-banking applications. Most of the App Store's offerings are only a few months old, if that. The App Store, however, has only a handful of pure payments applications. Some familiar names can be found, including eBay Inc.'s PayPal, but small, specialty companies have devised a few offerings. One is a $49.99 application from Inner Fence LLC called Credit Card Terminal that claims to “turn your iPhone into a mobile virtual terminal for charging customers' credit cards.” Credit Card Terminal is aimed at merchants such as artists who sell at fairs, professional photographers, service providers such as plumbers and electricians, and other merchants who are frequently out and about, Derek Del Conte, chief executive of Sammamish, Wash.-based Inner Fence, tells Digital Transactions. Del Conte won't reveal how many iPhone users have downloaded Credit Card Terminal since its Oct. 27, 2008, launch on the App Store, but says the early merchant response “has been outstanding.” The application has functions that let the user input a customer's card number and the three-digit security code commonly known as the Card Verification Value, or CVV, and send an e-mail receipt to the customer. Inner Fence works with processor Merchant Focus Inc. to provide merchant accounts for its iPhone users and with CyberSource Corp.'s Authorize.Net gateway service to get their transactions into the payment card networks. Credit Card Terminal users don't pay application or minimum processing fees. After buying the software, users pay a $25 monthly fee to cover account and gateway expenses plus 19 cents per transaction on the first 250 transactions (24 cents thereafter), and a discount rate based on card-not-present interchange of 2.09% for so-called qualified transactions. U.S. consumer credit and debit cards usually receive the qualified rate, while transactions on international, government, or commercial cards typically pay a higher, so-called non-qualified rate of 3.79%. Merchants could get lower interchange if they had equipment to read cards' magnetic stripes, but Del Conte argues Credit Card Terminal frees merchants not only to move around, but also from buying payment-processing terminals. “One of the reasons our customers like the solution and are OK with card-not-present transactions is they're carrying the device all the time,” he says. “Our customers like the fact that they don't need any other hardware.” While indeed the trend leader, the iPhone had only 2.5 million users as of last May, representing about 1% of the cell phones in the U.S., according to New York City-based ABI Research. “If you were a developer of applications, sometimes you have to place your bets, iPhone's not a bad one,” says Mark Beccue, senior analyst for consumer mobility at ABI Research. “It's probably the first good place to go [but] it doesn't necessarily take you into heavy market share.” The iPhone-centered development, however, is likely to spur innovation as developers produce parallel applications for other smart phones, including the new BlackBerry Storm from Research in Motion Ltd., maker of the ubiquitous BlackBerry mobile device.