Banks are so excited about Apple Pay they've been advertising it heavily across the web. Here's the home page from the New York Times yesterday.
When you look at your smartphone, you probably don't spend much time thinking about the poor calculator, day planner and digital camera it helped send to the dustbin of history. But starting today, that same phone is taking aim at another victim: your wallet and the credit cards you carry in it. Both are on "deathwatch" as Apple rolls out Apple Pay for the iPhone 6 and 6 Plus. While the impact of the new software will be limited at first, it will usher in a new era of convenience and security that will ultimately bring benefits to everyone -- whether or not they are iPhone users. Here's what you need to know.
I'm still not sure what Apple Pay really is. Can you help?
Apple Pay is really two ways to pay rolled into one. The most visible of those will be using your iPhone to pay in retail stores, verifying your ID with the fingerprint sensor. That version of Apple Pay will replace the traditional credit-card swipe. The other version is Apple Pay inside of apps. It's currently iOS only (Macs need not apply) because it requires the TouchID sensor. On apps that support it, you'll be able to complete a purchase with a finger as you've been able to do in the App Store since last year, assuming you enabled that feature). Mostly, Apple exec Eddy Cue told the Wall Street Journal, the company figures it will be used for those in-app purchases.
But they won't just be limited to power boosts inside of games like Candy Crush. An online retail app could use it to enable one-touch purchasing and even grab your shipping information without you having to enter anything into those tiny fields on your phone screen. Apps that don't support Apple Pay but want your credit card and address info are going to quickly look archaic; don't think merchants aren't aware of this. Buying on your iPhone is about to get a lot easier, for better or for worse.
What devices work with Apple Pay?
To use Apple Pay at a retail store, you'll need an iPhone 6 or 6 Plus. They're the only phones in Apple's lineup that have the necessary NFC (near field communications) chip as well as TouchID. For the "app-based" version of Apple Pay, the iPad Mini 3 and iPad Air 2 have the Touch ID sensor as does the iPhone 5s. They'll get part of the experience as a result.
For users of iPhone 5, 5c and 5s who want to use Apple Pay out in the real world, there is an option short of buying an iPhone 6 but you'll have to wait until early next year. The Apple Watch has the NFC chip in it, too and can link up with one of those older phones. That will allow you to pay by swiping your wrist over the payment terminal. It's not a cheap way to go given the Watch will start at $349, but if you're getting one anyway, it's a perfectly reasonable workaround.
Are my credit cards "compatible" with Apple Pay?
In most cases, the answer is yes but there are some important exceptions. When Apple announced the technology earlier this year, it made a point of saying that the largest banks -- and their credit cards -- would work with Apple Pay at launch. That means Citi, Wells Fargo, Bank of America, Capital One and JP Morgan Chase are good to go. Barry McCarthy of First Data, which does credit card processing for "thousands of banks," says his company is helping make it possible for everyone else to get on board too. In fact, since Apple unwrapped Apple Pay, it's managed to sign on 500 regional and local banks, whose cards should work by early next year, according to Apple CEO Tim Cook. If you have any doubts about a particular card, you can just try to register it with Apple Pay and that'll let you know if it's ready.
That said, certain types of cards just won't work at all -- yet. Store-branded cards are not part of the initial rollout nor are prepaid cards and most corporate cards. All are planned for future versions of Apple Pay, but it'll be a while.
What's this business about registering a card with Apple Pay?
Most people will already have one card in the system because it's associated with your iTunes account. To add others, you'll be able to scan them in with your iPhone's camera. Once you see how it works, you probably won't need much help. Apple Pay is part of the Passbook app, which many have used with an airline boarding pass or perhaps some Fandango movie tickets.
A lot of people are saying this isn't any more convenient than swiping a card. Aren't they right?
A lot of people said no one would want the iPhone too. Mobile payments are already catching on, with 15% of all Starbucks transactions being conducted through their own app, which is also no more convenient than swiping a card. Oh, and swiping your card is going to be replaced in 2015 by "inserting" your card. In my limited experience using the new terminals, they're mostly awful and awkward. Waving your phone over a compatible payment device -- whether it's an iPhone or an Android phone with Google Wallet -- is going to seem like a pleasure very soon, if it doesn't already.
And with app integration, you might find Apple Pay a far more convenient system very soon. McCarthy of First Data described how it will work at Panera Bread, using their app. You'll be able to order ahead and pay inside the app. "It's crossing between e-commerce and point of sale," he said, describing the technology. No swipe anywhere, no bill, all integrated.
Besides Panera, is anyone going to accept Apple Pay?
First, a clarification. There is no "accepting Apple Pay." You may have read an article or five suggesting that retailers don't plan to support Apple Pay, implying there is some special thing they have to do to work with Apple. What a retailer needs is nothing more than a NFC-equipped point-of-sale terminal. Those aren't everywhere yet. Apple says 220,000 merchants have them; First Data says that's out of 8 million retail points of sale in the U.S. But if the NFC reader is "live" it supports Apple Pay, whether or not the retailer has a deal with Apple Pay.
That said, forward-thinking retailers made a point of being ready to support the technology. McDonald's, Subway, Macy's, Whole Foods, Walgreens (along with subsidiary Duane Reade) and others are part of the first wave. The above slide from last week's iPad event show others who will be rolling out support over the coming months.
Best Buy and WalMart are saying they won't play with Apple Pay. Why?
Two reasons, neither is good. First, they are burying their heads in the sand about NFC. Every merchant in the U.S. needs to support chip-based credit cards by October 2015 or face the liability risk of fraudulent transactions on their own (today, that risk is borne by issuing banks). It's true that retailers can accept so called EMV cards without supporting NFC, but doing so entering the holiday season is going to be a decision those retailers will live to regret. Today, the speed of credit-card checkout is something we mostly take for granted and with chip cards, that's about to change. Support for NFC isn't about making Apple happy, it's going to be about making customers happy.
The second reason some retailers are being obstinate is a quixotic endeavor to do mobile payments called MCX, for Merchant Customer Exchange. Gap, CVS, Exxon Mobil and a whole host of companies have agreed to collaborate on a payments solution whose advantage to consumers centers mostly on integrated loyalty-program features. MCX itself admits the technology will be supported at about 110,000 points of sale when it's at "full scale" sometime down the road -- half the number Apple Pay will work at tomorrow. But at least MCX's app, CurrentC, supports most credit cards right? No, actually it starts out with support for basically none. "CurrentC will offer customers the freedom to pay with a variety of financial accounts, including personal checking accounts, merchant gift cards and select merchant-branded credit and debit accounts. Additional payment options will be available in the coming months," the consortium's announcement states.
Here's a teaser for my annual predictions column that runs every New Year: CurrentC will fail to gain adoption in 2015 and at least 1/3 of merchants on the list will make clear they will support NFC. That support will allow customers to use Apple Pay -- and Google Wallet. CurrentC and MCX will cease to exist before the decade is out.
I'm scared of this kind of thing in a Target/Home Depot/Chase-hack world. Can you reassure me?
Yes, in fact: Apple Pay is pretty much the most secure way to pay by credit card ever mass deployed. McCarthy notes that: "There’s multiple layers of security," in the system. He points out that you can't use the cards without scanning a fingerprint but perhaps more importantly, your card numbers are no longer transmitted across the network or stored by merchants. The way that works is something called "tokenization" and it's a huge advance in security. Even Apple won't keep your card information, except for the one card it has on file with iTunes for now.
The other cards are protected using something called the secure element in the iPhone and when you make a transaction a special number will be sent to the processor instead of your actual card number. That "token" is useless to a thief or hacker. If your iPhone does get stolen, you'll be able to shut it down with Find My iPhone. Though without your fingerprint, no one is going to be using your pilfered phone for purchases anyway.
In short, no system is perfect and perhaps some security vulnerabilities will yet be uncovered. But most of the major breaches to date have involved hackers getting hold of card numbers stored with retailers. With Apple Pay, those kinds of hacks are going to become obsolete. Other payment systems will move to tokenization, too, though it will take time. Apple's combination of the secure element, Touch ID fingerprint sensor, and ability to bring banks on board to accept its tokens is a testament to its market power and the iPhone's 42% share among U.S. smartphone owners. This is going to be more challenging to make happen elsewhere for anyone, yet more possible because Apple has laid the groundwork.
How important is this for Apple?
In the short run, only a little. Apple could sell 30 million of the iPhone 6 and 6 Plus before the year is out, but that's less than 10% of the iPhones in the world currently. The company is going to get 0.15% of the money spent through the technology without it costing you and me anything extra (the take will come out of the banks and payment networks share). Gene Munster of Piper Jaffray told the WSJ he thought that could amount to $118 million next year and $310 million in 2016.
These dollars are almost entirely going to be pure profit. Now given the company made $37 billion last year, it's still a drop in the bucket, but one that could eventually grow to be at least a cupful. It could take more than a decade for Apple Pay to contribute even 10% of Apple's profit, but it's not difficult to imagine that happening down the road. And if it's wildly successful, Apple could potentially act as a banking middleman and take an even larger cut. Think that's crazy? It's one of the few things keeping Sony afloat.
Apple Pay is also a reminder of the company's ability to lead the world in nearly impossible directions. Google's Wallet is very similar to Apple's offering but met with a lot of resistance, was blocked by wireless carriers and has thus far had minimal impact on mobile payments. Apple Pay takes some of the best elements from what Google tried to do but simplifies things based on Apple's unique control of both hardware and software. Cook and company were also able to marshall support from those 500+ banks and dozens of retailers to give Apple Pay the necessary critical mass to succeed. Now it's time to make it happen.
I'll be back soon with a real-world test of the technology.