Mobile Applications

Apple & the Mobile Wallets Race

There is an arms race going on over your wallet and your phone, and, as usual, Apple has built the Manhattan Project. Unlike the team of scientists who invented the atomic bomb, however, Apple is not the only company that has built a smartphone-based payment system. There is a long trail of sleek but unsuccessful digital wallets and payment apps in its wake—Google Wallet, Square Wallet, Visa’s—each one’s failure (or at least lack of noteworthiness) inspiring more cynicism than the last.

So when Apple announced that its iPhone 6 models would allow you to make in-store mobile payments via a system they dubbed “Apple Pay,” opinion was immediately split between predictions of disappointment and certainty that this would be the moment mobile payment systems had been waiting for. Regardless of their stance, however, nearly everyone has agreed on one thing: the way we pay at the register is going to change in the next five years, and Apple Pay is probably the catalyst.

So what makes Apple Pay different than previous solutions? Craig Hettenbach, of the investment firm Morgan Stanley, issued a blue paper on the subject. His argument, which AppleInsider quotes, effectively sums up the factors that will make Apple Pay a success:

"By reducing fraud, improving data security, and increasing credit/debit volumes for issuers and networks, while protecting the value of the existing payments value chain, we believe Apple Pay has a high chance of success. Apple's market share in the US, its exposure to a relatively affluent demographic, and the ease of use… position Apple Pay as the player to beat in the mobile wallet space."

Perhaps most important is the well-off user base that Hettenbach mentions, most of whom will have the iPhone 6 when their next two-year contract runs out. Bill Gates, commenting on Apple Pay, noted that Apple’s product penetration would ultimately enable mobile payments and Near-Field Communication technology to reach critical mass—that is, a large enough number of users to make the technology an accepted norm and make it common among retailers.

For those not yet aware, Apple Pay operates using Near-Field Communication, or NFC, as its payment system. At its simplest, NFC is made up of two components: a chip inside a device that interacts with a payment terminal when it is brought close to it. Your digital wallet (like Apple Pay) stores your credit, debit, gift, and loyalty cards in digital form and uses the ones you select when you wave your phone over the payment terminal.

NFC is already coming into its own in Europe and Asia—UK-based company Zapp, is currently building a mobile payment system for several retailers, including the large supermarket chain Tesco and Wal-Mart subsidiary, Asda. The US, however, is on the cusp of catching up. By October 2015, retailers will be required to update their point of sale (POS) terminals to work with secure EMV (Chip and Pin) technology. If they fail to do so, liability for credit card fraud will shift from the card processor to the merchant.  It only costs about $40 USD extra per terminal to include NFC as well, and most retailers will likely opt to save future upgrade costs in case the technology takes off—which, if iPhone owners choose to use their Apple Pay capabilities, it will.

As Hettenbach pointed out, NFC security, long a hurdle to mobile payment adoption, is actually an improvement on traditional cards—your AmEx will not go the way of celebrity iCloud pictures. Why? Apple’s “tokenization” system, developed and powered by Visa. Apple’s official press release states that your card data is never stored, even in encrypted form: it is replaced with a Device Account Number, which is used to create a one-time code for each transaction. When you wave your iPhone over a terminal and scan your fingerprint on your phone, it sends this number, not your card, to the bank or issuer, who will then charge your actual card—all without your real information ever going anywhere.

Apple is not alone in its campaign to change the way you pay, however. Though it has signed on many partners (Macy’s, Whole Foods, and Walgreens, to name just a few), with 220,000 retail locations, Wal-Mart, Best Buy, and other significant retailers have announced their intention not to support Apple Pay.

In fact, MCX, (Merchant Customer Exchange), a group of leading retailers working on a smartphone-based transaction system, has announced “CurrentC,” a payment app that uses QR codes instead of NFC and is available for Android as well as iPhone—a far larger overall market, though with a more fragmented ecosystem. James Wester, research director at IDC Financial Insights says, “Just because Apple is now responsible for us getting to this tipping point doesn’t mean Apple is necessarily going to win.”

And there are other technologies on the very near horizon as well, marketing themselves as bridges between card-based and mobile payments. Perhaps the most sophisticated is Plastc—an electronic credit card with a 30-day rechargeable battery and a lockable touchscreen that allows you to store and switch between 20 credit, debit, loyalty, gift, or even RFID cards. It also comes with EMV and NFC, meaning you can swipe, tap, or wave to your heart’s content. Coin and Final are the other two names on the smart credit card market, all of them betting on the need for an intermediate technology between cards and smartphones.

So is the world ready for mobile payments? In a recent survey, only 44% of Americans said that they would pay with a phone, mostly due to security concerns, which may be allayed. Around 70% of Americans aged 18-29 found the idea acceptable, however; it seems that young users will probably drive the transition. Countries like Singapore, Canada, Japan, and South Korea have a steadily growing population of people who are paying with their phones, and Kenya, which many would not expect to see ranking in a mobile transactions readiness measure, is actually one of the most mobile payment-ready countries in the world.

MasterCard’s index of countries’ readiness for mobile payment technology uses factors such as consumer readiness, infrastructure, financial services, and environment to assess when smartphones can become an appreciable part of a country’s financial infrastructure. A score of 60 indicates readiness, but the world average is still 33/100 points, and the first-place country, Singapore, only rates 45.6, with Canada, the United States, and Kenya right behind. 

This does not necessarily mean that Apple Pay and other mobile payment systems are going to fail—it just means that if it succeeds it will be in the long term, as consumers and retailers catch up to technology. In March of 2007, John Philip Coglan, CEO of Visa USA at the time, said that “The convergence of payment and mobile communications is not just logical—it is inevitable.” Technology and marketing research firm Forrester backs up his statement in its 2013 report, forecasting that by 2017 US mobile payments will hit $90 billion USD, up from the $12.8 billion spent in 2012. Worldwide that number gets dramatically larger, with mobile online and in-store purchases forecast to go from $163.1 billion USD in 2012 to $721.4 billion in 2017.

So keep your eye out for NFC terminals and QR codes, but don’t toss your physical wallet just yet. Apple Pay and CurrentC are in their very earliest stages, but they’re eying each other with considerable hostility—there will need to be at least some sort of standardization or compromise before the market takes off. Apple Pay may not be the future of payment technology, but it is the biggest step taken towards it thus far. In the meantime, those smart credit cards look as if they may provide an effective balance between convenience and security, though being priced at $100-$150 USD may keep them from being a middle-class staple.


Andrew Braun has an eclectic taste in music, a crippling addiction to change, and a time-consuming learning habit. He has held jobs as a writer, a web designer, a farmhand, a handyman, and a teacher, and plans to travel the world, teach, write, and work towards a master’s degree in political science.


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Andrew Braun

Andrew Braun has an eclectic taste in music, a crippling addiction to change, and a time-consuming learning habit. He has held jobs as a writer, a web designer, a farmhand, a handyman, and a teacher, and plans to travel the world, teach, write, and work towards a master’s degree in political science.

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