iPhone, NFC and Apple Pay: How Should Banks React?

After years of speculation, Apple has finally revealed its mobile payments strategy: Apple Pay. This is good news for (U.S.) iPhone users who want to ‘tap to pay’, but what about the majority of smartphone users who are using an Android device? What about those of us outside of the U.S? And what about the banks who want to offer a solution to a wider demographic?

Contactless EMV acceptance
Banks should note the merchants listed under “Use Apple Pay in these stores”. Contrary to the wider media reporting that these retailers have “partnered with Apple”, it seems that these are the U.S. merchants accepting contactless EMV. In many countries, the list is much longer with no push from Apple and those same merchants will no doubt now be accepting standard contactless EMV cards. In countries such as Canada and Australia, a large percentage of transactions are already contactless. So, it’s great that Apple is supporting contactless EMV, however, this is not an exclusive Apple initiative.

What about mobile payments for the remaining majority?
Apple Pay will initially be available for customers of the largest U.S. banks that have the latest iPhone or Apple Watch. But what about those outside the U.S? The good news is that millions of transactions are already happening around the globe without Apple’s intervention, simply by using the contactless EMV standard. And it is not restricted to only iPhone, but the same functionality can be offered across a broader range of mobile devices, such as Android or Blackberry devices which collectively outsell iPhone by more than seven to one according to IDT’s figures for Q2 2014. Additionally, these other operating systems have the great benefit that it enables issuers to keep their brand in front of their customers and allows them to integrate the functionality with their existing mobile banking app.

Host Card Emulation & Security
Apple’s decision to use an embedded secure element was a logical one as it owns both the hardware and software infrastructure. However, the hardware ownership among Android devices is much more fragmented and makes it difficult to introduce a similar ecosystem. Luckily, Android’s latest OS supports host card emulation (HCE): a technology that enables the secure element to be stored outside the device, inside the bank’s own cloud environment. When it comes to security, Android supports the same tokenization technology that Apple is using: real account numbers are never shared but instead replaced by an alternate PAN – making it an acceptable level of risk.

Clarity, finally
However, perhaps the most welcome announcement is the fact that Apple has finally embraced NFC technology. This means that banks finally have clarity and can focus on this preferred communication method of choice at the payment terminal. For Apple’s primary market, the U.S., it’s also strong endorsement for the ubiquity of EMV.

I’d be interested to hear other views in the comments below. Can the industry move forward together now? How do you think banks that are not in the first wave or those who want to support non-Apple customers will react?