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Surprise! Apple makes payments play

After weeks of rumour, hype and speculation, Apple has made its long-awaited entry into the payments business with a compelling mix of NFC technology, tokenisation, biometrics and must-have mobile for...


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Africa, ApplePay and the iPhone 6: Resistance is futile

If you've followed my bullish ramblings on mobile payments here at Finextra, you'll know that talk of the coming ubiquitousness of mobile payments is nothing new for me:

In my first book Bank 2.0 I predicted that Mobile Payments at the POS would overtake card payments by 2016-2017. I'm still bullish on that estimate, but would be the first to admit my biggest surprise in respect to Apple's announcement was that it has taken them until the iPhone 6 to do payments.

What it means for the industry

We can safely say now that the debate over NFC is over - NFC combined with the use of Tokens is the industry standard moving forward. For those suggesting BLE/iBeacon or other cloud based tech might leap frog, I think it's been fairly obvious all along that NFC was the chosen standard by the card networks, the only issue has been around implementation and timing. Apple's adoption of NFC signals that interoperability is a key component of the ecosystem moving forward, but it also probably means we're going to see signficant morphing of the existing networks around the shift to mobile. Those shifts will be:

  1. Move away from Card numbers to Tokenized Identity as the customer identifier (no more "cardholder" folks)
  2. Card networks become data networks - the data passing before, during and after a transaction becomes just as important as the authorization itself
  3. When we move to cardless ubiquity do card networks just become payment networks with payment and identity protocols?

Technologies like BLE and iBeacon have a role to play here. What we didn't see in the Apple announcement this time around is how they plan to stimulate in-store activity - how they will encourage use of Apple Pay over other payment modalities or other mobile wallets. This is where iBeacon is part of the long-term play. 

As Ian Kar pointed out on Bank Innovation, Apple definitely is making subtle moves into the merchant space, with one key intent.  They want to ensure you interact with your iPhone in-store, ensuring you use their wallet when you pay. Most likely that will be through combining loyalty and merchant rewards/offers contextually. 

That is the other exciting thing. Mobile payments are not like card or cash payments, and that is what most pundits who are skeptical constantly miss or discount. The use of mobile allows you to contextualize payments with information, content, location data, behavioral data, deals, etc before and after a payment that you could never do with plastic or cash. 

Apple has resolved the modality of payments with this move, but we're still just getting started on the value ecosystem.

Why did it take Apple this long?

Apple was waiting for the right ingredients to ensure success of their Apple Pay initiative. Apple didn't want another Maps fiasco, and they wanted to ensure people used the feature. However, the United States being Apple's primary territory and being the card payments backwater it was, has hindered that adoption because the propogation of contactless POS was poor. Enter Target...

The Target, and Home Depot breaches, just to name a couple are part of a broader systemic issue in the US around an aging mag-stripe infrastructure. There are still some, like Clint Boulton at the Wall Street Journal/CIO Journal who argue that cost of replacement of the POS infrastructure can not be justified on the basis of fraud costs alone (Card Security Costs Outweigh Benefits for Many). The varying estimates of POS replacement US-wide range between $9Bn and $35Bn, and estiamted fraud costs this year range between $6.9Bn and $15Bn. On this basis, the business case actually seems pretty strong, but let's just look at US card fraud as a whole. While some might debate this, the facts are the US is in serious trouble because of their slow EMV adoption.

As reported in Business Intelligence, the US does 25% of the world's credit card and debit card transactions, but carries 51% of the world's card fraud. Regardless of what you think of POS replacement costs, this is an incredible statistic that shows how far behind signature and mag-stripe put the US card business.

Apple now knows that the major merchant acquirers and the card networks are all fully committed to rolling out new EMV capable terminals, that will also support mobile contactless payments. This is key - without this guaranteed momentum, Apple was faced with uncertainity over the horse before the cart problem of a mobile payments capability. For merchants, issuers and acquirers, this makes the decision to invest in retooling the POS networks much easier. 

The additional sweetners here are three fold. Firstly, tokenization will avoid much of the type of breaches we've seen at Target and Home Depot because the token is only a one-time use thing. Secondly, the move to tokens and the combination of biometrics, etc allow for the emergence of a 'cardholder present' approach to interchange rates that will potentially give mobile payments a competitive merchant rate. Lastly, the US might effectively jump straight from magstripe to mobile, especially if issuers can figure out how to reduce the cost of card replacement by moving straight to mobile SE and tokens.

Ubiquity is inevitable

For those skeptical of mobile payments adoption, POS retooling and Apple's entry into payments signals the final hurdle to mainstream adoption. For the last 200 years we've seen a gradual speeding up of technology adoption in society, meaning that today the difference between early adopters and late adopters is often measured in just months. Payments behavior is more embedded than most, but that doesn't mean it is immune to change. A likely model for adoption rate for mobile payments in developed markets is 2-3 years, based on what we've seen around Kindle, iTunes, App and Smartphone adoption over the last 7-8 years. 

If you are skeptical about this I think it is important to point out that while debit card use has been increasingly signficantly over the last decade, physical payment methods around cash and particularly cheques (checks) have been in constant decline. If we are to examine customer behavior around payments it is very clear. Physical payments are on the decline, real-time electronic payments are the future of demand and interaction.

Now this doesn't mean that Apple's move will bring an end to cash or plastic anytime soon. It does mean that mobile payments will dominate within just a few short years as the instinct for a payment changes.

This is not an instinct just being driven by Apple either. On average, 4,361 out of 100,000 people globally were using mobile-payments services as of June 2013, according to Groupe Speciale Mobile Association, an international mobile-telecommunications group, and the World Bank. In sub-Saharan African, the figure was six times that—with nearly a quarter of the population banking on mobile phones. In more than 9 countries across Africa, mobile money accounts already outnumber physical bank accounts, and in markets like Kenya, mobile payments have long outstripped use of physical cash.

Conclusion

Mobile payments and mobile P2P are the coming ubiquitous form of payment. Apple's entry into this space simply speeds up this shift, and guarantees a common standard across Visa, Mastercard and Amex networks around NFC and the use of Tokenization. By 2020, it won't just be the USA that considereds mobile payments the primary modality, but indeed, Africa might get there before the US. 

For markets like the MINT (Mexico, Indonesia, Nigeria, Turkey) countries the likelihood that the majority of the newly banked will move straight to mobile is extremely high - they won't be given a plastic card. Distribution costs won't support that model.

It won't matter whether you are a farmer in Kenya, or an Apple Fanboy in New York City - mobile payments ubiquity is inevitable. Apple has just cemented that future into place sooner, rather than later. 

 

Apple chooses NFC and Tokens for Mobile
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Comments: (14)

Martin Cox
Martin Cox - Rambus - Rotterdam 11 September, 2014, 01:293 likes 3 likes

Excellent piece Brett.

I think the strongest message for the industry is that Apple is endorsing standards, not trying to invent new ones. They are voting for the ubiquity of EMV, NFC and tokenisation but as usual they're doing it with a very neat, end to end solution.

Brett King
Brett King - Moven - New York 11 September, 2014, 04:402 likes 2 likes

Martin,

What is an indictment on the industry is that it took a Google and Apple to fix the in-phone payment capability, and the target breach to fix the EMV problem in the US. Nothing about this was lead by banks or card networks, with the exception of approving the tokenization approach that Google pioneered.

BK 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 September, 2014, 18:001 like 1 like

@BrettK:

Apple Pay seems to do a lot more than other mobile wallets e.g. tokenization, no need to open app, etc. (as highlighted in my post http://www.finextra.com/blogs/fullblog.aspx?blogid=9924). All this needs to happen within a few seconds so that the instore queue doesn't slow down. This requires some amount of computing power. Is it possible that this is available only on iPhone6? If so, this could be another reason why it took Apple this long.

On another note, under the good old plastic + paper regime, I sign the chargeslip which bears the purchase amount. Old fashioned as it might be, this provides the cardholder with adequate proof of the transaction value, which she can use to contest discrepancy, if any, in the credit card statement. Any idea how a similar trace is established digitally in the case of an NFC-contactless transaction? If this is a part of the dynamically created payment number, then my point about Apple Pay calling for greater computing power could make even more sense. 

Brett King
Brett King - Moven - New York 12 September, 2014, 22:412 likes 2 likes

@Ketharaman,

I suggest you read this most excellent piece on Bank Innovation today which details the way Apple operates with Mastercard. It will give you some clarity on the security/technology aspect
http://bankinnovation.net/2014/09/heres-how-the-security-behind-apple-pay-will-really-work/

In terms of the signing of the changeslip, the issue is one of identity and fraud management - which is specifically why the US has such poor card fraud rates (i.e. they still use signature). While providing 'proof' as you say, the same information is displayed on Apple Pay in real-time, and is non corruptable (compared with paper). This is definitely a generational shift. You should read Mastercard research on the lack of interest GenY show in paper receipts - it is telling.  

In terms of discrepencies, this is a system that has been in place for 30 years. Since the introduction of electronic POS there has been no known corruption of receipt at a terminal. The only issue is mischarges which could as easily be resolved with a electronic receipt as a paper receipt. On the program management side I can assure you that for Moven's business we have never had to reference a paper receipt in a dispute situation. 

What we know is that Apple was willing to take the risk on identity knowing that they'll have better success than signature, and in return will get 20 basis points rebate per transaction from the banks as a result. It appears all concerned believe that mobile payments are more secure, and more efficient than plastic.   

A Finextra member
A Finextra member 13 September, 2014, 14:28Be the first to give this comment the thumbs up 0 likes

The mobile to mortar path to purchase is not starting within m-wallets. Its starting on mobile shopping apps that already open instore & deliver  coupons, sales, inventory, product reviews at 1000's of retailers  Banks have been consumed with the end of the path. They need to engage the shopper earlier on the path so they can tendersteer at the end.

A Finextra member
A Finextra member 13 September, 2014, 14:31Be the first to give this comment the thumbs up 0 likes

The mobile to mortar path to purchase is not starting within m-wallets. Its starting on mobile shopping apps that already open instore & deliver  coupons, sales, inventory, product reviews at 1000's of retailers  Banks have been consumed with the end of the path. They need to engage the shopper earlier on the path so they can tendersteer at the end.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 September, 2014, 19:17Be the first to give this comment the thumbs up 0 likes

@BrettK: TY for your reply. The Bank Innovation article does explain the security / transaction aspect of Apple Pay well but it doesn't answer my basic question about how transaction value is linked to the cardholder. Not sure how Apple can claim that it doesn't know anything about the purchase transaction if, as you say, the purchase value "is displayed on Apple Pay" If, as it claims, Apple doesn't know anything about the transaction, most specifically the transaction value, how will it know whether it's getting a 20 bps or any rebate on the transaction at all? I read a comment on this NYT article (http://dealbook.nytimes.com/2014/09/11/banks-did-it-apples-way-in-payments-by-mobile) saying "...Apple is offered a lower rate only ... on Apple purchases and not ... any other merchant that Apple Pay would be used (i.e. Macy's or McDonald's)". Thought it made a lot of sense given the context.

A Finextra member
A Finextra member 16 September, 2014, 01:29Be the first to give this comment the thumbs up 0 likes

Just one thought: Plastic does not need a battery.

Brett King
Brett King - Moven - New York 16 September, 2014, 01:371 like 1 like

Ulrich - fair point although I can use my NFC chip in my phone even when the phone is out of battery. I don't know if the iPhone 6 allows that. 

Having said that - how often really does your phone run out of battery these days? Almost never 

A Finextra member
A Finextra member 16 September, 2014, 01:46Be the first to give this comment the thumbs up 0 likes

Brett - You are right about the battery, normally we are carrying a battery pack to survive. Just today it happened to me - my phone had no juice anymore.

Maybe this fact inspired me to post this.

On the other hand even if you can use a NFC chip - the earlier mentioned CPU power of the iPhone 6 (or any other device) can't work without power. So there will something not be processed as usual.

Martin Cox
Martin Cox - Rambus - Rotterdam 16 September, 2014, 02:031 like 1 like

I think the iPhone will need power to autenticate the touch ID and to generate the cryptogram. Apple says "there's no need to open an app or even wake your display.." but no mention of it working without device power.

If your phone runs out of battery, use your card. They won't be going away any time soon. All of these systems have a fall back; dip the contact chip if contactless isn't available, swipe the stripe if the chip doesn't read, (or the merchant isn't EMV yet). Take an imprint of the card if the merchant doesn't have a POS (yes, that happenned to me recently in the UK).

..and if all else fails, use cash.

I don't think the worst case scenario should stifle innovation. If so, we'd all be still sending letters in fear of our email devices running out of power.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 16 September, 2014, 16:21Be the first to give this comment the thumbs up 0 likes

Note to Consumer: Carry a plastic card. Actually, also carry cash. Well, don't forget your leather wallet either. Note to Merchant: Buy NFC contactless terminal. Actually, don't throw away your contact terminal. Well, you must also retain your cash drawer.

I struggle to see where is the innovation in all this.

But let me assume that it’s there somewhere because it has an Apple label on it. While worst case scenario shouldn't stifle innovation, a smartphone running out of battery is a fairly common scenario. Especially if battery guzzlers like data and GPS need to be kept on for Apple Pay to work.

Apple Pay will hopefully drive many plastic-using iPhone customers to upgrade to iPhone 6 and try out mobile payments. Only time will tell whether it will have any effect on the other 70-80% of smartphone users who don’t use iPhone.

Martin Cox
Martin Cox - Rambus - Rotterdam 17 September, 2014, 03:47Be the first to give this comment the thumbs up 0 likes

Ketharaman, I've yet to come acrosss a retailer that accepts contactless cards that doesn't also accept contact chip on the same terminal, or have a cash drawer. That has nothing to do with mobile or Apple.

I'm not aware that either GPS or data need to be switched on for Apple Pay to work and I've yet to see a QR based solution that works without battery.

Do you have an alternative that you're suggesting? Perhaps stick with cash because my card or phone may not work in 100% of merchants, 100% of the time?

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 September, 2014, 13:25Be the first to give this comment the thumbs up 0 likes

@MartinC:

I agree. That's why plastic - not mobile, not Apple - is the last real innovation in retail payments. At least it helped many retailers to decline checks from Day One (e.g. India) or stop accepting them beyond a certain date (e.g. UK).

The point is, retailers will find it hard to justify investments to support every "innovation" that comes along unless the new payment method can help them cut costs, grow revenues or improve CX (and thereby cut costs and grow revenues). For more reasons than one, no mobile payment solution - including QR-based ones - has been able to demonstrate adequate value on these counts. Only time will tell whether Apple Pay will be an exception.

The question of alternative is moot but plastic is fine by me. According to this FORTUNE article (http://fortune.com/2014/07/24/mastercard-tech-company/), cash if fine for 85% of the world's transactions. Interestingly, the same article explains why even MasterCard executives - who have a lot to benefit from cashless - chided their own boss for talking trash about cash.

Brett King

Brett King

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Moven

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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