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Hari Subramanian

Payments changing lives

Hari Subramanian - Wipro

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A post relating to this item from Finextra:

Surprise! Apple makes payments play

10 September 2014  |  15538 views  |  31
apple_store.jpg
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...

Apple Pay is here. Ka-Ching NFC POS sales? Not so fast

12 September 2014  |  7019 views  |  9

Yes, Apple endorsed NFC in the latest announcement. If you are thinking this is going to increase sales of NFC POS terminals, don't hold your breath. Here's why.

Apple is smart enough to know that NFC is a technology that has been tried and tested by giants such as Google but was resisted by merchants. Yet, it had to conform to the norms of finance industry whose big players have laid their bets on NFC. Apple needed the co-operation of banks and card networks for getting those 800 million card accounts as tokens into the Secure Element and for getting preferential interchange fees by showing reduced probability of fraud (tokens and dynamic codes) and cost reduction in card management (no need to ship plastics anymore and certainly no need to put that chip on plastic card for EMV).

To me, Apple Pay is iTunes replayed all over again. Steve Jobs negotiated with music and record companies for iTunes. Tim Cook negotiated with Telcos (to get access to Secure Element), banks, and card networks for Apple Pay.

MCX announced just a few days before Apple that it will not be supporting NFC and will throw its weight behind QR codes and barcodes. This is due to concerns around the capital cost of upgrading POS terminals with NFC.

It is only a matter of time for 3rd parties to start writing payment apps that fetch token data from iPhone's secure element and combine it with dynamic transaction signatures or codes to...be sent to POS terminals by generating QR codes instead of using NFC. See picture for this blog for more details.

Apple is not interested in selling NFC. It is interested in the acquiring fees that come with US $ 12 Billion per day worth of POS transactions. To get that, it needs to support of merchants and retailers. More than anyone else, Apple knows it too well. That's why it announced that it won't collect any data from transactions to allay fears of banks, merchants, and networks. Why should it try to monetize on data when it can make much more money being an acquirer for 800 million digital cards?

Apple Pay with QR Codes and Barcodes TagsPaymentsInnovation

Comments: (12)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 12 September, 2014, 10:24

Makes a lot of sense. I now see a solid business case for banks to share some of their interchange with Apple while supporting Apple Pay. And I can update my comment on my post (http://www.finextra.com/blogs/fullblog.aspx?blogid=9924) as to why banks needn't be "intimidated" into doing so, as some have suggested.

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A Finextra member
A Finextra member | 12 September, 2014, 12:25

Apple pay transactions will be  treated as "Card Present " transactions as negotiated by Apple with schemes and banks . This definitely help merchants in store as well as online  as apple pay transaction  wouldn't be incurring any additional  cost .   Not sure whether apple would  get anything from the acquirer side as much it would get from the issuer side .

 

 

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A Finextra member
A Finextra member | 12 September, 2014, 12:37

Your QR code thoery is interesting . I am wondering why Apple themselves would not provide such an option to users  and merchants. May be they will do it in future unless there is a techinical issue for accessing secured element through OS

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Hari Subramanian
Hari Subramanian - Wipro - Greater New York City | 12 September, 2014, 22:00

Thanks folks, from what I can read publicly - it looks like payments through iTunes will be Card Present except in-app purchases which will be treated as CNP.

Reason why Apple won't support QR code now itself - it has to align itself with the strategy from card networks who have thrown their weight around NFC. It is more important to get cards tokenized first. 

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A Finextra member
A Finextra member | 15 September, 2014, 10:03

Are you sure Apple use Secure Element for their Apple Pay?

First thing that would strike my mind - why you need "tokens" if you already have the secure-enough SE?

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Bill Trueman
Bill Trueman - Riskskill.com - London | 15 September, 2014, 12:50

Interesting but not convincing at all. Indeed - this cannot happen. Ever. So why not? Technically, this is possible, but of course technical possibility and a good idea like this, won't stop people thinking about this.

The problems rest in:

 

a) The EMV Co and NFC standards, which require that there is a 2-way hand-ske and communication with the device and the scure element and a decryption porocess. 

b) The card schemes, who will have required the NFC to be adopted as the communication vehicle for the transactions to be permitted,

c) The issuers to allow the transaction to attract the interchange concession, to be transacted using the EMV Co / NFC standards and a channel that can be used to validate the transaction and ensure closed security.

QR codes were only a transient interim technology, that only had a place in small ways to bridge the gap that has now been theoretically bridged. 

We have heard a LOT about the impact of the ApplePay announcement on who/what will be affected, but one thing is sure: It has killed the QR code as a payment vehicle - so it will live on ONLY in the very good informational applications where it has been used thus far - i.e. to stop people needing to type various things into a device.

Adopting QR code developments with access to secure elements is NOT an option, and it is VERY VERY VERY VERY VERY unlikely that the access to the secure element (i.e. the underlying security) will be accessible to TP developers in this way either.

Nice thinking, but a complete non-starter as it breaches the security, card scheme rules and card standards in every way.

 

 

There is no way (logically) that the secure element will or can be relaced by 

 

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Hari Subramanian
Hari Subramanian - Wipro - Greater New York City | 16 September, 2014, 01:38 Those who don't believe this is possible should look at the way some e-commerce processors have implemented apple pay. There is no NFC there. If they can access the passkit API and token to process online payments without NFC I don't see why this is not possible
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Bill Trueman
Bill Trueman - Riskskill.com - London | 16 September, 2014, 01:46

@Hari - but this article was about POS implementation. NOT about e-commerce processors and their implementations. So not about online payment processing.  NFC is NOT something that can be used with online payments. So it is not possible because POS is NOT the same as CNP e-commerce.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 16 September, 2014, 09:33

On second thoughts, how can Apple make money from acquiring fees when it has said, “Apple doesn’t know what you bought, where you bought it, or how much you paid.”? As Ron Shevlin points out in his comment here (http://snarketing2dot0.com/2014/09/15/apple-pays-critical-success-metric/), "I guess the networks will tell Apple you paid $5 for something when you really paid $500"!

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Hari Subramanian
Hari Subramanian - Wipro - Greater New York City | 16 September, 2014, 14:56

Kethar's point - When Apple is the acquirer, Apple is the one forwarding transactions from merchants to the networks.

Bill's point - Software doesn't differentiate between POS or online transactions. Only thing that matters is interchange rates. If someone, submitted tokens from Apple through QR Code similar to e-comm transactions, it is possible that the transaction is treated as CNP. But in Apple Pay's case, public info suggests that both POS and online transactions are likely to be CP rates. CNP rates are only for in-app purchases.

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 16 September, 2014, 15:27

@HariS:

Apple is the Acquirer only for sales on Apple Stores, iTunes and AppStore, not everywhere that ApplePay is likely to be used. Otherwise, how can it claim “Apple doesn’t know what you bought, where you bought it, or how much you paid.”?

I read this 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 ... Macy's or McDonald's, etc.". That seems to make a lot of sense.

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Bill Trueman
Bill Trueman - Riskskill.com - London | 16 September, 2014, 15:50

@Hari - Careful - 

1. Software MUST differentiate between e-com and POS - it is in the scheme rules, and MUST be treated differently in so many ways. This is not opinion - but clear fact / rules/mandates and very heavily punished by the schemes with penalties for not doing do.

2. The only reason why Apple is going to get concession on the interchange rates, is BECAUSE they are submitting these transactions as POS / CP - and proving the security involved with 2FA / 3FA - Geolocate and Device profiling; tokenisation with encryption key, and adoption of the prevailing NFC and EMV standards.

3. The problem with the QR code thing is that it can transmit or facilitate ANY of the above in (2).

4. AND ABSOLUTELY NOT - the POS transactions will be treated as CP - and the e-commerce as CNP. It is the rules, and each will attract the correct interchange.

I am sure that you understand some of the software issues, but the rules and the scheme engagement is just as important to get right.

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Hari is a management consultant and industry advisor in banking and payments with over 20 years of global experience in Telecom and Banking and Financial Services. He has advised a number of the leade...

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