Unravelling Apple’s mobile Pay play

Apple has - as expected - officially entered the payments space this morning with the announcement that its latest two generations of iPhones and its first attempt at a digital watch will come with a secure element chip and NFC to turn the smartphone into a mobile wallet.

Chief executive Tim Cook boldly vowed to “replace” the wallet, or at least replace the “five decades old” technology of the credit card and its “vulnerable” magnetic stripe interface.

Analysts have noted that mPayments has been a tough nut for anyone to crack so far - Cook argued that it was because every effort prior “started with a business model centred on self-interest rather than the user experience.”

If the user experience is as seamless as what was demonstrated on stage at the launch event, Cook has a point. Apple already holds the credit card details of some 800 million high-value customers via iTunes, the ace in Cupertino’s hand when negotiating deals with card schemes, banks and retailers.

More than that, Apple also has the encoded fingerprint IDs of a subset of these customers via which transactions can be authenticated.

Cook made several references to security and privacy - commitments that could set Apple’s wallet apart from the wallet service Google came to market with first.

“We are not in the business of collecting your data,” said Eddy Cue, Apple’s senior vice president of Internet Software and Services.

“Apple doesn’t know what you bought or how much you paid for it. The transaction is between you, your merchant and your bank.”

Further, Apple won’t store credit card details on the device - just a device-only Apple account number, stored in the secure element, plus a one-time payment number for each transaction.

Apple is taking a similar approach to online payments, establishing a direct challenge to payments startups by offering a “one touch checkout” within iOS apps or in participating ecommerce stores. Users won’t have to enter in credit card data, delivery addresses and other personal details that are otherwise associated with the iTunes account.

Third party developers will soon have access to the Apple Pay API in iOS8 to develop one-touch payments within apps.

Who shares the spoils?

Apple announced that six major US banks - representing over 80 percent of card issuers in the United States - were signed on to the Apple Pay service, as are the three largest card schemes, American Express, MasterCard and Visa.  Dozens of retailers have already agreed to provide compatible payments terminals.

As yet there are no such relationships announced for Australian banks and retailers, but we are starting to get some insight into what sort of deal might be on offer.

Retail blogger Tom Noyes predicted well before today’s event that Apple would be authorised for accepting payments from Visa, Mastercard and American Express.

Noyes cited sources suggesting that Apple had successfully negotiated for Apple Pay transactions to be considered as ‘card present’ transactions by the network, rather than a ‘card not present’ transaction. A ‘card not present’ transaction usually comes with a higher processing fee to account for the higher levels of fraud in ‘card not present’ transactions.

Noyes leaked that Apple had secured a cut of 15 and 25 basis points from issuers (banks) for processing Apple Pay transactions - something none of the banks would have been keen to offer.

“Someone must have blinked, and the others followed,” he guessed. “No one wants to be left out of the Apple launch.”

One of Noyes other predictions didn’t come true. He expected Apple to use its iBeacons technology for contactless payments, a technology the company put to developers in iOS7. Instead, Apple opted for a combination of NFC with Fingerprint ID.

Apple has either not seen enough takeup of iBeacon to chance the technology, or it couldn’t convince the card schemes that a genuinely contactless system based on iBeacons deserved the lower processing fee associated with a ‘card present’ transaction.

It's worth noting that Apple hasn’t used the word ‘NFC’ in any of its promotional materials - suggesting that ‘Apple Pay’ might support iBeacons when the market is ready for it.

Update 3:30pm: 

Westpac group chief product officer David Lindberg welcomed Apple to the contactless payments market, where “Australia leads the US and other countries,” he said. 

Lindberg took the opportunity to note that Westpac customers can already make tap and go payments using the combination of a Westpac mobile app and Samsung’s latest smartphones.

“We look forward to working with Apple to open up the solution to our mobile banking application in the same way they have opened up the Touch ID fingerprint security in IOS8,” he said. “The fingerprint login is soon to be launched through our mobile banking applications.”

Do you think Australian banks will accept a similar deal? Have your say below...