Apple’s Payments Play

Apple is the only major device manufacturer to not yet incorporate into its phones NFC, which is the technology that allows devices in close proximity to talk and is widely considered the point of entry into mobile payments. Without a foot in the payments industry, the iPhone and its iOS platform could continue to lose ground to Android-based smartphones.

Although Apple seems to be behind the curve as it were now, it is well-known for its disruptive tendencies. When Apple revolutionized other industries from music to mobile phones to tablet computing, it wasn’t the first mover. Instead it chose to observe and wait for others to work out the kinks in the market and then entered the space with a streamlined way of executing that business objective. Expect Apple to disrupt payments very soon and for the industry to never look or feel the same. A lot has been going on behind the scenes at Apple’s headquarters in Cupertino, Calif, which indicate Apple not only has an interest, but definitely a capacity for payments.
An Apple mobile payments system has been expected for years following its successful operation of its e-commerce website, iTunes, and its appetite for turning industries on their side. There are rumours that the next iPhone 5 expected to be released in the fall will be equipped with NFC. Both Visa Inc. and MasterCard Inc. executives have hinted that they have had conversations with Apple about turning the iPhone into a mobile wallet. Then there are the other rumours that this iteration of the iPhone will not have the chip. However, the recent news of Apple’s intent to acquire a mobile security firm and soon-to-be-launched Passbook software are two big clues from the company that it is considering launching the iWallet soon.

Hints that payments could be coming soon

In June, Apple unveiled Passbook, an application that will be built into its next mobile operating system, iOS6. Passbook, which is somewhat similar to Square’s CardCase app, has the ability to store boarding passes, movie tickets, retail coupons, loyalty cards and even store cards with real-time updates. The app is a convenient place to hold all the accounts that currently reside in a mobile app or even a leather wallet. The application also has geolocation, which enables the app to automatically pull up the proper card or pass when the consumer is in the relevant venue. Currently the demos show 2-D bar codes, but the Passbook application itself could be an indication that Apple is planning to work with other service providers to enable payment among m-commerce applications or may be using Passbook to get consumers accustomed to the idea of using their mobile device for shopping-related tasks.

Apple also recently announced its intent to acquire mobile security firm, AuthenTec, which makes finger-print scanning technology, for US$355 million. AuthenTec currently offers software, hardware and applications that help people bolster the security of their digital identities both at home and work. The ability to safeguard personal information through this biometric technology could solve one of the big concerns that Apple and others have with mobile payments. Having a stronger position in mobile security would only stand to help Apple, if and, when it entered the mobile payment battlefield. In theory, users might have to swipe their fingers on their iPhone screens to complete a purchase instead of entering a PIN or simply tapping the phone against a POS terminal.

Apple already has some of the biggest pieces already in place, including patents for NFC technology and, most importantly, a loyal consumer base. Furthermore, it has gained considerable experience in the retail space first through its e-commerce site, iTunes, and later through the almost 400 stores it operates worldwide. It has more than 400 million credit cards registered with its iTunes store, and has been running micro transactions for songs, movies and iPhone apps through the system for years. In comparison, that is more than PayPal, which reports having 113 million active accounts or Amazon.com which reports having 152 million customer accounts. Mobile payments are a natural extension of that expertise, especially when it is centred on selling digital goods. It also has removed the bulky cash register from the shopping experience in its own brick-and-mortar retail chain. At the Apple Store, if consumers want to buy a product, they flag down an employee wearing a brightly coloured T-shirt and hand over a credit card, which they scan onto a specialty outfitted iPhone or iPad. It also has EasyPay functionality on a payment app that allows consumers to make purchases in store and walk out without ever interacting with a salesperson.

Apple’s unique mobile offering

In fact, Apple is one of the best-positioned tech companies that could enter the real world as a payments player. Mobile payments have been slow to reach mass adoption because of the chicken-and-egg dilemma. Mobile phone manufacturers are generally reluctant to implement NFC functionality as it increases handset costs and there is a still a lack of NFC-enabled POS terminals. Merchants are leery to upgrade terminals to accept mobile payments because of the cost and lack of consumer demand. Consumers are not demanding the technology because there are few places upon which to use it. Apple has placed itself in such a unique position in which it could in theory control all three parts of this ecosystem.

Apple’s next phone could be manufactured with an NFC chip or another technology like Bluetooth 4.0 that could conduct mobile payments wirelessly. Perhaps more importantly, it could leverage its experience in retailing and its 400 million accounts and solve the two major problems that merchants have with mobile payments: costly terminal upgrades and lack of consumer interest. Apple could enter the mobile POS market with a suite of products for merchants that would turn Apple’s signature products like the iPad and iPhone into cash registers and enable consumers to pay for products wirelessly from their mobile phones using their iTunes accounts. Apple may be able to offer merchants lower payment fees due to higher volume, as well as offer loyalty programmes to entice consumers to use their iPhones and iPads to make payments.  It is equally feasible that Apple could go a step further and entice consumers with a small discount if they connected their iTunes account directly to their bank account and skipped over the payment rails altogether, which would be bad news for the traditional payment players. With all these pieces to the payment puzzle lining up, it is hard to imagine that Apple would forgo the chance to disrupt the payments as it has done for numerous other industries