Speculation is soaring that Apple’s expected unveiling of iPhone 6 on Sept. 9 will also include some kind of mobile payments system, often dubbed “iWallet.” The basic idea is to let consumers use their iPhone in place of cash or physical credit, debit, and various kinds of prepaid cards.
But what would that actually look like? How might Apple put that together in a way that is distinctively “Apple-like?”
Fundamentally, it will be some kind of Apple magic in the form of an iPhone payment app that would simplify the buying process and, importantly, add value to it as an incentive for people to use the iPhone instead of their wallet. Apple is likely to leverage its existing iTunes account information (which includes user identity and one or more registered credit cards), along with some form of authentication such as the Touch ID fingerprint scan, and a potential drop in processing fees, benefiting both retailers and shoppers.
The term “mobile payments” covers a confusingly wide range of possible transactions, says Mark Ranta, senior solutions consultant for ACI Worldwide, a Naples, Fla., global payments company. ACI can supply everything from the client device software to the backend payment processing, and mobile transactions are a fast-growing part of its business.
The term has been applied to a range of transaction types, including using your smartphone to access your Amazon account and buy a book or DVD or leaf mulcher. For Ranta, these kinds of transactions are more properly understood as mobile e-commerce.
“To me, mobile payment is having the phone act as the payment instrument,” Ranta says. “That means, the phone replaces coin and currency, and [physical] debit, credit and prepaid cards.” These include a retailer’s smartphone loyalty app, linked to your account preloaded with some amount of money from a debit card or bank account; displaying a QR or barcode at checkout to deduct from a prepaid account or gain a discount, such as the popular electronic coupon model pioneered by Groupon; or replacing the credit card swipe by means of a data exchange between a phone and POS terminal using near field communications (NFC) chips.
But Apple likely wants, and may need, to do more than simply replace using a physical card, because that is already widely done in various forms. Because, by itself, that replacement doesn’t make pulling out your phone instead of your wallet an inherently simpler or more valuable experience.
The current benefits and shortcomings can be seen in various mobile payment applications today. Starbucks offers customers a loyalty app that can be preloaded with money from your credit card or a Starbucks gift card. (Here’s information about the Starbucks for iPhone app.) At the cash register, the app shows a 2D barcode on the smartphone screen. A laser reader at the POS terminal scans the code, pulling data from the phone. This scanning, says Ranta, is functionally identical to swiping your credit card or gift card through a card reader. The real benefit is to Starbucks: it pays less money in transaction fees to credit card issuers like Visa or a bank.
Today, Starbucks and all other retailers pay as much as five to 10 cents to the issuer every time a credit card is swiped by a customer, according to Ranta. But the ‘closed-loop’ arrangement made possible by the Starbucks app eliminates many of those swipes, he explains. “Starbucks already has your money [preloaded in your account],” he says. “They only have to pay for one swipe [to load the account], but you get multiple uses of it, each time you present the barcode, and Starbucks saves a lot of money in transaction fees.”
New laws now allow merchants to pass on these transaction fees to their customers, says Ranta. These additional charges may prompt some consumers to switch to cash or to look for some other mobile payment option that will eliminate or at least reduce those fees, he says, and that may be an opportunity that Apple can exploit.
The NFC option
NFC-based mobile payments have been talked about for years, but in the U.S. are still a very small percentage of all payments, according to Ranta. The NFC chip in your phone “talks” to an NFC chip in the POS terminal, typically handing off information about your Visa or MasterCard.
One example is the mobile phone carrier consortium called ISIS (not to be confused with the terrorist group with the same acronym, ISIS is being changed to Softcard), a joint project of AT&T, Verizon and T-Mobile. You need an “ISIS-ready” smartphone from one of these carriers – one with an NFC chip, the ISIS wallet app, and an enhanced SIM card with a Secure Element to protect identity and card data. On the retail side, there needs to be an NFC-based reader and partnership with ISIS, to set up a secure handshake between the merchant and your phone through a digital identity service from a company called Gemalto.
ISIS lets you set up an American Express Serve Account, to which you can add money from other credit or debit cards, or from your bank account. You can add cards from American Express, Chase and Well Fargo to the wallet, along with loyalty, membership and rewards cards from participating merchants.
Google Wallet is an app that adds a bit more. Like ISIS, it’s linked to a funding source – your bank account, credit or debit card. It supports NFC-based payments through the MasterCard-deployed PayPass system at participating merchants. But it also works on non-NFC phones (Ranta has the Google Wallet app on his iPhone, for example), with an associated MasterCard-powered debit card, called Google Wallet Prepaid Card, which eliminates many of the fees associated with other prepaid cards. And you can use Google Wallet online to buy stuff via Google Play or other Google products, as well as some other websites that support it (via a “Buy with Google” button). “It’s a neat app,” says Ranta. “I just wish it was more widely accepted.”
There’s been widespread speculation that Apple might rely on the Bluetooth Low Energy (BLE) radios that have been present starting with iPhone 4s, along with Apple’s iBeacon specification, as an alternative to NFC-based payments. IBeacons are mini-location sensors installed in various places in a store: if your iPhone has BLE turned on and you have given permission, these beacons can send you notifications for discounts, special offers, and so on, which your onboard retailer app can then access via Wi-Fi or cellular.
Ranta says that the BLE infrastructure is “a lot more expensive” than NFC for retailers to install. Apple itself, for example, has spread iBeacons liberally around its retail stores, and created a custom shopping app, EasyPay, to work with them. “I just don’t see iBeacon getting there fast enough,” Ranta says, given that more retail chains are committing to NFC-based transaction systems. Possibly that could change if the iBeacon infrastructure was limited, initially, to the cash registers and point of sale terminals.
Given the current market, what might an Apple mobile payments system look like?
Ranta thinks the next iPhone is likely to have an NFC chip (the rumored larger sizes – a 4.7- and 5.5-inch screen – clearly create more space for the chip and its accompanying antenna). “I don’t think they can ignore the market demand,” he says.
As others have also suggested, Apple could leverage identity and payment information that it already securely holds in millions of iTunes accounts, in a way that’s similar to how your Amazon account information can be used to make payments to other merchants. Ranta was recently on a Delta Airlines flight and charged the fee for the inflight Wi-Fi service to his Amazon account.
Currently with iTunes, a customer buying music or an app from Apple re-authenticates by means of a smart password – one that has to meet certain requirements for alphanumerical entry, case, etc. Apple could use the Touch ID fingerprint sensor on selected iPhones as the sole or additional authentication mechanism, Ranta speculates.
Apple’s iCloud Keychain, introduced with iOS 7 in 2013, offers a basic level of password management and could play a role in mobile payments. With it, you can store specific information -- your account names, passwords, credit cards numbers – in iCloud and sync them across iOS 7 and OS X devices that are logged in under the same Apple ID. [See Rene Ritchie’s Keychain “how to.”]
To leverage the cards stored in iTunes, Apple needs agreements with the card issuers, according to Ranta. And there have been several reports in the past few months that Apple is in talks with all the leading card companies. “These agreements are based on volumes – the number of swipes,” says Ranta. “If you shift the agreement to open this up to buy not just apps and songs but pizza and books, it will boost volumes.”
There will also have to be partnerships on the retailer side, to support a “Pay with iWallet” (or “iTunes” or “Apple”) capability at the cash register. “There’s a lot of legwork that would have to be done, and the rumors suggest that’s exactly what Apple is doing,” Ranta says.
All of these relationships and technology elements are not new, Ranta says, and he therefore doesn’t expect Apple to re-invent mobile payments.
Yet there are two areas where Apple could provide major improvements and new value for iPhone users.
Re-imagining the buying experience
First is the actual way people buy things, and how they want to buy things, with a smartphone. “Paying with a physical card today is so easy, that it’s hard to see what would be the value of pulling out my phone instead of my wallet,” Ranta says. “That alone won’t tip the market into mobile payments.”
Analyzing and rethinking the buying experience as a mobile experience is a starting point.
“One of the things that personally frustrates me is that today rewards and payments are treated as two very separate things" in mobile transactions, Ranta says. “I have to go into a dark corner of an app to get a reward. That makes no sense. You need to put the rewards [a discount, for example] up front and associate it with the purchase.”
Apple has already redefined the shopping experience at its own retail stores, with iBeacons and the EasyPay app.
“[Y]ou can now walk in, pick up a boxed Apple TV device, buy it and walk out without ever talking to an Apple salesperson or even visiting a checkout counter,” writes Mashable’s Lance Ulanoff, describing his own experience early this year in Apple’s Grand Central store in New York City.
“We started by using the iPhone to scan the product barcode and then we had to enter our Apple ID, pretty much the way we would for any online Apple purchase,” he continued. “The one key difference was that this transaction ended with a digital receipt, one that we could show to a clerk if anyone stopped us on the way out.”
Ulanoff characterizes this experience as a “far more palatable and more passive way of paying digitally, especially since it relies on a payment method iOS customers already know.”
Another example of adding value to the mobile shopping experience is Walmart’s Savings Catcher, which is now part of Walmart’s smartphone app. If a local rival has a lower advertised price on something you bought at Walmart, you can get the difference in price as a Walmart Rewards eGift Card. Buy something at Walmart, and scan into your phone’s Walmart app the barcode at the bottom of your receipt. Savings Catcher automatically compares the price you paid (for eligible items) with the advertised prices, both print and online, of other top retailers in your area. If it finds a lower price than you paid for the exact same item, it automatically gives you the difference via an eGift Card.
“That’s genius,” says Ranta.
Making the buying experience simpler, more intuitive, more secure, and more valuable to the end user is a very Apple approach, and it could draw a wide segment of iPhone users into mobile payments. “If you let me save $5 with every phone purchase, that gives me an incentive to pull out my phone to make the payment,” Ranta says.
The second area where Apple could put its distinctive stamp is in overall architecture of the payment system -- an open- or closed-loop approach to payments. The open-loop would let you present your phone at the cash register, authenticate, approve the purchase and use a card linked to your iTunes account to pay. “It would be just like using a physical credit card,” Ranta says.
By contrast, a closed-loop system would be similar in concept to what Starbucks is doing, Ranta says. “You preload your ‘iWallet’ and it’s all part of the Apple ecosystem,” he says. “The payment funnels back to Apple, and other players, like banks and the credit card clearing companies, are all eliminated. It goes from Apple to the merchant.”
Such a “direct billing” model could change the dynamics of the still nascent mobile payments industry, Ranta says. “It could get very interesting, because they literally take everyone else out of that space.”
“It could force the credit card companies to take another look at how they charge, and how much they charge,” he says. “They may lower fees. And hopefully, it would increase competition.”
Apple’s focus is continuously on improving the user experience. On Sept. 9, we may get to see how it plans to improve the user’s experience of buying goods and services through your iPhone.