The point-of-sale terminal at the CVS drugstore in Palo Alto, California, can accept payments through a quick tap from a smartphone. The clerk isn’t sure how it works, though he knows it does because “a few kids” have used it. But one shopper tries it by taking out his Android phone and clicking on Google’s “wallet” app intended to allow instant payment and taps the terminal. Nothing happens. Then he tries PayPal’s payment app. Nothing. Out comes the leather wallet.
Over the past decade, tech companies including Google, eBay’s PayPal, and upstart Square, along with mobile carriers, credit-card companies, and various retailers, have all proclaimed the “death of the wallet.” The promise: their digital wallet equivalents would make paying for things in physical stores much easier. Instead, they ran into countless technical glitches, resistance from merchants, banks, and phone carriers, and consumer indifference.
Though mobile payments at U.S. retail stores will nearly double this year, to $3.5 billion, according to market researcher eMarketer, they remain a rounding error on the more than $4 trillion worth of in-store credit-card and cash transactions. Cash and cards are simply good enough, says payments expert Bill Maurer, dean of the School of Social Sciences at the University of California, Irvine. “All of these mobile wallets are looking for a problem to solve.”
That was before Apple jumped into the market with Apple Pay in a bid to take mobile payments mainstream. Standing in front of a photo of an overstuffed billfold, Apple CEO Tim Cook unveiled its mobile wallet at a September 9 event where he also debuted new iPhones and the Apple Watch. When Apple Pay launches Monday on new iPhone 6 models, all it will take to buy a sandwich at Subway or an air-chilled chicken at Whole Foods Market is to hold your iPhone near a wireless reader and press your thumb on the home button.
The iPhone’s Touch ID fingerprint sensor, already used to unlock the phone, recognizes it’s really you. Behind the scenes, a payment processor such as Visa recognizes an encrypted version of your credit card such as the one in an iTunes account, along with a one-time security code for that particular transaction, and approves the sale—all in less than 10 seconds.
That is indeed an easier process than the other digital wallets, which require unlocking the phone, opening an app, checking into a store, typing in a code, or other steps that can take much longer than swiping a credit card. Apple’s ability to create elegant, user-friendly products helped it popularize and seize commanding positions in music players and smartphones. If Apple Pay works as promised, it could do something similar for payments, making mobile wallets appeal to the masses, starting with its influential army of iPhone users. “Mobile payment is finally hitting that pivotal moment when all the pieces are coming together,” says Matthew de Ganon, senior vice president of product and commerce for Softcard, a rival mobile wallet joint venture of T-Mobile, AT&T, and Verizon.
In the U.S. there are only about 220,000 merchant point-of-sale terminals featuring the wireless payment communications system known as near field communication (NFC). That represents a small fraction of the more than six million U.S. retail outlets. They are used so rarely that wags joke that “NFC” stands for “not for commerce” or “nobody freaking cares.”
But Apple’s often adroit timing may prove spot-on once again, because a new development could bring NFC to many more stores. In a bid to force adoption of more secure credit cards that use a chip and a PIN number instead of a magnetic strip for payment authentication, Visa and other payment networks will, starting next October, make merchants liable for fraudulent charges unless they use new readers compatible with the new cards. That’s expected to speed installation of new readers, most of which will include NFC capability.
Apple’s focus on security is timely, too. In recent months, card data breaches at Home Depot, Target, and others have alerted consumers that credit and debit cards aren’t very secure. Such lapses expose them to identity theft and the annoyance of being forced to change credit-card numbers on file with dozens of merchants. At the same time, 38 percent of consumers surveyed early this year by Javelin Strategy & Research cited security concerns as a key reason they’re holding back on mobile payments.
Although credit cards are used in Apple Pay, it’s more secure because card numbers aren’t stored directly on the phone or on Apple’s servers. Instead, digital tokens, encrypted numbers that look like card numbers, are assigned by a payment network such as Visa to each card and stored on a secure chip in the phone. During a purchase, that token and a one-time transaction-specific code are sent to process the payment, so even if hackers intercept the numbers, they can’t do anything with them. Though Google Wallet and others have used tokens, Apple Pay will deploy them more widely.
Notwithstanding Apple’s own recent iCloud breach that exposed nude celebrity photos, “it is probably the most secure mobile payment solution to date,” says David Brudnicki, chief technology officer for Sequent Software, which provides mobile wallet services to banks, retailers, and mobile operators.
Improved security is even more important to banks and retailers than it is to consumers, who have limited liability for fraudulent charges on stolen cards. Apple Pay has already signed up the three big payment networks—Visa, MasterCard, and American Express—as well as banks handling 83 percent of credit card transactions in the U.S., including Bank of America, Capital One, Chase, and Citibank. Better security seems to have made up for any reservations that banks may have about Apple’s role as a powerful new middleman on transactions, or the small cut of transaction revenues they’ll be paying the company. Another potential bonus: Apple Pay could help the card networks capture transactions currently completed with cash.
For all that, Apple’s impact will be small at first. For one, only iPhone 6 and eventually iPhone 5 owners with an Apple Watch can use Apple Pay. Moreover, some merchants and banks don’t want to cede relationships with customers and data about them to Apple, says Richard Crone, CEO of the payments advisory firm Crone Consulting. Large retail chains including Walmart and Best Buy, which are part of the Merchant Customer Exchange consortium pushing its own wallet app, say they won’t accept Apple Pay. The Softcard mobile wallet joint venture of T-Mobile, AT&T, and Verizon is touting its support of more than 80 Android phones and the ability to pay at retailers including McDonald’s, Subway, and Walgreens. PayPal, soon to split off from eBay, and Google continue to push their wallet apps as well.
Individual retailers which have persuaded customers to use their own apps have no intention of replacing them with Apple Pay. Starbucks, for instance, lets customers pay by launching an app and holding up the phone screen with a QR code to a reader on its cash registers. But spokeswoman Maggie Jantzen says the bigger reason that 15 percent of Starbucks purchases—some six million transactions a week—are now completed via mobile is the combined appeal of payment, a rewards program, and a store locator all in one app.
Apple will have to offer a lot more to merchants than it currently does if it hopes to gain the support of more of them, says Javelin mobile strategy director Mary Monahan. In particular, Apple Pay will need to incorporate loyalty programs and discount offers. Payments experts think the company will allow outside software developers to create apps that can add such features to Apple Pay.
By all accounts, it’s going to take years for mobile payments to catch on widely. Apple Pay’s success ultimately will come down to persuading consumers to change longstanding habits using payment methods that, after all, work pretty well.
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