Digital wallet technology appears set to revolutionize the way we make purchases at stores. In the coming years, there is likely to be a battle between retailers, credit card companies, and mobile device makers to determine who can make payments the most simple and safe, as well as who can leverage their brand power to gain a foothold in the fast-growing market.
Apple (AAPL) has spotted the opportunity here. Its iPhone business has a loyal base of users with a history of being early adopters of new technologies. This makes it an ideal platform to pioneer new concepts in personal payments devices. Whereas American consumers have traditionally needed to use a credit or debit card to make purchases at stores or online, Apple Pay allows them to make those payments using their phones, and collects a fee on each transaction from participating banks, which include JPMorgan Chase (JPM – Free JPMorgan Stock Report) and Bank of America (BAC).
Indeed, smartphones seem to have become an adequate, and in some ways even stronger, identifier of the consumer than a credit card would be. While other payment services, such as Google’s (GOOG) Google Wallet and eBay’s (EBAY) Paypal App for mobile phones, have a head start on Apple in this regard, Apple Pay is expected to bring mobile payments to the sort of critical mass that will give the whole industry a push to compete for the broader consumer market, rather than just early adopters. To wit, eBay is planning to spin off Paypal partly in anticipation of the opportunities and need for maneuverability and focus in this fast-changing field.
Apple Pay and Google Wallet both use near-field communication (NFC) technology to enable smartphones to communicate with payment terminal devices. NFC uses short-range radio communication to make payments using mobile payment apps as well as contactless cards (as opposed to traditional swipe cards). These payment methods have been catching on for years outside of the United States, to the point that swiping a credit card seems bizarrely outdated in many countries. The technology seems ripe for mass adoption in the domestic market over the next few years. While there are some security issues involved with NFC technology, they are considered to be far less than those of the current swipe card and security code model.
Security features help set Apple Pay ahead of the competition. Apple Pay requires not only your phone to make a payment (as payment “tokens” are stored in hardware on the device), but also your thumbprint to activate it. Google Wallet, on the other hand, stores payment information on the cloud, rather than in the hardware itself, making it less secure in some ways, although in practice this feature makes it easier to use on far more existing devices than Apple Pay.
One factor that is slowing down the adoption of Apple Pay by stores is the large consortium of retailers who have banded together to promote an app, CurrentC due to be released this year. Some retailers, such as CVS Health (CVS) and Rite Aid (RAD), have even disabled NFC technology altogether, effectively banning Apple Pay and Google Wallet as well as other contactless cards, which use existing credit card accounts, in order to promote the CurrentC app. The main motivator behind the CurrentC collaboration is retailer’s frustration with credit card fees. Credit card companies such as MasterCard (MA), Visa (V – Free Visa Stock Report), and American Express (AXP – Free AmEx Stock Report) charge retailers significant fees based on each transaction. CurrentC is a way to allow customers to pay the retailers directly, which could save as much as several percentage points of each transaction.
Many industry observers, however, are skeptical as to whether the CurrentC system will catch on to the extent the retailers hope. One problem with the application is that customers will need to link their bank accounts to the system to use it, which may lead some to some concerns over potential data breaches. Furthermore, some have noted concerns with the amount of information that CurrentC is likely to obtain from customers.
While many of the retailers that have signed up for the CurrentC platform may be contractually obliged to exclude other alternative payment methods for several years, the ease of using Apple Pay might tempt them to adopt it. The speed of the checking out process using Apple Pay may actually prove to be more financially beneficial for retailers than the value to them from squeezing out the credit card companies using CurrentC. Thus, it is likely that at the very least Apple Pay will be able to compete with CurrentC at many if not most of the retailers involved in that project.
While the mobile wallet revolution is likely to involve intense competition and surprises as the field develops, Apple is on track to be one of the winners at the present time, due to Apple Pay’s focus on safety and simplicity.