Embarking on the Apple Payments Expedition

There comes a time when an opportunity makes too much sense to not pursue it. In the world of consumer technology, that something is payments by Apple. The speculation of a marriage between the iPhone and mobile wallet seems to resurface every September when Apple debuts a new model of the iPhone. Though last year was a similar bust to prior years, the inclusion of NFC (Near Field Communication) technology in the iPhone 6 has made it a near certainty that 2014 will be the year that Apple finally breaks into mobile payments.

Let’s start with some background. The buzz around the ‘iWallet’ has triggered a substantial amount of ignorance and confusion, with many not fully understanding the market that Apple is poised to disrupt. That market is proximity payments, or better known as in-store payments, which are made at the physical point-of-sale. These payments are unlike online payments – a market that Apple has already begun to master through its iTunes Store and Apple IDs.

Apple has experienced phenomenal success with its version of the digital wallet, gradually building what’s now an inventory of over 800 million iTunes accounts. Most of these accounts are accompanied with credit card information, which is readily tapped when a user purchases music or digital content on from Apple device.

Apple-event-74Apple now has aspirations to enable payment at pharmacies, department stores and fast food chains. One barricade, up until now, was Apple’s resistant to include NFC in the iPhone, which resulted primarily from industry uncertainty around NFC’s ability to deliver enough benefit in payments to warrant hefty implementation costs. Apple’s caution was justified, of course, after witnessing the struggles of other NFC-based wallets like Google Wallet and SoftCard (formerly ISIS).

But Apple will indeed ride NFC into the proximity payments field, taking its traditional ‘push’ approach. The tech giant boasts confidence that its brand will gradually force smartphone owners to upgrade or purchase the iPhone 6 as well as convince merchants to install NFC-enabled point-of-sale terminals. Apple is also rumored to have already struck partnerships with several major retailers, including Nordstrom’s, CVS and Walgreens. As many in the payments industry agree, if any company is to crack the chicken-and-egg problem that has stood in the way of just about every other mobile wallet to hit the market, it’s Apple.

But why is Apple, a consumer technology company that is accustomed to big-ticket and high-margin sales, interested in tapping the payments industry that realizes inherently slim margins? The simple answer is that they’re probably not. Apple can use payments to develop and enhance other revenue streams, such as promoting relevant products at partnering retailers (one source estimates that Apple can generate up to $300 in advertising revenue per year per user). More importantly, a successful play in payments can lead to Apple’s ultimate goal in every that market it competes: drive greater brand loyalty and sell more iOS products.

While many have misinterpreted Apple’s entrance into payments as an attack on the Visas and Capital Ones of the world, Apple has actually coveted (and obtained) partnerships with these companies. Apple’s wallet app is destined to be the sexy, consumer front-end portion of proximity payments, while the card networks, issuers and acquirers go about payment processing as usual. One milestone already achieved by Apple is negotiating card-present fees in proximity payment transactions in exchange for bearing some fraud risk, likely driven by the commitment to tokenization of card credentials.

imagesSo, what might an Apple mobile payment actually look like? The process begins long before a consumer even hits the checkout counter. Using iBeacons that are empowered by BLE (Bluetooth Low Energy) technology, iWallet would alert consumers of relevant deals, based on prior shopping history or other contextual factors such as season or day of the week. Coupons and other promotional content could be readily available in the Passbook app for easy redemption upon purchase.

Passbook, which many have speculated to be the actual mobile wallet app, is tailor made for storing digital receipts, perhaps with even more transaction-level information than is included on a paper receipt. But, rewinding to the actual purchase: to execute a payment, a consumer would place his or her iPhone within about 4 centimeters of an NFC-enabled point-of-sale terminal. From there, the terminal would likely summarize the purchase and then ask for a fingerprint on the iPhone home button (TouchID) to authenticate the purchase, in place of a signature.

Both NFC and payments could be door openers beyond the mobile wallet for Apple. Apple may feel compelled to extend the use of NFC to other products, or perhaps use it to create new ones. One such example that is already in the pipeline is the NFC-enabled iWatch, which is expected in 2015 and could make Apple a pioneer in wearable technology. Apple may try to use NFC in apps for transit, building access or hotel room access.

A successful entry into payments could drive Apple to offer P2P (person-to-person) payments for iOS users. Early collaborations with banks and other financial institutions could position Apple to offer a simplistic form of PFM (personal financial management), integrating social channels for peer spending comparison and the like.

Apple’s road in payments is likely to be a long one. The number of iPhone 6 owners will remain a very small percentage of total iPhone owners for quite some time. And despite the known fact that mobile payments are not popular with the vast majority of consumers, I expect Apple to try and use its mobile wallet to woo consumers to the iPhone 6. In the interim, Apple may offer NFC-enabled smartphone stickers to iPhone 5S owners, the way that many banks have done. (Such stickers could be offered to legacy iPhone owners if TouchID is not part of payment authentication)

If my speculation on Apple payments in September 2013 or March 2014 didn’t get you excited for the coming ‘iWallet’, let this be your opportunity to rejoice. The debut of the iPhone 6 on Tuesday September 9th will provide the public with even greater detail on Apple’s intentions in mobile payments. The busy mobile payments playing field will get even noisier once Apple embarks on its payments expedition this fall.

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