The Green Sheet Online Edition
November 24, 2014 • Issue 14:11:02
Apple: Friend or foe?
Bankers have always bristled at the notion of nonbank encroachments, especially in the payments space. Not so with Apple Pay, the computing giant's new mobile wallet. So what gives? More than likely it's just too big and too important a move to ignore. "Just as no issuer could afford not to participate in Apple Pay, acquirers have to support it," said Eric Grover of Intrepid Ventures, a Minden, Nev.-based consultancy. "If Apple's mobile wallet gets traction, not supporting it would put acquirers at a decided disadvantage."
Top 10 acquirer Heartland Payment Systems Inc. saw the writing on the wall. Within a day of the official announcement of Apple Pay, Heartland's Chairman and Chief Executive Officer Robert O. Carr issued a statement of support, adding that Heartland, which acquires transactions for concessions at AT&T Park in San Francisco, was accepting Apple Pay during the World Series games played at the San Francisco Giant's stadium.
"Apple was thinking of the big picture with the timing of Apple Pay," Carr said. "Heartland supports Apple Pay because it aligns with our mission – to provide a secure method for transaction acceptance."
Transaction security is a major consideration for merchants, their card-paying customers and the entire card ecosystem. That's why Visa Inc. and MasterCard Worldwide are insisting on merchant and processor compliance with Europay/MasterCard/Visa (EMV) by October 2015. EMV is a global standard for the interoperability of chip cards that use cryptography and other security measures to erect a multilayered defense against card fraud.
EMV has been used for a decade or more in other developed countries, like the United Kingdom. The standard has been enhanced over time and now incorporates standards for near field communication (NFC) contactless payments. With Apple Pay, the NFC chips embedded in the handset communicate with NFC-enabled POS devices.
Bruce Dragt, Senior Vice President for Global eCommerce at First Data Corp., described Apple's decision to include NFC chips and tokenization with the latest line of iPhones as a game changer for banks and other payment companies. "Apple is using a commercially approved standard that leverages all the existing rails," he said, adding that any past efforts by nonbanks to get into the payments space didn't leverage those existing rails. "Apple is approaching this in a very friendly way," he noted.
Scott Calliham, Principal at First Annapolis Consulting, concurred. "What Apple has actually done is endorse the existing Visa-MasterCard rails, which does not pose a competitive threat to acquirers," he said.
Dragt pointed out that Apple brings "hundreds of millions of consumers" to NFC and tokenization. No other nonbank payment alternative has ever introduced a product with that large a pool of potential users. "It's a great jump-start," Dragt said. He is optimistic that in a relatively short span of time another 100 million consumers will gravitate in that direction, too. "We fully expect others [providers] to come along and recognize the opportunities and provide similar types of products that ride the rails of tokenization," he said.
Rick Oglesby, Senior Analyst/Consultant at Double Diamond Consulting LLC, also pointed to Apple's consumer popularity as a strong indication of adoption. "Once Apple Pay becomes second nature to consumers for in-app payments, that behavior could extend to in-person purchases," he said.
To join or not to join?
Apple Pay is the long-awaited mobile wallet from Apple that works only on the latest models of iPhones and iPads. It employs tokenization – no actual account numbers get exchanged; instead they generate unique tokens for each authorization request – and a fingerprint ID to start the transaction. Online stores can also accept Apple Pay and save customers the hassle of typing in card numbers, billing addresses and other information every time they make purchases.
Apple Pay, at present, works with American Express Co. cards and MasterCard and Visa cards only – and only cards issued by participating banks. These are among the largest – Bank of America Corp., Capital One Bank, JPMorgan Chase & Co. and Wells Fargo & Co. – but far from the entire universe of credit and debit card issuers. Apple, however, has said it has commitments from at least 500 additional card issuers.
Meanwhile, although big-name brands like Macy's, Target Corp. and McDonald's Corp. have thrown public support behind Apple Pay, several equally large merchants (notably the pharmacy chains CVS and Rite Aid) have disabled NFC readers they already had so as not to accept transactions from Apple Pay. Both pharmacy chains are members of a competing mobile wallet initiative, CurrentC, which is led by Wal-Mart Stores Inc. and other big-box retailers.
The Merchant Customer Exchange, the group pushing CurrentC, was formed to build a lower-cost alternative to Visa and MasterCard payments (Discover Financial Services Inc. and AmEx, too). CurrentC is designed to process payments through the automated clearing house (ACH) system instead of the card networks. It also shuns NFC, which the card brands support and Apple Pay employs to initiate transactions. Instead the CurrentC app works with quick response (QR) codes generated by customers' mobile devices, which can be scanned using existing POS devices.
Thiago Olson, CEO of alternative payment startup Stratos Inc., said the reaction of retailers like CVS is shortsighted. "What we see happening today with Apple Pay is a real déjà vu moment," he said. "In 2012, when Google Wallet rolled out, two of the largest mobile carriers proactively blocked Google Wallet on their devices in order to support their own mobile wallet scheme," Softcard (formerly Isis).
The Electronic Transactions Association expressed outrage over the news that CurrentC members were blocking Apple Pay access, labeling it "anti-consumer and anti-competitive." With more than 300 million smart, mobile devices and over 1 billion credit and debit cards in the hands of American consumers "the future ubiquity of mobile payments is certain," the ETA wrote in an Oct. 27 statement. The group urged the two pharmacy chains "to reconsider their misguided attempt to block this innovation." And it urged consumers "to vote with their wallets – mobile or actual – and shop at retailers that aren't restricting consumer choice."
To put this dispute into perspective, consider that as of 2013, 17 percent of smartphone users had made at least one POS purchase using their mobile devices, according to the Federal Reserve. Among those consumers, 39 percent said they did so by scanning a QR code generated by those devices. Presumably, many of those consumers are customers of Starbucks Coffee Co., which has a popular mobile payment app that scans QR codes (and works with iPhones). The Fed's data shows that just 14 percent of consumers made mobile payments in 2013 using NFC-enabled smartphones.
Data and projections on mobile payments are difficult to pin down. Strategy Analytics, a research firm, estimated mobile payments in North America totaled about $900 million in 2013. Starbucks CEO Howard Schultz, during a recent earnings call, put the figure at $1.3 billion in mobile payments last year in the United States alone. And he boasted that nearly all those payments were made at Starbucks.
"[W]e had a 90 percent share of mobile payments in 2013," Schultz said. The company claims close to 7 million payments per week (roughly 16 percent of all transactions at Starbucks stores) are made using customer mobile devices. And all of those were initiated using QR codes.
A recent report from Juniper Research Ltd., a U.K.-based researcher, predicted NFC phone ownership is skyrocketing and will continue to dominate for the foreseeable future. The firm predicted 516 million mobile users of NFC contactless payment services worldwide by the end of 2019, up from 101 million in 2014, driven primarily by Apple's implementation of the technology.
That may not count for much if results of a recent survey of 1,000 small businesses by Newtek Business Services Inc. is indicative of the broader market. Among the businesses polled, 82 percent said they were not equipped to accept NFC payments; 93 percent said they had no plans to upgrade to accept NFC-based mobile payments, like Apple Pay.
Dragt said First Data is confident more merchants will get on board with NFC now that Apple has joined the fray. He explained how First Data has been bundling EMV, NFC and tokenization into the devices and POS operating systems it places with merchants. "From the smallest retailers to the largest, we've made it easy for Apple Pay to work on top of the existing model," he said.
On Oct. 20, the day Apple officially unveiled Apple Pay, First Data stated, with much fanfare, that it was ready to work with merchants and mobile app developers to support Apple Pay acceptance. Two of its largest acquiring partners – Wells Fargo and Bank of America Merchant Services – were also ready to support Apple Pay right out of the gate, and several First Data merchants were accepting contactless payments initiated with iPhones, First Data said.
"Today Apple Pay ushers in a new era of digital payments, and First Data is there to process secure and easy transactions for our clients," stated Frank Bisignano, First Data's Chairman and CEO, in a press release.
First Data said it had rolled out an e-commerce solution called Payeezy that lets merchants and their app developers build iOS apps for accepting Apple Pay for purchases of physical goods and services. The acquiring giant also recently introduced a small business POS solution dubbed Clover Station. The Clover Station gives an entirely new look and feel to the physical POS. Plus it includes features for tracking inventory, employee management, customer loyalty and rewards programs, as well as payments.
First Data introduced a mobile enhancement to Clover on Nov. 4. The unit is called Clover Mobile and is designed to enable merchants to take the functionality of Clover to the store floor. When launching Clover Mobile, First Data boasted the Clover Station had become "one of the fastest growing POS systems in U.S. history with 26,000 units distributed to date." Clover Mobile is in pilot now and will be widely available in 2015, First Data said.
CurrentC (which works with Android phones) incorporates merchant-oriented value-adds, such as advanced marketing tools and support for loyalty programs. It is also designed to track customers' purchases and to store that as encrypted information. Apple Pay, on the other hand, doesn't let merchants track or store any customer-identifiable information – a security feature highly touted by Apple.
Apple also has Visa and MasterCard in its court. And the Cupertino, Calif., firm has reportedly cut some interesting deals with its card company and bank partners. According to a Nov. 3 report in Venture Beat News, Apple has agreements in place to collect 15 basis points per credit card transaction, as well as a half-penny for each debit card transaction from card issuers.
Apple is also requiring participating banks to commit at least 95 percent of MasterCard and Visa cards in their portfolios to participate in Apple Pay, Venture Beat wrote, quoting a brief by a Keefe, Bruyette & Woods analyst who claims to have seen a document detailing the terms.
Industry consultant Paul Martaus conjectured that Apple will use the money it collects to sweeten the pot and increase merchant acceptance. "They need merchants for this to work," Martaus said, adding that they can use the money to pay for merchants' contactless terminals. NFC has been slow to take hold with merchants, but Martaus said, "Apple gives its imprimatur to the technology."
Apple is also rumored to have negotiated with issuers for lower interchange in part because security is considered more robust.
So what do acquirers and their partners expect going forward? "The vast majority of acquirers we have spoken with are not sure if Apple Pay will really take off or not, but there are at least some short-term aspects they can use as marketing and product bundling to help win new business," Calliham said. Overall, the attitude of most seems to be if Apple can drive more card transactions through the system it's good for business, he added.
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