Apple (NASDAQ: AAPL) announced a new mobile payments program called Apple Pay that Apple CEO Tim Cook said "will forever change the way all of us buy things." The new service will pit Apple against rivals like Google (NASDAQ: GOOG) and Softcard, formerly Isis, which has the backing of Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE:T) and T-Mobile US (NYSE:TMUS).
Apple has signed deals with Visa, MasterCard and American Express for its mobile payments program, which will use Near Field Communication technology, embedded in the top of Apple's new iPhone 6 and 6 Plus. Apple is also working with major banks in the U.S. for the service, including Bank of America, Capital One, Chase, Citibank and Wells Fargo. According to Eddy Cue, Apple's senior vice president of Internet Software and Services, the deals mean Apple is accounting for 83 percent of U.S. credit card purchase volumes.
In a coup for Apple, Cue said 220,000 retailers will work with Apple Pay including Macy's, Bloomingdales, Walgreens, Whole Foods, Duane Reade, Subway, Staples, Toys 'R' Us, and McDonalds. Getting retailers to support a mobile payments system is key since they need to provide point of sale terminals that work with the system.
Apple Pay will work with iTunes accounts, and customers will be able to add their own cards to the service.
As part of the service, Apple is leveraging the roughly 800 million iTunes accounts it has on file, and users can use the credit card they already have on file with iTunes for the service, or they can take a picture of a credit card with their phone to add it. Cue said the card numbers are not given to the merchant and the service uses a one-time payment number and a "dynamic security code" in order to protect users' financial data. Users can also use Touch ID, Apple's fingerprint sensor, to confirm the transaction.
In terms of security, if a user loses their iPhone they can suspend all payments via the Find my iPhone service. According to The Verge, Cue said Apple is "not in the business of collecting your data." He said Apple "doesn't know what you bought, where you bought it, and how much you bought it for."
NFC has been a standard feature on Android, Windows Phone and BlackBerry platforms for years, but Apple had not embraced it, in line with the company's generally cautious approach to adopting new technologies for the iPhone until it is comfortable they will find mainstream appeal.
Apple's platform will compete against existing mobile payment options like the carrier-led Softcard, Google (NASDAQ: GOOG) Wallet and the Merchant Customer Exchange's (MCX) CurrentC brand. Many mobile payment schemes, at least in the U.S. market, have failed to take off as the companies behind them have not yet convinced consumers that paying for physical goods via their mobile devices is easier or more beneficial than paying with a credit card. How Apple works to overcome that will be key to the success of its payments plan.
The NFC device market is expected to expand over time, according to analysts. Global shipments of mobile phones equipped with NFC technology will surge fourfold between 2013 and 2018 to 1.2 billion units, according to research firm IHS Technology. Worldwide shipments of NFC-enabled mobile phones reached 275 million units in 2013, up 128 percent from 120 million in 2012. The market will expand by at least 50 percent this year to reach 416 million units, IHS said.
However, NFC has yet to truly take off in the U.S. market, especially for mobile payments. Only half of U.S. smartphones are equipped with NFC today, according to estimates from Jackdaw Research estimates recently cited by the Financial Times.
For more:
- see this Apple release
- see this The Verge live blog
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Correction, Sept. 10, 2014: This article incorrectly stated how many merchants will work with Apple Pay; it is 220,000, not 22,000.