The biggest news to come out of Apple’s product introduction in early September was Apple Pay, a mobile payment service that could jolt the moribund $400 billion business for credit card processing out of its deep slumber. The wake up call could impact players who handle trillions of electronic transactions, who may feel the ground shifting. The threat of Apple’s entry into payments may have pushed eBay to spin off its payments subsidiary Paypal, announced today. And KKR, who owns the biggest card processor, First Data may want to step up plans for an IPO, announced earlier this year.
Apple’s technology offers end-to-end security for mobile payments and could relegate the 50-year-old system of plastic cards with magnetic strips to the trash bin. Mechanical systems are too easy to hack and high-profile breaches are accelerating. Payments by mobile phone are on the upswing and are on the way to displacing card transactions.
Apple has a secure system to guard the transaction from inception at the phone to its movement to the cash register with multiple levels of defense. Apple authenticates users before authorizing the payment, makes sure it’s the user who actually approves the transaction and sends the encrypted information without the card data to the terminal.
The computer giant‘s cut from authorizing payments may be .15% of the gross merchandise value, or 15 cents for every $100 spent, according to MacRumors. That could quickly add up to real money. Apple’s mobile payments business could reach $1 billion in a few years, according to KHX Investments
Apple Pay may set off an industry reshuffling in electronic payments not seen since iTunes shook up the music industry. Already PayPal is on the defense with an ad in New York Times that says, “We want our money safer than our [celebrity] selfies,” which intimates Apple’s credit card information is stored in the iCloud like photos. Apple encrypts account numbers on a chip in the phone.
Apple engineered security checkpoints into the hardware and software of new iPhones and wearables. It offers rings of protection with firewalls so even the most sophisticated crooks will be stumped. Credit card numbers are removed from sight for everyone, even retail employees, protecting iPhone users from unwanted intruders.
Every year, retailers and banks absorb billions in losses from stolen cards and hacked IT system and they want a reboot for electronic payments, an industry shake up. Merchants bear the brunt of losses from security breaches, whether they’re stolen cards, skimmed accounts or unauthorized IDs, and they want a new way to plug the holes and prevent leaks.
And, retailers want to expand loyalty programs. Customers can store rewards on Apple Passbook along with credit card accounts. Merchants who reach out right at the last minute at the POS tend to close more sales. Once buyers start to buy, their defenses go down and there’s less friction for more purchases, according to academics. Big Data helps merchants use statistical analysis to match clusters with deals for offers that work. The math is easy:
Transaction + Right Suggestion = More Sales
NFC Is Near
The heart of Apple’s mobile security on the iPhone 6, iPhone 6 Plus and Watch is the Near Field Communications chip on the devices. The NFC system has an antenna to transmit and receive signals and an encrypted token for handshakes. NFC uses a low power signal, with a range of a few inches to send data from the phone to the reader. Users wave the phone in front of the reader and, presto, the acknowledgement pops up indicating the transaction is complete.
Thieves can’t scan for card numbers and passcodes because Apple doesn’t send them. Apple assigns a security code to each transaction, useless outside the closed system.
We mentioned Apple Pay is coming to iOS8 on the iPhone 6, iPhone 6 Plus and Watch in October. Users of iPhone 5S can also use Apple Pay if they buy the Watch’s which also has an NFC chip to handle the transactions.
Below is a summary of the levels of security for Apple Pay.
Level 1: The transaction starts with Touch ID, fingerprint authentication. Users have to press their thumbprint to the phone for verification. This first layer of security will prevent anyone but the phone owner from making a purchase. Users can disable missing phones with “Find My iPhone.”
Level 2: A new chip on the Apple devices, called the “Secure Element,” encrypts and stores account numbers in Apple Passbook. Users must verify credit card accounts with the bank before Passbook accepts them. Passbook will also store airline boarding passes, movie tickets and gift cards. And Passbook will store customer loyalty cards and receipts.
Level 3: The NFC chip uses “Dynamic Security Codes” for secure communications between phone and the reader. Apple Pay will transmit Device Numbers, not actual credit card numbers to the reader.
Level 4: Apple’s Watch uses passcodes for transactions. It verifies the user then checks the user’s heartbeat to make sure the watch has not broken connection with the skin.
Tim Cook, CEO of Apple is stepping out from the long shadow of Steve Jobs to switch your wallet for an iPhone. It’s a secure trade.
KHX Investments performs market research and investment advisory services. Susan Kalla is the Founder.