Apple Pay isn't just something Apple dreamed up and hopes will be adopted. Rather, it's part of and compatibile with a worldwide move to stem the tide of credit card fraud. And Apple is leading the way.
Let's face it. Current day credit and debit cards with the raised number and magnetic strips are relics of a long gone era. The major snafu with Target's point of sale system shows how vulnerable the devices are that read the card's magnetic strip. The technology used by merchants hasn't caught up with the techniques used by the black hats, and credit card fraud losses are expect to hit US$10 billion in 2015.
However, that's about to change. The card issuers, EuroPay, MasterCard and Visa (EMV) are tired of paying for fraudulent charges in the billions, and so they've developed an initiative called the EMV standard, to go into effect in October 2015. Part of initiative is to get smartcard technology used, especially in the United States. These smart credit cards have embedded chips that can conduct an encrypted, authenticated transaction.
The stick used to promote this move to better technology is the Liability Shift provision. As Jeff Carelli at Paymentsleader.com explains:
One key component in the EMV discussion is its accompanying liability shift. This liability shift means that those issuers and merchants using non-EMV compliant devices that choose to accept transactions made with EMV-compliant cards assume liability for any and all transactions that are found to be fraudulent. MasterCard defines the liability shift this way: The party, either the issuer or merchant, who does not support EMV, assumes liability for counterfeit card transactions.
Any merchant who thinks that it will be too expensive to replace their point-of-sale (POS) terminals will have to ponder the Target-like scenario of massive financial liability, no longer assumed by the card issuer. Just the appearance of looking like they're not concerned about customer security will be bad for their public relations. Competing merchants will make sure we know who has the best, most secure checkout system.
The Banks Love it Too
Not only will the merchants have to replace about 15 million POS devices, at cost of about $450 each, but the banks will have to re-issue over a billion credit cards, at a cost of over a billion dollars. It seems like a lot, but it pales in comparison to the mounting financial losses due to fraud.
The smartcard works in a similar fashion to Apple Pay. A token, designed by the issuer, is exchanged at the POS, and if authenticated, an encrypted transaction takes place that ends up crediting the merchant and debiting the customer's card. The difference with Apple Pay is that the customer need only have a credit card number on file, eliminating the need for a physical card. That will save the banks some money down the road.
Also, while Apple Pay works similarly to smartcards, customers, dismayed by the old technology of conventional plastic credit cards may well decide they want to skip the new smartcards altogether and jump straight to their iPhone or Apple Watch method. (When they can with merchants who support the POS NFC mode.)
September 9: Apple's Eddy Cue announces Apple Pay merchants at launch.
Because the merchants won't want to assume financial liability for fraud, because they don't want to look backwards and incompetent, and because they will want to attract upscale, security minded customers, there will be great incentive to move to the new POS devices that also have the NFC system enabled.
Another factor is sales throughput. One year at Christmas, at Barnes & Noble, my wife and I had about $150 worth of books in our hands, but when we got to the checkout station, the line was massively long. It looked like a 30 minute wait to pay for our books, so we just set them all down and walked out of the store. Just as the Apple video shown during the September 9 event demonstrates, merchants will make the tedious part of the shopping experience, the payment process, seem to evaporate. That means less POS friction, better cash flow and happier customers.
Business people know how to spend money to make money. An investment in a whole new payment system, launched by the EMV initiative, will prevent their own liability and attract customers. Apple is riding this wave by working with the banks to implement an attractive, compatible technology to smartcards, and that's why Apple has the blessing of so many banks.
In fact, even though Apple Pay won't be operational until October, banks are already lobbying to be the default credit card in your Apple Pay profile. Not only will it mean they'll be the card you use most often, making them more money, but further on, down the road, they may well be able to avoid having to manufacture and send you a new smartcard.
It All Adds Up
In summary, Apple Pay will succeed because of 1) the liability provision of the EMV initiative, 2) the desire by merchants to avoid looking like it's risky to shop with them, 3) the compatibility with the smartcard system, 4) the potential for banks to save money, and 5) better POS security, throughput and customer satisfaction.
To top it all off, Apple gets a 15 cent payment for each $100 spent. Everybody wins.