Apple may have just solved mobile payments conundrum

[SINGAPORE] When shiny new gadgets are unveiled with the razzmatazz that Apple is famous for, the most important message sometimes gets lost in the decibels.

The new 4.7-inch iPhone6 and its bigger brother - the 5.5-inch phablet, iPhone6 Plus - along with the new Apple Watch were the stars of the show at Flint Center in Cupertino, California where Apple held its bash on Tuesday. However, the most far-reaching announcement may have been the new mobile payments service launched by the company called Apple Pay.

The service will take advantage of the near-field communication (NFC) chip that Apple has finally put into its phones (and also its watch). User credit card details registered in Apple's iTunes store will be used by the service. A user can also take a picture of a credit card not registered with iTunes and add it to the phone. At the point of purchase, an iPhone user simply holds the phone next to a terminal with a thumb on the Touch ID sensor and - voila! - the payment is done.

Sounds cool and simple, and it'll be available at 22,000 retailers in the US starting Oct 20. Apple Pay also helps in online shopping. In apps enabled with Apple Pay, one can buy items with a single touch without having to enter credit card details. A lot of such apps are being developed. Big merchants can even build customised apps which use Apple Pay.

What is probably the service's killer feature is that Apple Pay will not give out a user's credit card number and details to the merchant; it will, instead, use a one-time payment number and a dynamic security code.

Unfortunately, iPhone6 users in Singapore will not be able to use Apple Pay anytime soon. It will be available only in the US for now, and Apple has not provided any timetable for an international rollout.

The move into payments could, in the long run, prove to be a game changer for the company. Time will tell, but it appears that Apple has finally cracked the mobile payments conundrum that has held back previous efforts like Square Wallet, Google Wallet and others from becoming mainstream payment options.

Several factors have tripped up companies with what, at first glance, appeared to be elegant solutions that allowed users to pay for purchases using their mobile phones. In 2011, US start-up Square introduced the Square Wallet app that was supposed to let users pay for their buys with credit cards by just giving their names. Another start-up, LevelUp, tried something similar, and even the US telcos tried their hand at it with a payment solution called Isis Wallet. Google also threw its hat into the ring with its Google Wallet solution.

None of these efforts proved successful; they either faded away or remain niche options. Why? The main reason was that the margins for processing payments is minuscule and none of these players had the market clout to be able to succeed.

Apple is in a unique position to take advantage of the capabilities it has built over the years such as its TouchID, Passbook and iTunes accounts. Its market clout and credibility have enabled it to negotiate deals with credit card companies Visa, MasterCard and American Express for this venture. It has also roped in several banks and is talking to others.

The result is it has been able to drive down costs. More importantly, Apple does not need to make money from this venture, at least not immediately. The extraordinary margins that it makes from iPhone sales can cover costs as the company positions Apple Pay as a "lifestyle privilege" for iPhone users, who won't have to sign credit card receipts or key in Pin numbers any more.

As IHS Technology senior director Ian Fogg notes, the iPhone acts as a critical bridgehead to acquire new customers, and as a foundation for new ventures such as Apple Watch and Apple Pay. "The more new customers Apple can win with iPhone 6, the greater the chance of success with the Apple Watch and Apple Pay," Mr Fogg told The Business Times.

Ovum senior analyst Gilles Ubaghs adds that Apple's long-anticipated entry into this space marks a milestone in payments regardless of the eventual outcome of its new service.

He said: "Perhaps unsurprisingly, given Apple's proclivity for closed-garden approaches, its new Apple Pay service follows a more traditional device-based secure element (SE) and avoids using cloud-based HCE (host card emulation) services. This will add to security and enable 'card present' transaction rates which will please merchants."

HCE means having your credit card details stored in the cloud, which requires authentication for every transaction. This type of transaction is treated by credit card and payment-processing companies as being what is known as a "card not present" payment - which implies the physical credit card is not presented to the merchant during the transaction, much like in online purchases. With Apple's in-device storage of the information, the payment is considered a "card present" transaction.

But Mr Ubaghs added a note of caution: for all its attractions, the Apple Pay service is likely to remain a niche option for some time - at least until iPhone 6 usage becomes more common and the service is made available outside the US.