Some Apple Pay Notes

I’ve already written about Apple Pay (1, 2) and I’ve highlighted the fact that Apple does not store customer and transaction data. I also mentioned that this might be very attractive for merchants, banks and credit card companies.

As weeks pass from the big announcement on September 9th, more details about the system have been trickling out. An article by Yoni Heisler gives us a more in-depth look, and of particular interest to myself, it gives us the reason why credit card companies might be fully behind Apple Pay.

The credit card companies and other players in the transaction chain are a very important for the success of Apple Pay. Although a lot of attention focuses on the convenience of payments, the reality is that convenience itself is seldom a driver of adoption. In fact, I believe that looking at convenience alone is completely the wrong approach.

Instead, if there is a tangible cost saving associated with Apple Pay adoption, we can expect either merchants or credit card companies to aggressively entice customers to use Apple Pay. In addition to simply putting up notices in the store, this also may be via bonus loyalty points or discounts. Hence the financial benefits will be shared with customers, giving them a financial incentive to use Apple Pay. This will be a much stronger driver of adoption compared to convenience alone.

Yoni Heisler’s article clearly shows where the cost savings with Apple Pay are. Also if you consider the huge size of the savings that the article mentions, it is no wonder that merchants and credit card companies will be very eager to adopt it.

Noyes’ statement brings up an interesting point, namely that the fundamental aspects of Apple Pay weren’t concocted in Cupertino. Rather, Apple Pay was designed in accordance with an emerging token-based mobile payments standard which aims to increase security and reduce the incidence of fraud. To that end, Apple is getting into the mobile payments space at just the right time. So while Apple isn’t necessarily inventing the wheel here, Apple Pay again represents the first real implementation, on a massive scale no less, of the relatively fresh tokenization specification.

That said, it’s not as if Apple took the easy way out and simply developed Apple Pay to conform to the most general requirements for token-based transactions. On the contrary, sources at two top credit card companies who helped work on the implementation of Apple Pay told me that large technical teams from Apple, credit card companies, and banking institutions worked tirelessly over the past few months to implement additional layers of security into the Apple Pay platform.

What this says is that Apple Pay was developed in concert with credit-card companies. The credit-card companies have essentially invested as much in Apple Pay as Apple has. The reason for doing this is to reduce credit-card fraud which costs billions of USD to credit card issuers and merchants. The financial rationale for credit-card companies investing in the increased security is plainly obvious.

Token transactions as they have been implemented for Apple are a new and much higher standard of security for electronic payments. The amount of security built into provisioning tokens and supporting transactions is a new standard that I think will definitely shift fraud patterns going forward.

If it does indeed become the standard, then Google may have a problem as I mentioned in a previous post.