Apple Pay: Breakthrough innovation or banking re-invention?

On Tuesday, Apple presented a new series of mobile devices, including two new iPhones and the Apple Watch. While the hardware is gorgeous, another announcement has generated a heated discussion in the financial industry: Apple Pay, writes Thomas Wagenknecht.

Put simply, consumers can use the new devices to make contactless payments both online and in brick-and-mortar stores. Users verify their purchase using the fingerprint-based “Apple ID”. Offline, Apple makes use of near-field communication (NFC) technology which enables users to make purchases on the move.

Consumers can transfer credit card data from their existing iTunes account or simply scan their debit or credit card with the iPhone camera. Critically, the service is backed by leading financial services corporations including Visa and MasterCard, as well as Citi and Wells Fargo.

Sound familiar?
Like so many ‘innovations’ from the Cupertino-based tech giant, this service is not really new. NFC is already built into many smartphones and credit cards. Apple Pay’s backend is supported by Stripe, founded in 2011.

Rivals Google and eBay have tried their luck before – with limited success. Yet, Apple’s design and roll-out might be the breakthrough. Mobile payment will become more present in customer minds, which might drive retailers (Apple partners with some major chains) to introduce more NFC-equipped checkouts.

An open door for innovation
More importantly, Apple Pay can revolutionize standard banking processes. There are endless opportunities for developers to enhance the service, using Apple’s iOS.

For starters, there might be a decreasing need for transaction authentication numbers (TANs) since users can now authorize transfers using their iPhone. Once you’ve stored their account details, sending money to friends might become as easy as sending an e-mail – a process already offered by some US startups. Or how about letting customers withdraw money from an ATM using their iPhone and fingerprint to confirm their identity?

There’s more. For instance, Apple Pay will reduce switching costs for credit card users because the days of carrying a new card and memorizing the PIN are clearly numbered. This enables banks to offer more cards to new customers (e.g. in credit card-weary regions like Germany), but it also poses many questions – and opportunities – for innovation.

If, for example, users are more willing to switch credit cards, there will be more pressure on banks to speed up verification and issuing processes. Not to mention the ongoing need for integrated, but agile software development as more and more financial transactions are offered via smartphones and smartwatches.

Focus on security and privacy
No doubt smarting from the well-publicized hack of celebrity iCloud accounts, Apple put huge emphasis on security in their presentation. All credit data will be stored in the “secure element”, a separate part of the iPhone’s chip. At each transaction, Apple creates a temporary token that authorizes the purchase.

This is decrypted and verified by a third party payment provider.The payment receiver neither sees the actual credit card number, nor other personal details. Apple claims that no transaction records are stored and everything can be deleted with a single click if the iPhone gets stolen. Nonetheless, banks and merchants that partner with Apple Pay become somewhat vulnerable to system breaches.

Apple Pay won’t come for free
Apple could drive mass acceptance of mobile payments where PayPal, Softcard and even Google have failed in the past. You could even argue that Apple Pay is giving these rivals a boost along the way by bringing mobile payments to a wider audience.

But for the banks there’s a price to pay – a share of the transaction fee. Apple has squeezed the music industry with sales on iTunes and will ask the financial industry for a slice as well. And banks also lose an interface between their brand and the customer. Am I paying with my Barclaycard? Well yes, but I’m more likely to say I’m paying with my iPhone. Apps like Venmo and Square Cash also gain popularity every day, making banks as intermediaries less and less important.

The result? As long as financial corporations want to keep their leading role in transactions, they will need to increase marketing and development efforts in order to keep up with the new pace of mobile payment.