Will Apple Pay-ve the way for mobile?

Apple Pay'S launch in the first market outside the states has been hotly anticipated by the payments industry (and the odd Apple aficionado).

Anna Milne, EPI’s advisory board and other industry experts examine the potential to evolve the mobile payments industry in the UK market, in comparison to the US

Apple Pay has launched in the UK, making this market the second international region to receive the service after its debut in the US in late 2014, alongside the roll out of the iPhone 6.

In terms of vendor compatibility, the UK is far more prepared at launch than its US counterparts. Contactless payments are already becoming more mainstream as the vast majority of the UK’s major retailers have NFC terminals installed, and Apple Pay is compatible with any terminal that already accepts contactless payments.

Apple Pay acts as a mobile wallet and comes in after rival wallet services, such as Google Wallet, have had limited adoption rates. However, Apple Pay’s UK entrance is likely to spur adoption of competitors as well. According to Ars Technica, Google Wallet registered a 50% increase in transaction volume in the two months following the announcement of Apple Pay US. The number of new Google Wallet users also doubled during the same period.

Some US retailers have used Apple Pay as an incentive to upgrade their point of sale (POS) terminals to EMV/contactless, away from mag stripe yet uptake remains slow among non-Apple partners and it has been difficult for consumers to rely on Apple Pay as a wallet replacement solution.

Given the total UK iOS market share of 36.8%, as of end May 2015, according to Kantar, it is unlikely that Apple Pay will be a significant disruptor to the payments industry at launch as users will have to own one of the latest models of iPhone, iPad or Apple Watch to use the service.

Launch Support

Apple Pay is supported by all major UK banks, bar Barclays. The latter has announced it will support in due course. Barclays is currently pushing its bPay contactless payment technology, which includes a wristband, key fob (into which you insert an NFC chip) and a mobile phone NFC sticker.

Transport for London (TfL) is a key launch partner. The London transport network has been a great vehicle for contactless payments through its Oyster prepaid cards and more recently, its acceptance of contactless debit and credit cards. Interestingly, US Apple Pay users have already been using it on the network, as TfL’s Shashi Verma confirmed at a MasterCard workshop in June.

Apple Pay does not disrupt the four-party scheme model and, at least in the short term, is expected to be beneficial for card networks, banks, acquirers, POS vendors, and even its direct competitors.

Apple Pay comes at a cost for card issuers- 0.15% per credit card and $0.005 per debit card transaction in the US. These figures are as yet unclear for the UK market. Yet issuers are willing to absorb the extra cost due to expections of decreased card fraud and an overall increase in card transaction volume.

How it works

Users store existing credit and debit cards on their Apple devices via the iOS Passbook app. Card details can be entered manually or by uploading a photo using the device’s camera.

Once a card has been authenticated, its details are not stored on Apple’s servers. Instead of the user’s actual credit or debit card numbers being stored on the device, a unique 16 digit Device Account Number (DAN) is assigned, encrypted and securely stored in the Secure Element (SE), a dedicated chip in iPhone, iPad and Apple Watch.

The DAN is issued for each card by a token service provider such as Visa, MasterCard or American Express, to emulate the actual card.