Here’s How Apple Pay Is Already Rocking the Payments Industry Boat
Apple confirmed the long-running rumors about its interest in the mobile payments market when it unveiled Apple Pay, a system that will allow the iPhone 6, iPhone 6 Plus, and upcoming Apple Watch to be used as digital wallets. As noted by Apple, credit and debit card numbers can be stored in the iPhone’s Passbook app by either entering the card number manually or by taking a picture of the card.
The card information is then stored in a Secure Element chip. Utilizing a contactless technology called Near Field Communications (NFC), combined with a tokenization process that will encrypt credit and debit card numbers, as well as other transaction information, Apple Pay will allow users to make payments with the new iPhone models at more than 220,000 retail locations.
Since Apple Pay will not be rolled out until later this month, it remains to be seen if Apple’s digital wallet solution will be any more successful than similar mobile payments systems, such as the Android-based Google Wallet. However, there are signs that Apple Pay has already sparked reactions from companies that are involved — or want to be involved — in the mobile payments industry. Here is how two of the Cupertino, California-based company’s current competitors and one major former rival have reacted to Apple Pay.
Last month, eBay announced that it was splitting its online payments business PayPal into a separate company. “For more than a decade eBay and PayPal have mutually benefited from being part of one company, creating substantial shareholder value,” said eBay president and CEO John Donahoe in a press release. “However, a thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively. The industry landscape is changing, and each business faces different competitive opportunities and challenges.”
While Donahoe didn’t name Apple Pay as one the changes he saw in the “industry landscape,” there are several indications that the eBay/PayPal split may have been partly driven by Apple’s entry into the mobile payments market. As reported by USA Today, activist investor Carl Icahn has been pressuring eBay to split off its rapidly growing payments business from the company since January. In a post on eBay’s official blog, Donahoe rejected Icahn’s proposal and listed three reasons why the e-commerce and online payments businesses should remain together.
“One: eBay accelerates PayPal’s success,” wrote Donahoe in January. “Two: eBay data makes PayPal smarter. And three: eBay funds PayPal’s growth.” Donahoe even specifically highlighted PayPal’s success in mobile payments as evidence that the businesses “create mutually reinforcing network effects.” So what has changed since the beginning of the year? The only obvious change in the industry landscape appears to be the introduction of Apple Pay. This seems to suggest that Apple’s entry into the mobile payments arena is one of the primary reasons behind the eBay/PayPal split.
There is also evidence that eBay reversed its position on a PayPal spinoff after a failed bid to cooperate with Apple on its mobile payments system. According to “payments industry executives” cited by Re/code earlier this year, PayPal was trying to get in on Apple’s mobile payments system by offering to help manage Apple Pay with various types of support services, including fraud detection.
However, according to sources cited by Bank Innovation, PayPal’s chance to turn a potential rival into a partner was torpedoed by Apple after it was revealed that PayPal had teamed up with Samsung on the Galaxy S5. The Samsung Galaxy S5’s fingerprint scanner can be used as a secure method for payments through PayPal.
According to Bank Innovation, PayPal’s former president, David Marcus, even warned against the deal because it would ruin PayPal’s chance to get in on Apple Pay. However, Marcus’s objections were overruled by Donahoe, and the PayPal executive later left for Facebook.
Marcus’s hiring by Facebook is likely related to the social media company’s own impending entry into mobile payments. As reported by TechCrunch, Stanford computer science student Andrew Aude recently discovered a peer-to-peer payments feature hidden in Facebook Messenger. The as-yet-inactivated feature will allow Facebook Messenger users to send money to each other similar to other money transfer apps such as Square, Venmo, and PayPal.
Since this in-app feature only allows users to complete peer-to-peer money transfers, it doesn’t appear that it will be a direct competitor to Apple Pay. Aude also noted that Facebook’s system only seemed prepared to handle debit cards, unlike Apple Pay, which handles debit and credit cards.
However, the Facebook Messenger payment feature demonstrates that the introduction of Apple Pay has already impacted the overall mobile payments industry in indirect ways. With millions of new NFC-compatible iPhone models in the hands of consumers and the potential for widespread mobile payments adoption, it appears that Apple Pay has helped reignite other companies’ interest in the overall online payments industry.
The co-founder and former CEO of Microsoft elaborated on how Apple Pay might benefit the overall mobile payments industry in a recent interview with Bloomberg. “Apple Pay is a great example of how a cell phone that identifies its user in a pretty strong way lets you make a transaction that should be very, very inexpensive,” Gates told the news outlet. “So the fact that in any application I can buy something, that’s fantastic. The fact I don’t need a physical card anymore, I just do that transaction and you’re going to be quite sure about who it is on the other end. That is a real contribution.”
Although Gates is no longer actively involved in the day-to-day operations of Microsoft, it was interesting to hear the former CEO of one of Apple’s biggest rivals explain how Apple Pay could be a rising tide that lifts all boats in the mobile payments industry. “And all the platforms, whether it’s Apple’s or Google’s or Microsoft’s, you’ll see this payment capability get built in that’s built on industry standard protocols, NFC,” said Gates. “And these companies have all participated in getting those going. Apple will help make sure it gets to critical mass for all the devices.”
Although Gates was happy to praise Apple’s entry into the mobile payments market, he remained evasive when it came to discussing any plans that Microsoft might have for getting involved in the market. However, he did say he was “very happy” with what current Microsoft CEO Satya Nadella is doing.
Will Apple Pay spark a mobile payments revolution or will it become the next Google Wallet? Apple fans and industry watchers will have a better idea of how Apple Pay will impact the overall online payments industry in a few weeks. Although Apple’s website only states that Apple Pay is “coming in October,” Bank Innovation cited insider sources that claimed the mobile payments system would be launched on October 20 as part of the iOS 8.1 software update that is expected to be released.
Follow Nathanael on Twitter @ArnoldEtan_WSCS