Banking

Apple’s new payment system likely to benefit card networks, banks

Apple Inc.’s new iPhones are threatening to make the plastic in your wallet obsolete, and that’ll probably still benefit Visa Inc., MasterCard Inc., American Express Co. and the biggest card-issuing banks.

The iPhone 6 and iPhone 6 Plus, introduced Tuesday, include a payment system called Apple Pay that will let consumers shop in stores and online using the tap of a finger on a phone instead of the swipe of a credit or debit card. The service relies on the card networks and banks including Bank of America, JPMorgan Chase & Co., PNC Financial Services Group and Wells Fargo.

For Charlotte’s Bank of America and the other banks participating in Apple Pay, the system will make it easier for customers to pay with mobile phones, said Tim Sloane, analyst with Massachusetts-based Mercator Advisory Group. “This will help make those cardholders more profitable to the banks,” he said.

Apple’s decision to team up, rather than develop a payment system from scratch, could funnel more spending to the networks and card-issuing banks as transactions shift from cash and plastic cards to mobile phones and other digital devices.

At stake is a mobile-payments market that will probably more than quadruple to $90 billion by 2017, according to Forrester Research.

Bank of America CEO Brian Moynihan, in a statement provided by Apple, said the bank has already been providing its customers with tools to make their financial lives better.

“For them, better means simple and convenient. Apple Pay is another exciting move in that direction,” he said.

Apple Pay will come before some big banks have introduced their own mobile wallets. Bank of America, for example, has tested mobile wallets but never rolled out a product.

Apple Pay will use fingerprint scanners to verify users and near-field communication, a radio-based technology that exchanges data between devices that are held or swiped within a few inches of each other.

The new wallet will use “tokenization,” a security feature banks have been pushing for, said Sam Maule, a payments expert for Carlisle & Gallagher Consulting Group, a Charlotte-based company that serves the financial services industry. In tokenization, a consumer’s sensitive payment data is replaced with a unique identifier, or token. “You’re using a one-time, throwaway identification for that transaction,” Maule said.

Data breaches in which sensitive customer information is stolen can create problems for banks. At least five financial institutions with a major presence in the Charlotte area had to issue new debit cards to customers who shopped at Target after the retailer disclosed a massive data breach late last year.

With cards “we’re totally reliant on the exposed numbers and the outdated and vulnerable magnetic stripe,” Apple CEO Tim Cook said Tuesday. “It’s so easy to lose your card, or have it compromised, it’s no wonder that people have dreamed of replacing these for years.”

‘Big step’

Still, the change in technology doesn’t exclude existing card networks and issuers.

“This gives the networks and banks significant market access,” said Sloane, of Mercator Advisory Group. “It’s a big step.”

Merchants that will accept contactless payments on the new iPhones include Macy’s Inc., McDonald’s Corp., Walt Disney Co., Starbucks Corp., and Target Corp., Apple said. The new payments system will be available in the U.S. in October, it said.

Maule, of Carlisle & Gallagher, said the success of Apple Pay will hinge on how merchants embrace it.

“The biggest hurdle besides consumer adoption will be merchant adoption,” he said. “Merchant adoption will help drive consumer adoption.”

Rewards programs at participating merchants will also be key to the payment system’s success at competing with other mobile wallets, he said.

“Will this be the single wallet solutions that works? No. There will always be multiple options to choose from.”

Visa handled 60.5 percent of global card purchases at merchants last year, followed by MasterCard, with 26.9 percent, according to the Nilson Report, a payments-industry newsletter. American Express’s market share of purchase transactions was 3.8 percent, the data show.

Those that have sought to challenge that dominance include EBay Inc. and Merchant Customer Exchange, a retail industry group with its own mobile-commerce ecosystem and whose members include Wal-Mart Stores Inc. and Target. There’s also Softcard, the e-wallet application formerly known as Isis, a joint venture of AT&T Inc., Verizon Wireless and T-Mobile Inc. that enables users to pay in stores by tapping their smartphones.

Any benefit to the networks from the new iPhones is likely to be slow, Randy Vanderhoof, executive director of industry association Smart Card Alliance, said before Tuesday’s unveiling.

“Payments is always a difficult business to change,” Vanderhoof said in an interview. “We should always be cautious of announcements around major changes impacting the way consumers shop and pay and how that will be enabled. It’s always going to take longer than we think it will.” Observer staff writer Deon Roberts contributed.

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