Apple Inc. has officially unveiled Apple Pay, a mobile payment system in its upcoming line of smartphones and its smartwatch, using a model that involves legacy payment companies but adds a new spin.

The Apple Pay process will incorporate a Near Field Communication antenna across the top of the phone, as well as the TouchID fingerprint scanner, a secure element in the phone handset and an NFC sensor at the point of sale, said Apple vice president Eddy Cue.

“You will be able to see all of your credit cards on Apple Passbook,” Cue said. To add cards to the Passbook for use in Apple Pay, consumers take a photo of the card, and Apple confirms through the issuing bank that the card belongs to phone’s user, Cue said.

The card details are not stored on the phone. Instead, users are assigned a “device only” account number, which in turn produces a one-time number and code for a transaction, he said.

“If you lose your phone, you do not have to cancel your credit cards,” Cue said. “You can use the Find My iPhone app and suspend all payments from that phone.”

With Apple Pay, a merchant cashier never sees the cardholder’s name, account number or security code, he noted.

Users make payments by holding the iPhone near the NFC sensor at the merchant site and are completed instantly, of which Cook said, “That’s it. It’s so cool.”

Cue said stores that will immediately accept Apple Pay include Macy’s, Bloomingdale’s, Walgreens, Duane Reade, Staples, Subway, McDonald’s, Whole Foods and, of course, Apple retail stores.

Apple has established deals with American Express, MasterCard and Visa, and also with the six largest issuing banks, Cue said. He did not name those banks, though the presentation included images of JPMorgan Chase and Bank of America cards. More banks will be added, he said.

Apple’s move will pump new life into NFC payments, said Randy Vanderhoof, executive director of the Smart Card Alliance.

“Consumers that have used NFC mobile payments have liked it, but haven’t liked not being able to use any payment card they want in their mobile wallet,” Vanderhoof said. “Apple’s wallet overcomes this challenge by letting consumers’ use the card of their choice through their iTunes account. It’s a smart move and a big win for NFC,” Vanderhoof said.

The timing of Apple’s entry into payments is good for merchants, he said. Many are already looking to install new point of sale terminals to accept EMV-chip cards, so they can also look at enabling NFC acceptance at the same time.

“No one can change consumer behavior like Apple,” Vanderhoof  said. “This move will make the market for mobile payment explode. And it is a great endorsement of NFC technology as the best way to secure mobile payments.”

Companies providing payment gateway services for the wave of future payments in mobile, virtual and digital currency also view Apple’s entry as a revelation.

“Apple’s new payment presentation method is an example of the dynamic change taking place in the payments space,” said Apriva CEO Chris Spinella. “We see this as a chance to get large retailers on board with new payment technologies more quickly, driving forward innovation in payments.”

Even though Apple’s announcement has delighted supporters of NFC, some factors will continue to work against the technology, said Greg Boardman, senior vice president at Ingenico Group.

Consumer and merchant confidence in payment security measures remain tarnished, and they likely won’t automatically embrace NFC contactless payments, Boardman said.

“Apple having NFC is certainly the put-up or shut-up moment for NFC supporters who have long said the technology would take off if Apple were involved,” he said.

Ingenico’s terminals are ready for any technology that merchants want to adopt, but those merchants are going to be cautious about any system that may come across as potentially less safe than EMV chip-based card technology, Boardman said.

The card brands’ support for Apple will aid the transition, he added.

Meanwhile, Apple is betting that tokenization systems offered by payment companies will provide a security boost to its new Apple Pay system at a time when consumers are wary of Apple’s cloud-based services.

First Data, TSYS and Visa have announced their tokenization technology will support Apple Pay, which will enable the upcoming iPhones and Apple Watch to make contactless payments at a variety of retailers from cards issued by many of the top banks. Security is vital to Apple’s pitch because the company is still working to calm consumers’ worries about the safety of its iCloud service, which was targeted as part of a leak of nude celebrity photos last week. (See page 7.)

Apple Pay uses tokenization to replicate consumer card credentials and assign each account a randomly generated number in the cloud. That number, or token, is then stored on the device’s secure element. The iPhone also generates dynamic data for each contactless payment.

Apple’s use of tokenization is “highly secure,” said Barry McCarthy, president of financial services at First Data, in an interview with ISO&Agent Weekly. “The [primary account number] is never transmitted to the phone…which makes it difficult for the bad guys to steal the PAN in flight.”

In 2015, First Data will become the token service provider (TSP) for issuers, McCarthy said. First Data will manage tokens throughout their lifecycle, including sending new tokens if a card expires or in the case of loss or theft.

First Data played a key role in the launch of Google Wallet as well. The processor works as the trusted service manager for Google’s payment system, loading card credentials to a secure chip through a process called provisioning. For most Google Wallet purchases, Google presents a virtual MasterCard number to the merchant instead of the true card account number.

“First Data will continue to support a portfolio of projects and partners,” said Pete Donat, senior vice president of First Data Ventures.

Apple Pay will support NFC transactions at the POS or online payments through in-app solutions. NFC at the POS will be categorized as card-present transactions for interchange fees, and in-app purchases will be considered card-not-present transactions but its fees will align with more secure forms of card-not-present, said Donat.

NFC wallets have struggled for adoption, and one reason was because merchants didn’t have POS equipped with the capability. But as merchants upgrade their terminals for the October 2015 deadline for EMV acceptance in the U.S., those new terminals will likely have NFC.

First Data has started shipping peripheral devices with EMV and NFC capability and a PIN pad, said McCarthy.

First Data, which supports 750 million credit and debit cards in the U.S. and 4 million merchant locations, resides “at the center of a significant portion of all payment transactions,” McCarthy said. Apple “recognized that role…and we were invited to help participate among a very small list of providers to bring the [iWallet] solution to market.”

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry