Apple Inc. has the power to make mobile payments huge, but apparently not quite the way bankers hope.
Several recently unveiled patent applications indicate the Cupertino, Calif.-based company has a comprehensive vision for incorporating Near Field Communication technology–widely considered a critical element for mobile payments–into its iPhone.
Numerous payments companies have developed NFC systems that can turn phones into versatile financial tools, but few of them have gone beyond the pilot phase because phone makers and wireless carriers have been reluctant to incorporate the chips into their hardware.
Many bankers quietly have hoped Apple would take the leap. The technology giant repeatedly has demonstrated it has the clout to upend the marketplace, and payments execs say an NFC-capable iPhone would be a game-changer for mobile payments in the United States.
However, details from Apple’s patent filings suggest the company’s mobile-commerce plans are very different from the payments structure touted by financial companies, and some observers now wonder whether bankers should be careful what they wish for.
“Almost certainly [Apple executives do not] care what the banks think,” says Aaron McPherson, a research manager for payments at the Framingham, Mass.-based research firm IDC Financial Insights. “Why should they? What do banks have to offer them?”
The iPhone famously upended the mobile-phone market, with Apple bucking the carriers’ longstanding insistence on controlling the software that runs on handsets.
“Their whole business philosophy is they have total control over the hardware and software,” and this could certainly include payments applications, McPherson says.
When several patent filings from Apple were published this month, they shed light on the company’s plans to transform the iPhone into a payment device that relies not on credit or debit cards but on a beefed-up version of Apple’s own iTunes digital media store.
Financial companies have been pushing the idea NFC-enabled phones would become mobile wallets, store payment card account data, and function like contactless credit or debit cards.
Apple’s vision also has the phone initiating transactions, but instead of accessing an open-loop, general purpose card account, an NFC-ready iPhone might link to Apple’s proprietary iTunes service, largely cutting banks out of the equation.
ITunes is another Apple creation that has disrupted an established market. Since it initially was developed to focus on small-value sales, such as 99-cent songs, Apple typically aggregates many purchases into a single transaction, limiting the interchange paid to banks.
With NFC, the iPhone could extend iTunes’ influence at the point of sale.
In its patent application for a “Concert Ticket +” system, Apple spells out, transaction by transaction, how an NFC iPhone and the iTunes digital storefront would work within a strictly controlled ecosystem–and without bank input.
Apple sees consumers initiating transactions through iTunes, such as buying tickets to a concert or sporting event.
At the venue, the iPhone would become a mobile payment device, according to the filing with the Patent and Trade Office, No. 20100082491. A button labeled “Buy/Prepay Extras” may enable a user to toggle to another screen to prepay for certain benefits associated with the event, ... for example, an option to purchase recent albums by the artist associated with the event, to prepay for a live recording of the event, or to prepay for certain concert attire to be obtained at the event.
Much of the patent addresses the purchase of digital goods, such as music, but it also describes using iTunes system to handle the sale of physical goods.
“Expecting to be thirsty and wanting a concert souvenir, the user may prepay for refreshments ... and concert attire,” as well as parking, the application reads.
Consumers could use the NFC-phone to charge these purchases to their iTunes account. They might also be able to initiate transactions using a bar code displayed on the phone; merchants already use a handful of such systems.
The application never mentions the word “bank” and mentions credit cards only once (in parentheses), as one of many types of data the mobile device could access. Apple did not return calls requesting an interview for this article.
Another Apple patent application, No. 20100082444, is even further from bankers’ visions of the mobile wallet; it casts the iPhone as a personal price scanner that would enable shoppers to ring up products with their phones before completing the transaction with conventional payment methods.
Both applications were submitted in 2008 and made public by the patent office this month.
A third patent, No. WO/2010/039337, filed last year with the World Intellectual Property Organization, describes how the iPhone could provide person-to-person payments, a service several payments companies already are testing or providing.
Though these patent applications makes clear that Apple has a mobile-payments strategy, none of these concepts seem imminent.
Apple is expected to launch a new iPhone model this summer, and the tech-gadget blog Gizmodo.com published Monday a detailed look at its inner workings, which did not appear to contain any NFC components. The next iPhone operating system, which Apple announced April 8, also did not appear to support NFC.
So if Apple does make a move into payments, “it’s next year, if ever,”McPherson says.
Nick Holland, a senior analyst at Aite Group LLC of Boston, says when Apple does make its move, “the party that really will be cut out is the banks.”
If it wants to move ahead with any partner, Apple may choose eBay Inc.’s PayPal Inc., which already handles some payments within iTunes and offers a mobile payments application for the iPhone.
PayPal’s early success in online payments stemmed from its ability to simplify the process of handling transactions in what was then a new digital environment in which banks were slow to adapt. PayPal declined to comment for this story.
However, even if Apple’s NFC plans are not quite what bankers want, it could help still help them deliver the mobile wallets they have been touting for years.
“Bear in mind also that if Apple drops a technology into a device, others will quickly follow suit,” Holland says. Alternative “payments providers should be licking their lips.”
Allen Merrill, president of the Americas unit of the Singapore-based contactless-payment software provider Cassis International PTE Ltd., says financial institutions are “all sort of wondering about Apple,” but he stresses even if Apple goes against what banks expect, its actions eventually may work to banks’ advantage.
Much of the progress made already in mobile payments happened because Apple rewrote the book on smartphone software, he says.
“There is a sense that what Apple, in particular, has already done ... has already been an impetus toward the broader trend that will progress toward mobile payments,” Merrill says.
And even though Apple likes to go it alone, it cannot do so in the heavily regulated world of payments, he says. “Even Apple is going to have to play by rules that are not of its own making," Merrill says.