Amid this week’s Apple announcement fanfare was the introduction of Apple Pay, an attempt to give consumers a safer way to make payments without a physical credit or debit card. While it’s unpopular to bet against Apple, this new offering won’t revolutionize the payment processing industry for one simple reason: Payment behavior — not the device — drives the standard.
Apple is correct that cards rely on “exposed” information: numbers on the card and the data on the magnetic stripe. Apple’s contention is that Apple Pay keeps that information “unexposed” by employing measures such as biometric authentication to improve the overall security of a point-of-sale transaction. But the transaction system remains the same. The authorization and clearing protocols are the same. The merchant acquirers and the issuers are still connected in the same way.
Previous attempts have fallen flat
Replacing traditional cards isn’t an easy proposition. Remember NFC processing? Card issuers did a number of pilots, but the public just didn’t adopt it. Proximity cards? All it took was fewer than 100 moviegoers to complain that their ticket transactions at the point of sale got mixed up with cash transactions by the person behind them in line. When the press reported it, proximity cards were dead on arrival. NFC also required merchants to change devices. And that’s a cost that merchants do not want to assume.
Now, there will be early adopters of Apple Pay. There will be success stories. But there will also be failures.
(How is technology changing the face of the financial industry? Consider reading: Security Concerns Limit Growth of Mobile Banking)
Why ‘chip and pin’ has a better chance
Apple proponents would say the company has “ubiquity,” that they are an influential institution capable of transforming consumer behavior. However, the numbers do not support that. Apple’s share of both wallet and market has been steadily declining while the shares for Android devices have been rising. A lot of folks have looked at Apple, after the initial hype faded, and instead chose Samsung.
For years, the US payment processing industry (including retailers) has been resistant to adopting “Chip and Pin” (part of the EMV standard), which has been widely used in many other countries for over a decade, and has provided a demonstrable reduction in credit and debit card fraud. However, this is about to change, as from October 2015, US retailers will assume the liability for fraudulent use of payment cards if they do not support payment using EMV cards.
These chip cards will emerge as the payment standard because behavior drives the standard. In this case, U.S. cardholders using their ATM cards essentially already practice EMV behavior. Chip and pin is the channel and pathway that will get traction at the point of sale.
Apple’s devices are legendary gamechangers. But when it comes to payments, devices don’t change the game.