Apple Pay is Apple's attempt to sew up the market for mobile wallets, which companies including Google and PayPal have struggled to dominate for years. What's different this time is the remarkable number of participants Apple has assembled to make its version of digital commerce work. That, plus a number of advances in securing the transactions, should give a major boost to digital payments, experts say.
Small-business owners should take note, not only because a wallet-enabled device may soon be headed their way, but also because the technology behind Apple Pay may shape the future of mobile payments.
"For a number of years we've been looking for a large-scale collaboration of banks, payment networks, and merchants," says Michael Archer, a partner in the global financial services practice at management consultant Kurt Salmon. "Those pieces are coming together to create an actual business case [with Apple Pay]."
A "digital wallet" is, in essence, a piece of software code activated through an app that lets consumers store and access credit, debit, or bank account information through a mobile device to make purchases.
Starting next week, more than 500 companies, including major banks, credit card companies, and some of the nation's biggest merchants, will be ready as consumers start to use Apple Pay at more than 200,000 merchant locations.
Participating banks include Bank of America, Citibank, JPMorgan Chase, and Wells Fargo. The big credit card networks, including Mastercard, Visa, and American Express, have also lined up behind Apple Pay. Major retailers such as Walgreens, Macy's, and McDonald's are also on board.
"If you want to move the needle on consumer acceptance, you have to come to the market with significant scale on the consumer side, and this is what Apple has done," says James Anderson, senior vice president of emerging payments at MasterCard.
Consumers who have the new iPhone 6 will be able to load up to eight different credit cards, plus rewards-point cards, into the Apple Pay app. And while they will be able to pay at registers simply by tapping their new iPhone 6s, Apple Pay also lets them pay within applications on their phones.
That's particularly important to any small business that designs consumer apps, or uses them to allow customers to buy things, Anderson says, because consumers will no longer have to leave the app to pay.
"Merchants say they really like giving the consumer an in-app experience, because it is more immersive, and represents the brand better," Anderson says.
Just as important is the security Apple has brought to bear on its mobile wallet. First off, Apple is securing its payment app with a biometric fingerprint reader, which verifies the person making the transaction is the person who owns the phone. The new phones also have embedded within them something called a nearfield communication chip (NFC), which transmits payment information via short bursts of radio waves directly to the register. Apple uses NFC to send a "token" with encrypted details about the transaction, rather than the actual account information of the cardholder.
"Innovations around tokenization and biometrics set Apple Pay apart from offerings like Google Wallet and Softcard," says Andy Schmidt, research director at CEB TowerGroup. (Softcard is the wallet alternative put out by the telecommunications consortium including AT&T, Verizon and T-Mobile.)
While much of this may seem like nerdspeak, it's positioning Apple to capture one of the fastest growing payment markets out there. While e-commerce in the U.S. logs about $260 billion in sales (in a $17 trillion economy) mobile sales account for just under half that, at about $115 billion. But that number could triple in the next five years, according to some estimates.
The big challenge, of course, is consumer adoption. Apple's reputation for great user experiences, plus its substantial cool factor, might enable the company to give the mobile wallet true cachet. And that might be good for other companies that are also chasing the dream.
"I am a believer that if you have got room enough for one [mobile wallet] maybe there's enough for more than one," Archer says. "But for now, Apple is the first mover in the market with a complete package."