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Apple Pays or not?

Was September 9, 2014 a good day for payment systems?

Just as everybody was saying digital wallets are dead in the US, Apple comes with this announcement of its own payment solution. If you haven’t watched the keynote you can watch it here.

But rather than Apple paying it unlike the name, the US issuers find themselves picking up the bill.

As many things in life it has pluses and minuses. On the good side we may include NFC, HCE and utilizing existing networks of Visa/Master/Amex. And on the not so good side, we may name the fees that the US issuers will pay to Apple, and NFC and HCE being locked down by Apple to only Apple Pay for the moment.

Let’s take a closer look at each the components of the announcement about Apple Pay:

1) NFC: iPhone 6 comes with the NFC technology. Finally, there is no more debate about NFC and contactless.

We will (should) be able to use iPhone 6 without the stickers to pay. At this point they locked it down for their own use only but it is actually a silly thing to do.

There will be many apps apart from payments which will want to use NFC. In fact I just bought a portable speaker set in Madrid by Sony which has NFC connectivity. I assume that in a very short time it will be free to use just like the Bluetooth.

The more important aspect is the status of POS terminals.This announcement will also push the acquirers to upgrade the terminals with contactless readers. As the US has the liability shift for EMV set for October 2015, replacing terminals is a requirement anyhow. Today only about 200K terminals in the US are contactless. I believe that by this time next year we will see that number at least a million.

In Europe, we are having that migration to contactless anyhow. Many countries have been doing it including Spain, Poland, France and the UK. MasterCard Europe just announced that new terminals will have to be contactless starting for 2016 Jan 1 and all the terminals in Europe will need to be contactless by 2020. We expect Visa EU to follow with a similar announcement very soon.

In other countries (SA, Mexico) we as BBVA have been pushing all the acquirers and Visa/MasterCard to move to contactless technology. And in many other countries such as China and Australia, this transition has started and will only speed up.

Warning: If the banks/acquirers do not move fast to contactless terminals, there will eventually be other mobile solutions and banks may lose merchant fee revenue.

2) HCE: Telco’s are dead. Apple will use the secure element in its hardware (phone). No need for SIM card to make secure payments. (Please refer my earlier writing about HCE and Telcos)

We don’t know at this moment if they will allow the banks to use Host Card Emulation (HCE) in the cloud with our apps but I assume that they will. They might try to force banks to use the secure element in the phone to charge a fee but listening their arguments, I wouldn’t think so. Yet their model outside of the US is not defined yet.

3)Tokenization: As they were very concerned about hacking and fraud that could come with payment systems, they ended up making the NFC transactions with tokenization which means that each transaction will create a code instead of using the normal 16 digit card number. Companies like First Data and T-Sys will provide that and Visa/ MasterCard /Amex are also in the game meaning they will send the issuers the normal 16 digit to authorize the transactions.

Therefore no impact for banks. Visa/Master/Amex had announced their plans for tokenization last year and will upgrade their systems which will in the normal systems upgrade for the banks.

4)Fingerprint: As our beloved banks in the US have not made any decision for a better cardholder verification than the good old and analog signature such as PIN, Apple will use the sensor to validate the cardholder. (They had Visa/MasterCard/Amex agree with that verification) Will need to see if it is comfortably used by the cardholders or US issuers also push for PIN. In all other countries PIN is the preferred way to verify.

We will need to see how it is going to happen for instance in the UK where Apple has a large share and all transactions are already PIN. Banks will need to agree with Apple that outside the US, they will have to use PIN. The choice should be offered to the cardholder.Many cardholders like me will be hesitant to use fingerprint as it may also be eventually hacked. And if it does, unlike PIN, I cannot change my fingerprint!!!!!

5) The wallet/Apple Pay: Here comes their deals with the card issuers in the US. If the cards of the issuers (that Apple had the deals in September 2014) which together form 83% of all the volume in the US are used from iTunes or by taking a picture of the plastic, then Apple gets a fee for the transaction from the issuer bank. This is where the investors of the Apple stock are happy about. A steady fee income. Globally though where most interchange and merchant fees fare lower, those numbers like in the US will be very difficult to achieve for Apple.

Yet I do not expect that the large American issuers who signed the deals with Apple getting out of the wallet game totally. Citi announced its own wallet last month. They will/should not let all the NFC/mobile transactions go to Apple. After observing the speed of terminal upgrades in the US, I expect them to push for their own wallet. Visa/MasterCard are sending forms to ask US issuers if they will want to be in the Apple Pay wallet. Many small US issuers without the wallet technology will want to be in.

So what is the final verdict? Well, as we have been saying plastic eventually disappear. There is no return from mobile technologies. Yet having a digital wallet will NOT guarantee that a card will be used. It is again what and how banks offer within that wallet is more important.

Having the best promotions (right offer, geo-tagging, etc.) and best info about the card transactions are the key. Having a simple loyalty system to be preferred is also very important.

Banks’ investments into a better campaign management and customer contact systems are essential.

Banks need to continue developing wallet/card apps with the best possible deals from retailers. Apple is not in that business and I would not expect them to be. Even if they do it, they will be doing it with global retailers not with smaller local retailers in each country. That requires like what banks have at their payment systems structure: Acquiring business and key account managers. And that means a big organizational change and focus. I can’t believe that Apple will go for it.

In short, I believe that September 9, 2014 was a good day for payment systems, especially for the US. I hope that the banks finally see it as a wakeup call. As I said before, banks really need to be much faster. NFC and contactless are gaining speed. I humbly warned the US banks last year asking if it was over in Payment Systems.

Now at least the US banks hear the knocking at the door. And it’s not the angels…


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