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All You Need to Know About Apple Pay

Apple Pay
The latest innovation out of Cupertino, California is here: Apple Pay. Apple Pay is the technology giant’s entrant into the emerging world of virtual wallets and is now available on the iPhone 6, iPhone 6 Plus, iPad Air 2, iPad mini 3 as well as the forthcoming Apple Watch. With it, users can enter their credit card information into their devices or iTunes accounts and then use the devices to securely make purchases either online or at the point of sale.

As things currently stand, Apple Pay is accepted at 220,000 brick-and-mortar stores across the United States, including locations of mega-retailers like Whole Foods, Macy’s, McDonald’s, Chevron and Subway. All in all, it can be used with 35 retail brands in person and 23 store brands online. Apple Pay can also be used to make purchases through 18 apps, including Uber, Lyft, OpenTable and Airbnb.

With that being said, there are still bound to be countless questions about this new payment technology, and we’ll do our best to answer them below.

How Apple Pay Works

The experience of using Apple Pay will differ slightly depending on whether you’re shopping at the point of sale, through an app or online. It all starts with loading your payment information into your device, however, and there are a few different ways to do that.

Loading Credit Card Information

  1. Taking a Picture: You can add a credit card or a debit card into your Apple Pay account by simply taking a picture of it with your phone or iPad. Apple will then verify with the bank that the card is indeed yours and securely store your payment details in the phone’s “secure element” (a special computer chip).
  2. Entering Manually: You can also enter your credit or debit card details into your phone by hand. The same verification and storage procedures as when you take a picture will then take place.
  3. Using a Card from iTunes: Apple Pay is synced to your iTunes account, and you are able to simply choose to use the credit card or debit card that you already have on file.

When you load a credit or debit card to your phone, it is assigned a unique Device Account Number, which is encrypted and stored in the device’s secure element. It is also saved for quick viewing in the device’s passbook. It is this Device Account Number, and not your 16-digit card number, that is then used to make purchases.

You can save up to eight different cards in your device by these means. You will also be able to select a default card for quick use or simply scroll through your various saved cards upon preparing to make a purchase.

You can load credit cards and debit cards from any of the more than 500 banks and credit unions that are part of the Apple Pay platform, including American Express, Bank of America, Barclaycard, Capital One, Chase, Citi, Navy Federal Credit Union, PNC, USAA, US Bank, and Wells Fargo.

Making Purchases at the Point of Sale

Making a purchase at the point of sale is quite simple with Apple Pay. All you need to do is hold your phone over the contactless reader on the point of sale machine and Apple Pay will come up. You can then use the default card or choose from one of the other cards stored on your device. To complete the purchase you’ll simply press and hold the Touch ID button, which scans your fingerprint for verification. Your phone will then vibrate and beep and you will receive a notification of the transaction.

Making Purchases Online or Through an App

Making a purchase online or through a mobile app is pretty straightforward as well. Apple Pay simply shows up as a payment option with participating merchants/apps, you click on that option, and then verify using the Touch ID button. That’s it.

How Transactions are Verified

One of the most important aspects of Apple Pay’s security is the way payment information is relayed to merchants and verified by your bank. Each transaction is assigned a one-time payment number as well as a dynamic security code, and that information is encrypted and used in place of your credit or debit card particulars. As a result, cashiers will not see your name or any of your card information.

Pros & Cons of Apple Pay

Pros

    • No Need to Carry a Wallet: Simplicity lies at the heart of Apple Pay’s appeal. Rather than having to carry around both your phone and a wallet, you can lessen your load by only lugging around the former. This perhaps means less bulky trousers and the freedom to leave that purse at home.
    • Security: Apple Pay utilizes Near Field Technology to communicate with merchant point of sale machines. NFC is generally regarded as a very secure form of device to device communication given that it carries a range of only about four inches.On top of that, Apple Pay does not actually store your credit card information in your phone or transmit it to merchants. When you first enter in your card details, Apple Pay assigns the payment vehicle a unique Device Account Number, which is stored in a secure computer chip in the phone and is used as a proxy for your card number when you make a purchase. That means even if your phone is lost or stolen, no one will be able to get a hold of your credit card information. Furthermore, if you do lose your phone, you can remotely wipe the card information from your phone and thereby avoid having to get new cards from the issuers.
    • Anonymity: Apple does not collect information about what you buy, where you buy it or how much you pay for it. Merchants are even shielded from your identity for in-person transactions as well. As a result, your information stays between you and your bank in most cases.

    Cons

      • Limited Number of Merchants: While 220,000 stores are currently equipped to accept payments via Apple Pay, that represents merely 5% of the total number of retail locations in the United States. You therefore won’t be able to use your phone as a form of payment everywhere you shop – a fact that will certainly slow adoption of Apple Pay.
      • Only Available on Select Devices: If you don’t have one of the newest Apple devices, then you won’t be able to use Apple Pay. The service is only available on the Apple iPhone 6, iPhone 6+, iPad Air 2, iPad mini 3, and the forthcoming Apple Watch.
      • Lose Your Phone, Lose Your Wallet: Americans lose their phones once every 3.5 seconds, according to a report from the mobile security firm LookOut. ApplePay simply raises the stakes of such a loss.
      • Battery Dies, Lose Your Wallet: Cell phone batteries are improving, but we all still inevitably find ourselves low on juice when we’re out and about. If you’re relying on your iPhone for both calling and consumption capabilities, your ability to buy is therefore only as good as your last charge.
      • Incompatible with Store Credit Cards: As things currently stand, store-branded credit cards cannot be used through Apple Pay. This will inevitably lead consumers not to use Apple Pay when making purchases through their favorite merchants, as the benefits provided by their store-affiliated credit cards will outweigh the convenience of mobile payments.
      • Tendency to Overspend: It is said that people tend to spend more when using a credit card because the money involved seems more remote and less real. It only goes to figure that this phenomenon will be super-charged with a digital wallet like Apple Pay. You don’t even have to hand over your card to a merchant, swipe it yourself or even open your wallet; you just click and go.

      Apple Pay Competitors

      Apple Pay is not the first virtual wallet to hit the market, nor will it be the last. The service, though buoyed by the supreme popularity of Apple’s products, faces a few notable competitors. Here is an overview of some of the most popular ones:

      Google Wallet – Google Wallet enables you to securely save credit card and debit card information on your phone and make purchases at the point of sale using contactless Near Field Technology, much like you would with Apple Pay. You can also send and receive money from anyone in the U.S. using their email address as well as make purchases online. Google Wallet offers a 100% fraud protection guarantee, provides a secure PIN for locking and unlocking your account, and enables you to remotely wipe your payment information in the event you lose your phone.

      CurrentC – CurrentC is a virtual wallet offering backed by some of the nation’s largest retail chains, including 7-Eleven, Best Buy, CVS, Lowe’s and Walmart. It is available via a free downloadable app, to which you can link your checking account, store-affiliated gift cards, and certain store-branded credit cards. In addition to giving you the ability to make payments, CurrentC enables you to automatically redeem coupons and discounts as well as earn rewards at the point of sale. It is protected with a four-digit account code, and purchases are encrypted using a secure paycode that is unique to each transaction. Your payment information is stored in CurrentC’s secure cloud.

      PayPal – Accessible online and via mobile, PayPal enables you to send and receive money on a global scale by linking up with your bank account or credit card. PayPal is also one of the most common forms of payment that online merchants choose to accept, given its availability worldwide. The company has also started enabling in-person point of sale transactions with specialized card readers that merchants can hook up to their phone, iPad or point of sale machine.

      Softcard – Formerly known as Isis, Softcard is the mobile wallet offering backed by AT&T, T-Mobile and Verizon. Softcard enables you to load your payment information and make point of sale purchases at more than 200,000 merchant locations. It is compatible with credit cards from American Express, Chase and Wells Fargo. You can also load funds from other credit cards, debit cards and U.S. bank accounts via an American Express Serve account if you so choose. Softcard is secured using a personalized PIN and any transaction that you make is encrypted using a unique one-time identification code. You can also place a remote freeze on your account if you lose your phone.

      Ask The Experts

       

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      Cristian Borcea

      Associate Professor of Computer Science, Guttenberg Information Technologies Center, New Jersey Institute of Technology How do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      I think Apple Pay has the potential to be the best of the bunch. This is due to the design/implementation of the product itself and also to the good reputation Apple has for providing products with excellent usability. The latter will make more people willing to try this system.

      The work that Apple did to have support from the major credit card companies is also a major factor in the potential success of Apple Pay.

      Finally, the product appears at a time when people have heard of such systems, and perhaps have even used some of them. It's just a matter of providing a system that is really easy to use and secure/anonymous. Overall, this could be the real beginning of mass use of mobile payment systems (as well as creating a de facto standard).

      Do you think mobile payments signal the impending death of the credit card?

      I think credit cards will still be around and quite widely used in the next 10 years. At least in Apple's case, the mobile payment system is still linked to our credit cards. So, even if we don't use them directly in the stores, we're still paying with credit cards. Some people, senior citizens for example, won't generally use mobile payments in my opinion. Also, although Apple has good privacy safeguards in place, some people will still try to avoid to add one more intermediary in their payment process.

      From a privacy point of view, anonymous e-cash systems that have been developed by the research community (and we even have a few practical implementations out there - BitCoin for instance) would be ideal if someone will find a business model. These systems, in theory, could guarantee our anonymity. However, stores want to track our shopping habits, credit card companies want to stay in business, so it's not clear whether we can see such systems adopted on a large scale any time soon.

      Should security be a concern with Apple Pay?

      I think it's clearly more secure than using the credit cards directly. Whether or not is 100% secure, I cannot say. But logically, it's enough if it's more secure than using a credit card in a store.

      I would be a bit more worried about privacy given that I don't know exactly all the internal design of the system.
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      Han Zhang

      Associate Professor of Information Technology Management, Faculty Director of the Executive MBA Program, Ernest Scheller Jr. College of Business, Georgia Institute of TechnologyHow do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      Apple Pay’s ability to dominate the mobile payments competition is contingent on the adoption of iPhones in the smart phone market. However, I’m sure that Apple Pay will become one of the top players in this space, and will undoubtedly accelerate the adoption of mobile payments in the U.S.

      Apple Pay will face some strong competition. First, Google introduced Google Wallet in 2011, but it hasn’t been successful. There are many reasons Google Wallet may have fizzled. One important factor could be timing; when Google Wallet was introduced a few years ago, the market and consumers were just not ready for that. Consumers weren’t educated, and security of mobile payments was a major concern for consumers. Yet with all the recent news about data breaches and with Apple Pay coming on to the market, Google Wallet may get another chance to compete since consumers may now be much more familiar with mobile payment. Second, some leading U.S. retailers such as Wal-Mart, Best Buy, Target, 7-Eleven, Lowe’s, Sears, etc. endorse a retailer-owned mobile-technology group called Merchant Customer Exchange (MCX), which is trying to offer a new platform for smartphone-based transactions. Currently some companies such as Wal-Mart and Best Buy are claiming that they will not support Apple Pay, but that may be subject to change. I personally do not see a lot of hope for MCX. Finally, EBay has decided to spin off its payments business PayPal, and PayPal is certainly going to compete in the mobile payment market.

      I really think that Apple Pay was introduced at the perfect time. All the scary data breach stories (e.g., Target, Home Depot) have shown consumers that the traditional credit/debit card transactions are not secure enough. Moreover, every merchant in the U.S. will have to support chip-based technology by October 2015. Otherwise, they would have to face the liability risk on their own in the case of fraudulent transactions. Apple Pay is based on near-field communications (NFC) technology, and Apple doesn’t have to negotiate with each retailer. All that a retailer needs is a NFC-equipped point-of-sale terminal. So if a retailer has the NFC reader, a customer will be able to use Apple Pay. Large chain stores such as Walgreens, Subway, McDonald’s, Macy’s, Whole Foods, etc. are all equipped with the NFC reader. Therefore, Apple Pay has a great opportunity to be successful.

      Compared to Google Wallet, which uses NFC technology as well, Apple Pay has a lot of advantages. Apple Pay uses biometric authentication through the iPhone’s Touch ID fingerprint system, and it already has several million credit cards that are linked to iTunes. More importantly, Apple’s market power can bring banks on board to accept its tokens, which are very important for Apple Pay to be successful. However, I have to point out that iPhone’s market share in the U.S. smartphone market is 41.4%. iPhone 6 and iPhone 6 Plus are only a small percentage of the total iPhone shares. Therefore, convincing more consumers to buy newer versions of the iPhone (or Apple Watch for iPhone 5, 5c and 5s users) becomes the key for Apple Pay’s future success.

      In summary, Apple Pay may not dominate the mobile payment market. However, I do think that with Apple’s great track record in changing consumer behavior, Apple Pay will definitely make mobile payment method more mainstream.

      Do you think mobile payments signal the impending death of the credit card?

      No, I don’t think it signals the impending death of the credit card.

      People may use credit cards less often, but I foresee mobile payments and credit cards coexisting in the future. There are several reasons:

      1) A certain percentage of people may never use a smartphone or may take a very long time before they adopt them, so for those people, mobile payments are not a viable payment option.

      2) While mobile payments could be convenient for a lot of people, technology (smartphone or payment devices in stores) may fail sometimes. Your phone could be dead, may not get any signal, or could run out of battery. People may use mobile payments, but people will always have credit cards in their wallet. For example, a few years ago I always used my mobile phone to download my mobile boarding pass and check in at airports, but one time the devices at an airport didn’t work. I had to get a paper boarding pass and was in a rush. So now I use the mobile boarding pass, but I always print my boarding pass as a backup. Mobile payments could be the same thing.

      3) Credit cards may make a comeback. In Europe, smart cards have been in use since the 1990s. These smart cards, also known as chip cards or EMV (Europay, MasterCard and Visa) cards, are more secure than credit cards. Due to the cost of the smart chip technology, most of the corporations in the U.S. don’t want to pay for it. However, because of Target’s data breach last year and Home Depot’s more recently, the U.S. will surely move to the more secure chip and pin technology. President Obama signed an executive order on October 17, 2014 to protect Americans from credit card fraud and identity theft, and new types of credit cards (smart cards) will gradually replace the traditional credit cards staring in 2015. I’m sure smart cards will be extensively used for the next several decades.

      Should security be a concern with Apple Pay?

      In reality, nothing is 100% secure. As an information technology professor, I believe Apple Pay is the most secure payment method if we want to use a credit card. First, no one can use a credit card on Apply Pay without scanning a fingerprint on the iPhone device (currently iPhone 6 or iPhone 6 Plus). Second, a random 16-digit number (called a token) is transmitted across the network, meaning that merchants will not see credit card numbers and thus can’t store them. Third, Apple won’t keep credit card information except for credit cards used in iTunes.

      Of course I have to admit that no system is perfect. However, the well-known data breaches in the recent past were all reliant on hackers having access to the credit card numbers stored with retailers. Apple Pay significantly reduces this type of risk.
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      David Hendrickson

      Associate Professor and Director of the BS in Computer Systems Program, The Technology Institute, City University of Seattle How do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      Not sure. It will introduce the concept to a portion of the population not accustom to it. However, the boomers (in my opinion) will still find it challenging. Some millennial will find it easier now that it's on their iPhone. Google has had a hard time with it but Apple's implementation may be easier and therefore help with adoption. It will eventually happen, it's just a matter of time.

      Do you think mobile payments signal the impending death of the credit card?

      I sure hope so. As a technology guy (typically an early adopter) this has been a long time coming. I am particularly encouraged on the merchant side too. I was one of the first to adopt Square in my personal business. Time for customers to do the same.

      Should security be a concern with Apple Pay?

      Yes, but not any different than other technology. I don't know why phone are any less secure than a credit card scanner or bank (my university offers NSA approved courses in hacking and info security). All can be broken into. It's how we handle the situation once the number has been stolen that is important. The better you are at handling it, the more secure you feel in adopting a new payment technology. That is how I would evangelize it.
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      James Grimmelmann

      Professor of Law, Francis King Carey School of Law, University of Maryland How do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      The Apple brand has a lot of power behind it with consumers. Apple is extraordinarily good at devising satisfying user experiences, and the historical example of Apple's negotiations with the record companies shows that it can break industry logjams. I think it will establish itself as a serious player.

      Should security be a concern with Apple Pay?

      Because Apple doesn't give the actual credit card number to merchants who accept Apple Pay, security is substantially less of a concern than with today's credit card payments.
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      Benjamin G. Edelman

      Associate Professor of Business Administration, Harvard Business School Do you think mobile payments signal the impending death of the credit card?

      The crux of the question is why a consumer would prefer Apple Pay over credit cards. Apple has yet to offer a satisfactory answer to that. “Leave your credit card at home” isn’t going to be a realistic option for many people for a long time; rare is the person who shops only at merchants that can accept Apple Pay.

      Is Apple Pay truly going to be faster than a credit card? I’d say it’s at best a toss-up, but at most a second or two saved. Is it more secure? Maybe, but it’s not at all clear why consumers should care given that security responsibilities largely fall to banks and card issuers.

      Even with Apple Pay, consumers are still using credit cards. It’s a long way from Apple Pay to the death of the credit card.
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      Gang Qu

      Professor of Electrical and Computer Engineering, University of MarylandHow do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      It will easily be one of the leaders given the popularity of iPhones.

      Do you think mobile payments signal the impending death of the credit card?

      No. Traditional credit card payment will still dominant for maybe a half generation, at least.

      Should security be a concern with Apple Pay?

      Absolutely.
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      Chuck Davis

      Corporate Faculty, Harrisburg University of Science and Technology How do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      I think Apple Pay will stack up well against the competition in the mobile payment space. They have a strong following and they seem to have put everything together the right way. Even though they aren't the first to take this technology to market, they are the first to do it in the way that they did and one might argue that they were the first to do it correctly. I believe that this strategy, in conjunction with Apple's marketing power, will put them at the front of the competition very quickly.

      Do you think mobile payments signal the impending death of the credit card?

      I hope so. There are so many problems with the traditional credit card model. Sure, chip and pin will fix much of the pain points we experience here in the United States, but using a third party for payment tokenization makes a lot of sense because it keeps the retailer from storing static financial information. Retailers don't want to be in that business and deal with the regulatory headaches and the expense of securing financial data on their systems. I'm sure the retailers, the purchasers and the financial institutions will all fare better under the new, and improved transaction architecture.

      Should security be a concern with Apple Pay?

      Security should always be a concern for any institution managing financial data, however, since the credit card number is not passed from the Apple Pay device, nor is it passed to the retailer, there are fewer attack vectors in the transaction process. This means that we no longer have to worry about our credit card account being compromised when our wallet is stolen or when we make payment to a retailer.

      Today, if you have a credit card with Near Field Communication (NFC) you can just place your card near the reader and the credit card details are transmitted to the reader. This removes the need for the card to be swiped. Unfortunately, this also means that if someone were to get close enough to your wallet, with a rogue NFC card reader, they would be able to remove money from your account. Apple has solved this problem by implementing a biometric authentication system using the fingerprint reader on the iPhone that verifies identity and will only broadcast the NFC signal when authenticated, so it removes the risk of someone stealing money from your account by bumping into you.

      While security should be a focus for the back end financial processing and payment tokenization companies, there is far less risk of data theft for retailers and the purchasers of products and services, compared to today's credit card payment processes.
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      Sarit Markovich

      Clinical Associate Professor of Strategy, Kellogg School of Management, Northwestern University How do you expect Apple Pay to stack up against the stiff competition in the mobile payments space?

      Apple is a pretty late entrant in the mobile payment market. Luckily for Apple, none of the current available solutions offers a solution that creates a lot of value to the mass market. Square offers value to small merchants, Paypal offers value to small merchants and those looking for peer-to-peer transfers, but that’s it. The other alternatives of tapping your card rather than swiping it are not attractive enough for consumers to make the switch.

      Apple, on the other hand, offers you the ability to (maybe*) leave your wallet at home. You can organize your credit cards and pay with your phone. I think that given the available technology nowadays, it’s not clear that NFC is still the best choice, but consumers trust Apple and so do merchants, which gives Apple a huge advantage in the market. I’m sure that Paypal, as a standalone entity, would be able to attack back: it has a large consumer base and have consumers’ and merchants’ trust; the question is whether it’d be able to offer something much more convenient than Apple pay, something that consumers and/or merchants really value. Otherwise, they probably missed the train.

      *I say maybe, as we’ll be really able to leave our wallet at home when driver’s licenses would be digitized; but that’s a completely different story.

      Do you think mobile payments signal the impending death of the credit card?

      No. Apple and almost all other solutions are built on top of credit cards; they don’t want to deal with the financing part and the security issues. Consumers love the credit cards because of the rewards, and merchants want them around for fraud protection and liability reasons. Unless the banks decide to become a serious player in the mobile payment market, I don’t see the credit cards going away in the near future.

      Should security be a concern with Apple Pay?

      It should; but I don’t think it would. As long as consumers know that the credit card company is liable for any fraud, the value from the convenience of the solution would most likely outweigh the cost of security concerns.

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