2014-10-21 11:30:42
Even Apple may not manage to replace wallets with mobile phones
Oct 18th 2014 | From the print edition
Not dead yet
TRY buying things exclusively via mobile payments and you will surely die,
either of starvation or of a caffeine overdose. Coffee shops aside, hardly any
restaurants or retailers allow customers to pay by waving a smartphone. That
will soon change: on October 16th, just after The Economist went to press,
Apple was expected to announce that, within days, the latest iPhone s
mobile-payment feature, Apple Pay, will start working in America. It lets users
tap their phones on merchants terminals to make wireless payments.
Such technology has been around for years. It has failed to take off, however,
in large part because so many firms have fingers in the mobile-payment pie, and
often block others from grabbing a big piece of it. Google Wallet, a
mobile-payment service that started up in 2011 to great fanfare, for a long
time worked on only one of America s four big wireless networks, Sprint. The
other three have their own rival project, now called Softcard (it was named
ISIS until events in the Levant forced a change). A consortium of big American
retailers, such as Walmart and Target, also offers a mobile-payment service,
called CurrentC, as does PayPal, whose main business is online payments. And
then there are dozens of startups, from Stripe to Square, each with its own
take on mobile payments.
The fragmentation confuses merchants and consumers, who have yet to see what is
in it for them. From their perspective, the current system works well. Swiping
a credit card is not much harder than tapping a phone. Nor is it too risky,
especially in America, since credit cards are protected against fraud.
Upgrading to a new system is a hassle. Merchants have to install new terminals.
Consumers need to store their card details on their phones, but still carry
their cards around, since most stores are not yet properly equipped.
The hope is that Apple Pay will help overcome these barriers. As with iTunes,
for which the firm cut distribution deals with record labels and developed
software to prevent piracy, Apple has pulled together a complete ecosystem.
Card networks and banks have agreed to process payments, reportedly for lower
fees than normal. From its launch, Apple Pay will be accepted at 220,000
outlets in America, including big chains such as McDonald s and Whole Foods
(Apple has not said when the service will be available abroad).
Apple s technical choices may help to set industry standards. One is near-field
communication (NFC), a wireless technology that links smartphones and merchant
terminals. Another is tokenisation : the devices do not exchange card numbers,
but tokens (a sort of digital voucher), making fraud much more difficult.
Apple has also made mobile payments less arduous. Users who already have an
iTunes account do not have to type in their card details. They approve payments
by touching the fingerprint reader on their device. Owners of the firm s new
smartwatch, to be released next year, will only have to raise their hands. And
tokenisation is appealing, given the recent data breaches at big American
retailers (Kmart, the latest victim, announced on October 10th that some of its
customers payment cards had been compromised ).
But even Apple s magic may not be enough to make mobile payments fly. It is not
clear how merchants will benefit from Apple s new ecosystem: it does not offer
them lower fees for processing payments or useful data about their customers,
as CurrentC does. As a result, they may refuse to sign up for Apple Pay or
discourage its use. Even consumers may quickly lose interest. Early adopters
will try Apple Pay, but find that it is still easier to pay with a card, says
Tim Sloane of Mercator Advisory Group, another market-research firm.
Tapping a phone is likely to remain just one of several widely accepted ways to
pay. Starbucks s successful app, which lets customers pay by holding an image
on their smartphone up to a scanner, shows one way to increase the appeal of
mobile payments: it not only cuts the wait for the next dose of caffeine, but
also awards loyalty points. Petrol stations, grocery stores and public
transport seem ripe for similar services. That, in turn, may help to prepare
people for more outlandish forms of payment. Apple has developed devices called
iBeacons, small transmitters that can detect nearby iPhones, making it possible
to pay without even pulling out your phone.
Apple Pay may have a bigger, albeit indirect impact in the developing world,
says Irving Wladawsky-Berger, who until recently advised Citigroup on mobile
money. With many standards now set, he reckons, the technology will become
cheap and ubiquitous thus helping the world s 2.5 billion unbanked to connect
to formal finance. Mobile phones have already enabled poor countries to
leapfrog a few stages of development in telecoms and, in some cases, finance.
Cheap mobile payments will allow them to jump further.