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.