Consumers have a love-hate relationship with credit cards. We love not having to walk around with a brick of dollars to cover purchases we often didn’t know we needed. But we hate having to make a minimum payment or clear the balance on the credit card billing statement. In the background there’s concern that the balance will get out of hand and lead us into trouble. Debit cards are less convenient and they usually stop working when you exhaust the bank account that backstops the debit card. Prepaid cards are helpful to those with shaky credit but in most respects they behave like debit cards. Recently we have heard of hackers stealing payment card data that makes us feel insecure.
Consumers use their cards in retail stores, called “card-present” transactions, or for making payments over the phone or internet, called “card not-present” transactions. Currently, the security in a card-present transactions are just a little better than in a card not-present transactions because retail clerks can ask for collateral identification, but they seldom do. In either case, a pin can be required. The chip of new chip and pin payment cards will generate a one-time code going to the card issuer for verification. Other layers of security may also be added, such as fingerprint or iris image or a verification call to the mobile phone associated with the payment card.
In 2012, consumers conducted 62.1 billion card-present transactions and 11.7 billion card-not-present transactions. That’s 256 card present transactions and 48 card not present transactions per year per consumer of age 18 or older. Most of those transactions were based on swiping the familiar 2-inch by 3-inch plastic cards.
A mobile wallet app uses a mobile phone for storing personal identification and payment card account numbers needed to conduct transactions without presenting the physical payment card. In 2012 the Google and PayPal dominated mobile wallet industry, but accounted for 2% of the card not-present transactions. That was before Apple Pay.
Apple Pay is likely to be quickly and easily adopted by many consumers. Apple Pay is available to the installed iPhone customer base of nearly 500 million units worldwide (35 million iPhones were sold in the 2nd quarter of 2014). On the downside, recruiting new iPhone customers may be difficult, because the iPhone 6 is pricey, at nearly $700 (or around $180 from Walmart, phone stores or other retailers with a 2-year mobile service contract).
In the next few years, millennials will be a challenging market segment for Apple Pay. Just 37% of millennials hold even one credit card. Their reluctance stems from a poor economy and piles of student loan debt. Apple Pay can fix neither of those bogeymen.
Apple Pay is impressive because of its outstanding security approach – tokenization, where the payment card helps create and submit a random number that the payment center will accept for either a specific purchase or for one-time-use. This is similar to the pin and chip arrangement that proved highly successful in thwarting European payment card fraud. Apple will not use iCloud to store Apple Pay data (avoiding association with the nude celebrity photo hacks). No other mobile wallet has security this good.
Apple Pay can be used in both card-present and card not-present transactions, and it has the cooperation of VISA, MasterCard and American Express. The iPhone base is largely upscale consumers, and that explains the cooperation from major retailers (Apple Pay is already accepted at 220,000 stores).
People like using their Apple products because they are designed to work elegantly and they do. Once again, Apple’s design delivered Apple Pay to be convenient and easy to use. Most important, Apple has engineered major progress in security and that will reassure consumers.
Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research