How Apple Pay works

What Apple Pay Means To Credit Card Users

Many fans of Apple products swooned earlier this year when it announced that it would join the mobile payment market with Apple Pay. If you have an iPhone 6, iPad Air 2, or iPad mini 3, you can already make payments with the touch of a finger, and more businesses are being added all the time.

Next year, mobile payments company Square will add Apply Pay, and that should change the landscape even more. But what if you’re not a tech-head and want just the short version? Well, here is how Apple Pay works in a nut shell…

The barriers

The technology to allow mobile phone payments is surprisingly simple and well developed. Near field communications, or NFC, is simply a short-distance radio signal that evolved from another standard called RFID. That stands for Radio Frequency Identification, which is a technology in use since the 1980s — commonly found in key cards used by hotels and office buildings.

This technology is reliable, inexpensive, and relatively secure, yet there are significant barriers that prevent companies from creating a mobile payment system.

First, companies have to put an NFC-enabled device in the hands of a critical mass of consumers. NFC technology actually debuted in 2006 on a garden-variety Nokia flip phone, which is pretty much a museum piece at this point. The new iPhone 6 with Apple Pay,  is a hit, but having to own one leaves out people like me who somehow manage to survive with their iPhone 5s purchased way back in 2013. It also seems unlikely that Apple Pay will ever be compatible with phones from rival manufacturers.

Next, a system has to be compatible with both retailers and credit card issuers. Right now, Apple Pay has the support of most major card issuers, with the main holdout being Discover. When it comes to ensuring retailers are compatible, the results have been mixed. Certainly Apple Pay has signed up many of the biggest names in retail, but most small businesses and some other major retailers such as CVS, Rite-Aid, and Wal-Mart are not on board.

The competition

In fact, several major retailers are working on their own mobile payment system called CurrentC, which differs from Apple Pay in several key ways. First, it uses two-dimensional bar codes that display on the screen of customer’s phones. Next, their system isn’t compatible with credit cards — only debit cards, gift cards, and store charge cards.

In fact, these retailers are actually looking at mobile payments as a way to avoid the merchant fees they pay for credit card acceptance, not as a way to genuinely help their customers make payments easier. Presenting a bar code to a scanner does make this system more universally compatible, but unlocking a phone and holding it up is far less convenient than Apple’s fingerprint-activated system. Finally, the CurrentC system, which hasn’t even launched but has already experienced a security breach, is unlikely to be adopted by as many merchants as Apple Pay already has.

Where do we go from here

As someone who studies the credit card industry all day long, my prediction is that neither mobile payment architecture will win out in the end, since they are both too proprietary.

The major payment networks — Visa, MasterCard, American Express, and Discover  — must come together to set a single standard for mobile payments, much like they did long ago with magnetic stripes and more recently with EMV smart chips. This new standard will likely be based on some form of NFC communications, which is quickly becoming a standard feature across all mobile phone manufacturers, not just Apple.

In fact, it wouldn’t surprise me if it evolved from Apply Pay some time in the future. Until then, Apple Pay is likely to be recorded by future historians as a popular technological trend emblematic of life in the mid-teens of the 21st century.

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