Apple, which built its iconic brand by making cool, shiny electronics, on Tuesday entered the daunting world of consumer finance with a new mobile payment system built to resist the relentless attacks of cyber-criminals who have ravaged the nation's retail industry.
The idea of replacing the plastic in our wallets with a digital alternative hasstymied many of the world's most powerful companies. And Apple's promises of high security prompted an immediate backlash among critics who noted that the company had recently failed to keep hackers from collecting and posting intimate images of Hollywood celebrities, taken with iPhones.
Several experts say that Apple is well positioned to deliver a successful mobile payment system because of its broad network of partners, including the nation's leading banks and credit card companies, as well as such major chains as Walgreens, McDonald's and Whole Foods.
Apple also is unusual among technology companies for controlling both the hardware and software used in its products, meaning it can produce a smartphone with all the necessary components for a mobile payments system.
Tuesday's announcement, during an annual event live-streamed from Silicon Valley to the world, focused far more on its latest gadgets, two larger, updated iPhones — the iPhone 6 and iPhone 6 Plus — and the long-rumored Apple Watch, with a variety of health-oriented apps for users who want to monitor and analyze their daily activities.
Yet Apple Pay could prove the bigger bet, given its potential to shake up two industries, retail and finance. Both are central to the U.S. economy but have struggled to adapt to technological change and especially the rising sophistication of cyber-criminals, who have targeted a wide array of marquee corporate names: Target, Neiman Marcus, JPMorgan Chase and, most recently, Home Depot.
"It won't be too long before we look back on this era and think it's nuts," said Harvard Law School professor Jonathan Zittrain. He and other technology experts noted that Apple has a history of solving business riddles that have eluded others, as it did with the iPod, which thrived not only because of its stylish hardware but because big record companies agreed to distribute their music through Apple's iTunes store.
"Maybe Apple is bringing the same thing to the table that it did with the iPod," he added.
Apple Pay would allow users to buy products from many stores using credit card information pre-loaded onto an iPhone by its owner. A consumer would merely need to hold a device close to a sensor and confirm the purchase with a fingerprint scan or other method. The merchant would get two codes: One would identify the credit card, the other would be a one-time authorization code. Even if a hacker somehow stole both, they couldn't be used for any other transaction.
Chief executive Tim Cook, striding a darkened stage in a style pioneered by his predecessor, the late Steve Jobs, seemed to revel in the challenge of creating a new payment system, saying that $12 billion are spent on credit and debit cards every day, in a total of 200 million transactions.
"That's 200 million times that we scramble for our credit cards and go through what is a fairly antiquated payment process," Cook said. "Most people that have worked on this have started by focusing on creating a business model that was centered around their self-interest instead of focusing on the user experience. We love this kind of problem. This is exactly what Apple does best."
Apple has enjoyed a reputation for strong security in its products, especially the iPhone, though that was eroded over the past two weeks by revelations about the hacked pictures of celebrities. Security experts have blamed that breach on weaknesses in Apple's iCloud service, not the iPhone itself.
"Apple's claiming it's more secure. We'll have to see," said Ed Mierzwinski, Consumer Program Director at U.S. PIRG, who studies the security of financial services. "Their iCloud services didn't appear to be so secure."
Yet Mierzwinski and others praised Apple for attempting to create a mobile payments system that could be substantially more secure than plastic credits cards with magnetic strips — technology abandoned in most of the world, where credit cards have implanted chips and each transaction typically requires that a consumer enter a PIN number.
"Apple has already got a wireless technology, and it's in a lot of people's pockets," Mierzwinski said.
Apple Pay would rely on chips, implanted in the latest iPhones and new Apple Watches, that would be capable of sending signals a short distance through the air, using a technology called Near Field Communication, or NFC.
Google and other companies have built systems using the same NFC technology that will underpin Apple Pay. Such technology was used for an estimated $4.9 billion worth of transactions in 2013, according to market research firm Gartner. That figure is projected to grow to $8.2 billion this year and to soar to $21.9 million in 2016.
Widespread adoption of Google's service has been undermined by the resistance of wireless carriers that would not activate the chip in smartphones that used Google's Android operating system but were built by other companies. The carriers had invested in a rival payment system, called Isis.
"Apple controls their ecosystem extremely tightly," said Tim Sloane, a payments analyst at research firm Mercator Advisory Group. "Unlike Google Wallet, Isis or others that have a choke point where the mobile carrier can decide who has access to that NFC chip, in this case, Apple has access to that chip. So when they say they're going to enable a mobile wallet and it's going to be NFC based, it means Apple has the ability to execute that directly with the banks and the networks."
Capital One was among a handful of banks to sign on to the pilot program for Isis mobile wallet app, a joint venture of Verizon, T-Mobile and AT&T. But Capital One exited the test a year ago because of the quality of the technology, said Tom Poole, the bank's managing vice president of digital commerce.
"We just didn't see account credentials reliably delivered to devices," he said. "When you see challenges like that, it shows the technology just wasn't ready yet. Apple's control of hardware and software allow them to do a better job with technology than some of the things we've seen in the past."
The Washington Post
Wed Sep 10 2014
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