Will Apple Pay Pay Off?

Rachel Gearhart
by Rachel Gearhart, Managing Editor

Analysts predict that mobile payments could grow from $1 billion last year to more than $58 billion by 2017. Needless to say, the mobile payments industry is gearing up to be a hotbed for profits.

But as other companies’ troubled attempts have shown, getting into the payments business is no easy task - even for a company like Apple (Nasdaq: AAPL).

So when Apple released Apple Pay - a “seamless payment experience” driven by decades-old near-field communication (NFC) technology that has yet to gain traction in the U.S. - investors, customers and analysts raised a critical eyebrow.

With countless other mobile payment startups currently struggling to gain adoption, various security concerns, and only 5.5% of U.S. retailers currently accepting Apple Pay, investors are asking, “will Apple Pay pay off?”

Even the world’s most valuable brand and Apple rival, Google (Nasdaq: GOOG), has struggled with its own NFC-based payment services.

As explained in a recent Investment U article, NFC technology utilizes secure and instant wireless communications, allowing NFC-enabled devices to be “swiped” against others to complete financial transactions.

Many large retailers like Walmart and Best Buy have passed on the NFC technology that payment services rely on due to the cost of maintaining the NFC readers.

Because of this, in March, Google announced that Google Wallet users will be able to access Google Wallet Instant Buy using Sionic Mobile’s ION Rewards app. The move will lessen Google Wallet’s dependence on NFC technology in favor of bar codes or QR codes.

Many large retailers such as Lowe’s, Sears, Gap and RiteAid are embracing an NFC alternative that uses QR codes, CurrentC.

The Google Wallet still requires merchants to accept NFC, but the integration transitions the Wallet into QR code technology, which has more traction in retail locations.

“I think NFC has held the mobile payments industry back as a whole,” said Ronald Herman, CEO of Sionic Mobile. “As a technology it just never gained traction here. It’s not so much the technology itself; it’s the participants and the environment.”

Apple’s use of NFC chip in the iPhone 6 also comes with its share of security concerns - ones that will keep it closed off to developers for a while.

For at least the next year, Apple says that the NFC chip will be locked for only Apple Pay. Locking the chip will prevent iOS users from using it to pair with other electronic devices and transfer contacts and files. And potential security threats.

Once potential security kinks are worked out, the company may allow developers to adopt the chips for other purposes just as it did with Touch ID (a fingerprint reader that verifies your identity to unlock your phone, confirm purchases and install apps) in iOS 8.

But Apple Pay should still be more secure than traditional credit cards.

Apple Pay relies on payment tokens meaning that it randomly generates numbers that mobiles devices can use for transactions instead of your credit card number. Therefore, if someone hacks your token number, it only existed for one transaction and your credit card number wasn’t involved at all.

As an additional security feature, you’ll have to verify your identity with the Touch ID before using Apple Pay.

Regardless of the challenges, there have been some payment breakouts such as Stripe, Braintree (now owned by eBay’s PayPal) and Square.

Even if Apple can relieve security concerns with its use of tokens and Touch ID and NFC technology gains traction in stores, Apple Pay doesn’t currently work for the 1 billion Android phone users. And that’s a huge group of untapped consumers.

Editor's Note: With advances in mobile payment technology, those green things in your wallet are becoming more and more trivial. And the implications on our economy, and your portfolio, are huge. Learn more by clicking here.

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