Mobile payments were once seen as a neat perk to offer tech-savvy customers—not something a business had to offer to stay competitive. That may be changing.
Apple’s unveiling of its new Apple Pay mobile payment service on Tuesday is expected to greatly expand the prevalence and popularity of mobile-based payments. The company has partnered with more than two dozen major retailers, including Macy’s, McDonald’s and Whole Foods, that have agreed to begin offering the service. It will also be incorporated into many popular apps. (For example, Apple CEO Tim Cook touted how users of the restaurant-booking site OpenTable will be able to pay for their meals using Apple Pay.)
How does it work? iPhone 5 or 6 users can sign up for Apple Pay and enter their credit card info—or take a photo of their card—with their camera. (Apple is seen as having a major head-start here, because it already has millions of payment cards on file thanks to its popular iTunes service.) The card data is encrypted on a chip embedded in the iPhone called the Secure Element. At participating stores, customers can then hold their iPhones in front of a near-field communication (NFC) reader and place their finger over a fingerprint sensor to confirm payment. An app on the phone will allow them to select Apple Pay as their payment method and use Apple's Touch ID to confirm it. (Watch a video of how the technology works.)
Apple Pay will also sync up with the new Apple Watch when the smartwatch hits the market in 2015. Customers will be able to authorize payments by simply tapping their watch.
For a small business, Apple Pay may become a game-changer as some businesses will likely consider adopting NFC technology that allows customers to use mobile payments. With so many large retailers already on board, it may become an issue of competitiveness; consumers may get used to being able to use their smartphone, tablet or smartwatch to pay for things—and expect that convenience from small businesses as well.
While Apple Pay is seen as a huge step toward making mobile pay mainstream, some analysts point out that big hurdles still lie ahead. About 220,000 stores will offer Apple Pay when it’s released in October, but that’s still only a 2.4 percent slice of the 7-9 million U.S. merchants that currently accept credit cards, according to Jacob Davidson at Time.com. He writes:
The remaining 97.6 percent of business do not have point-of-sale systems that work with [NFC] … Merchants will have to upgrade their checkout process for Apple’s service to catch on, and the expense of such an endeavor has—thus far—left many businesses reluctant to do so.
One analyst told Davidson that Apple Pay would need to reach 20 percent penetration to reach a “critical mass.”
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