Apple unveils Apple Pay, its long-awaited entrance into mobile payments

The iPhone and iPod maker finally made the leap into the mobile payments space with the launch of Apple Pay, an NFC-based contactless payment system.
Written by Natalie Gagliordi, Contributor
Screen Shot 2014-09-09 at 1.48.06 PM

Apple has finally made its long-awaited leap into mobile payments.

The iPhone and iPad maker held another one of its insanely hyped product reveal events at the Flint Center for the Performing Arts in Cupertino, California on Tuesday, and along with confirming the anticipated launch of larger screen iPhones with a bevy of new specs and features, the consumer tech giant rolled out a comprehensive mobile payments platform that many in the industry have been waiting for.

"I would like to talk about an entirely new category of service and it's called the wallet," said Apple CEO Tim Cook. "We have created an entirely new payment process and we call it Apple Pay."

Coming with every iPhone 6 and iPhone 6+, Apple Pay, as expected, utilizes NFC for contactless payments and a dedicated chip called the Secure Element, and integrates with Apple's Passbook app, which originally launched with iOS 7. It will also integrate with Touch ID for security purposes. Users will set up and control their wallets via their iTunes account.

Eddy Cue, Apple's senior vice president of Internet Software and Services, called the payment method "fast, secure and private" and touted that American Express, MasterCard and Visa are on board as processing partners.

Along with the 220,000 merchants that currently accept contactless payments (and therefore can accept Apple Pay), there's also a bevy of brands partnering with Apple to begin accepting Apple Pay, including Macy's, Staples, Walgreens, and fast food behemoth McDonald’s, which is adding the payment system within its restaurant locations as well as to its drive-thrus. 

As for the data, Cue noted that Apple is "not in the business of collecting your data," therefore Apple will not know "what you bought, where you bought it or what you paid for it."

Also as expected, a form of tokenization will be used within Apple Pay. Tokens replace card numbers with other numbers that have meaning, but can't be stolen becuase they either expire or are specific to a transaction. 

From the official Apple press release:

When you add a credit or debit card with Apple Pay, the actual card numbers are not stored on the device nor on Apple servers. Instead, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element on your iPhone or Apple Watch. Each transaction is authorized with a one-time unique number using your Device Account Number and instead of using the security code from the back of your card, Apple Pay creates a dynamic security code to securely validate each transaction. 

According to James Wester, head of global payments at research firm IDC, talk of tokens makes sense in regards to the Apple payment system because it's a model that works well with Apple's mobile devices, which have GPS, biometrics and other bits and pieces of identification data that verify that a phone is actually bound to a credit card number. Furthermore, this would potentially affect pricing models in terms of card present and card not present fees.

Timed to the launch of Apple Pay, Apple partner Visa announced its new Visa Token service, which does the obvious: replaces payment account information with a token. It will be available in October to Apple customers with Visa accounts.

"Today we are beginning to see a glimpse of the future of payments," Charlie Scharf, Visa CEO, said in a statement sent to ZDNet. "This future involves shifting the plastic card in a consumer's wallet to the screen of a mobile device, tablet or wearable. Underpinning it all is the safety and reliability of the Visa network and our new offering called Visa Token Service."

Yet even with merchants, brands and a fleet of payment processors on board, Wester said questions regarding the nitty-gritty details behind the payment platform still remain.

"Beyond the hype and the discussion there are concerns and issues that everybody in the value chain is going to want to have answers to, and we could be a ways away from that," Wester said. 

Update: Apple Pay will work with the Apple Watch, Cook said near the end of the launch event. Cook called the Apple Watch the "most personal device" that Apple has ever created.

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