Sept. 9 has been a big day for technology, with Apple unveiling its latest-generation iPhone 6 and iPhone 6 Plus as well as the hotly anticipated Apple Watch. However, the biggest breakthrough feature to come out of Cupertino in years isn't one of Apple's sleek, shiny, new devices.
Apple finally announced Apple Pay, its mobile payments system relying on near-field communications (NFC) that has been long rumored to be in development. While Apple has been recently hit with a security controversy just days ahead of Tuesday's announcement when hackers reportedly infiltrated iCloud and leaked hundreds of private celebrity photos over the Internet, Apple chief executive Tim Cook was eager to demonstrate Apple Pay, which he hopes will do away with credit cards and take over the retail and finance industries, two of the biggest sectors of the American economy.
Cook said Americans close at least 200 million transactions worth $12 billion with their credit cards and debit cards every day, using an ages-old magnetic stripe technology that is older than the first computer.
"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."
Unlike magnetic stripe cards commonly used in most American retail stores, chip-and-pin cards commonly used in Europe and NFC-based mobile payments such as Apple Pay and Google Wallet provide better security without having to be more complicated. With the old credit card system, a user's credit card information, including the card number and the cardholder's name, gets stored in the retailer's system once the cashier swipes the card over the register. Anyone, a hacker, the next customer or an unscrupulous cashier, can get hold of that information and use it for their purposes.
With Apple Pay, which will be integrated with the iPhone 6 and iPhone 6 Plus as well as the Apple Watch, the iPhone generates a unique 16-digit code that will replace the card number for each transaction. The user will point the top of his iPhone near the point-of-sale terminal and will then be asked to confirm his identity by swiping his finger over the phone's Touch ID scanner. This will generate the random 16-digit code that gets transmitted to the cash register to finish the transaction.
Apple says it has no access to the user's information and transaction details. Neither will retailers. The user's credit card information is installed in a secure element, a piece of hardware that keeps everything stored in it virtually un-hackable. Even if a hacker breaks into a user's iPhone, the secure element keeps all sensitive information out of the phone's software. It also protects data from hardware hacks, prompting it to shut down when it senses physical tampering.
"Apple's claiming it's more secure," says U.S. Public Interest Research Group consumer program director Ed Mierzwinski. "We'll have to see. Their iCloud services didn't appear to be so secure."
With Google Wallet and other mobile payments such as Isis, which is backed by mobile carriers AT&T, Verizon and T-Mobile, already in place, Apple is certainly not the first company to introduce NFC-enabled payments. However, as analyst Tim Sloane of Mercator Advisory Group says, Apple holds full control of its ecosystem.
"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," Sloane explains. "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."
Apple has already formed partnerships with American Express, Visa and MasterCard, which means Apple Pay provides full support for around 80 percent of all credit cards. By the time the mobile payment system is launched in October, users can expect a long list of retailers to accept payments from buyers' iPhones. The list includes giant store chains such as Target, Walgreens, Starbucks, McDonald's, Whole Foods, Bloomingdale's, Macy's and Subway, to name a few.
Analysts believe Apple Pay has the potential to change the way Americans pay for their goods, since Apple has a huge advantage: a massive customer base that can finally make mobile payments mainstream.
"I think what Apple has done is give the mobile payment system a massive jumpstart by just being a player in the marketplace," says [video] Om Malik, founder of GigaOM, in an interview with Bloomberg.
