Apple, Rivals Wait Each Other Out in Mobile Payments

Apple Inc. boasts that its iPhone "changes everything," but against the expectations of many bankers, it may not be changing payments — at least, not this year.

The consumer technology juggernaut reportedly does not plan to include a near-field communication chip for payments in the next iPhone, which is expected this summer. Including an NFC chip in the fifth-generation iPhone has the potential to elevate mobile payments beyond the testing phase and make it a mainstream service overnight.

Apple's decision doesn't mean it is not interested in mobile payments, however. To the contrary, many expect the company to roll out a mobile payments system for its massive customer base that avoids some of the turf wars inherent in any NFC-based system. The carrot: Apple could avoid sharing transaction revenue with banks, payment networks and other interested parties, which for now must reassess their own game plans.

A more popular technology outside the United States, NFC allows for data to be transmitted from one device, such as a phone, to another, like a point of sale terminal, at short distances, but there are different technical standards on how to use it, said Richard Crone, the chief executive of Crone Consulting LLC in San Carlos, Calif.

"Most of" the differing rules "were put forth by those trying to protect their existing payment franchise — a single application with a single reader controlled by a" trusted service manager, Crone said. "Apple looks at that closed, restricted market and says, 'How can we think outside the chip?' "

He added, "If they can use a technology that doesn't require NFC, then they're ahead of the game."

The Independent of London, citing unnamed sources at several large U.K. mobile operators, reported Monday that Apple would not be including NFC chips in the next version of the iPhone. One source said the "lack of a clear standard across the industry" was the reason Apple is holding off.

Aaron Greenspan, the president and chief executive of Think Computer Corp., a Palo Alto, Calif., mobile payments company, told American Banker on Monday that a source at Apple contacted him in February and "made it pretty clear that [NFC] would not be in the iPhone 5."

Think Computer has had talks with Apple about collaborating on mobile payments technology but has no direct partnership with the company, Greenspan said. An Apple spokeswoman said the company would not comment for this story.

Richard Doherty, a research director at Envisioneering Group in Seaford, N.Y., has said Apple is planning to include NFC technology in future versions of the iPhone and iPad.

Doherty said Monday that it is plausible Apple would hold off on including the technology until a "full ecosystem" is developed, including add-on hardware to enable older iPhones for payment.

In addition to banks, payment networks and processors, there are also wireless carriers, mobile device manufacturers, merchants and point of sale terminal makers contending for a place in the mobile payments market.

"The stars need to be in perfect alignment for 14 players at least to pull off NFC payments," Crone said. "It's a complex, interdependent ecosystem with a lot of new variables and business models that have yet to be resolved."

Crone said Apple could bypass NFC for another mobile payments approach. If it were to do so, it could sidestep the battle for control over the end users and minimize sharing of revenue from transactions with those other players, Crone said.

Last year AT&T Inc., T-Mobile USA and Verizon Wireless announced the formation of a joint venture to develop a mobile payments network called Isis. The carriers plan to operate the network based on handsets equipped with NFC and will route transactions over Discover Financial Services' payment network and issue customer accounts through Barclaycard US, a subsidiary of Barclays PLC.

At the same time, payment networks are pushing NFC methods that give them and their issuers more control over the customer relationship.

For example, Visa Inc. is offering its partner banks the ability to issue memory cards containing payment credentials. Customers can install this chip themselves in many smartphones, though the iPhone, which does not have a slot for the card, would require the use of a special case. The memory cards are made by DeviceFidelity Inc. of Richardson, Texas.

Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp are either testing the technology or planning to test it.

An alternative to NFC that has already shown promise is the digital bar code, which a consumer can present on a smartphone's screen for a retailer to scan at the point of sale.

Starbucks Corp. recently rolled out its bar code-based mobile payments system to all corporate-owned coffee retail locations. With the system, Starbucks customers can load funds through a prepaid mobile application.

Think Computer's closed-loop FaceCash system also lets users generate bar codes that can be presented on a customer's smartphone or printed. About 20 merchants, primarily in the Palo Alto and Cambridge, Mass., areas, are using the system, Greenspan said.

"We obviously started with the bar codes because they're easier and they're cheaper," he said. "We can ship out a bar-code scanner for $30."

"All you have to do is plug it in," he added. "There's no new standard to worry about."

But Mohammad Khan, the president of ViVOtech, a Santa Clara, Calif., company that sells point of sale technology to retailers, said establishing standards for NFC payments is not the primary issue, as the four main payment networks already have established standards for their contactless payment service.

Instead, standards are needed around how to use NFC chips for loyalty applications, such as closed-loop rewards programs and private-label cards that retailers offer, Khan said.

ViVOtech has been working on its own standard that it has been including in its point of sale terminals.