EMV Push Spurring Smaller Banks' Interest in Apple Pay

The adoption of new anti-fraud card technology is prompting more community banks to take a serious look at joining Apple Pay.

Some merchants are upgrading point-of-sale terminals ahead of October, when liability for counterfeit cards will fall on merchants that fail to properly process cards with EMV-chip technology. Many terminals will include technology for accepting payments through near-field communications such as Apple Pay and Google Wallet.

As a result, many banks are likely to go ahead and sign up for those services, too. Industry observers said that it is especially important for smaller banks to consider mobile payments, which can level the technological playing field against larger competitors.  

"This is the future," said Greg Coogan, president and chief executive of West Bay Partners, a technology consulting firm. "You either embrace it or you get clobbered by it. You need this to compete."

Roughly 60% of point-of-sale locations will be ready for EMV-chip technology in October, said Thad Peterson, a senior analyst at Aite Group. Most of those locations will also be equipped to accept NFC payments if the retailer decides to turn that option on, he said.

Mobile payments, which have been available for a while, initially struggled to gain a critical level of usage.

Google Wallet, for instance, ran into challenges after its May 2011 debut. It was restricted to certain devices on the Sprint network, said Nick Holland, head of the payments practice area at Javelin Strategy. And a limited number of merchants were willing or able to accept mobile payments.

Apple Pay, however, has created a buzz with consumers — and piqued bankers' interest — since its October launch. It has grown from working with six financial institutions to being accepted by more than 2,500 card issuers. There has been strong interest in Apple Pay at banks that work with Fiserv, said David Keenan, Fiserv's senior vice president of network solutions.

Apple Pay's debut was well-timed; it came out closer to EMV's implementation. As a result, more merchants are ready to accept this form of payment, industry experts said.

A spokeswoman for Apple Pay declined to comment beyond her company's prior statements on the initiative. A representative for Google declined to comment.

"Apple Pay isn't really anything new in terms of technology," Holland said. "They just packaged it nicely and brought it to the mainstream. Now we will see a variety of other initiatives."

Samsung recently said it would launch its own mobile payments, though industry experts noted that details remain sparse on how it will work.

Customers Bancorp in Wyomissing, Pa., was one of the first banks to partner with Apple Pay. About two-thirds of Customers' clients have signed up for it, said Warren Taylor, the $6.8 billion-asset company's president of retail banking. Customers decided to join partly because of EMV and the greater acceptance of mobile payments that is bringing, he said.

Though there are only about 500 million near-field communications phones globally, the concept is starting to take off. Any bank that doesn't offer Apple Pay "will be at a disadvantage," Taylor said.

"This levels the playing field," Taylor added. "It's easy for a bank to set up, and really relatively inexpensive, so almost anyone can afford to do it."

It takes very few resources for a bank to sign up with Apple, and a bank's asset size shouldn't affect its ability to work with Apple Pay, Peterson said.

Apple takes a cut of the card issuer's interchange fees, but the amount is small enough that it shouldn't discourage potential partners, industry experts said. So far, the experience has been "effortless" for customers using it to make purchases and for banks that sign up, Taylor said.

"This is an opportunity for banks and credit unions to be associated with a premier consumer brand," Holland said. "Banks see this as cutting edge. This is clearly a way for smaller institutions to have the same clout as the bigger ones."

Associated Banc-Corp deliberately became an early adopter of Apple Pay because it thought "this was an area that will be increasingly important, and EMV was potentially one of the catalysts to drive acceptance," said Brent Tischler, the Green Bay, Wis., company's director of channel optimization. The $26.7 billion-asset Associated, which also works with Mastercard MasterPass, is interested in learning more about Samsung Pay.

"We believe the digital payments space, though relatively small, will continue to grow and that growth will accelerate," Tischler said. "It would be risky long term for banks to stay on the sidelines. It will be important for customer acquisition and retention."

Still, some of the hype over Apple Pay has been overblown, industry observers said. The excitement is likely to encourage others to enter the mobile payments arena, further fragmenting the business. It could cause some consumers to opt out of Apple Pay, some observers said, adding that concerns still exist about potential fraud.

"The hype is over the top," said Chuck Winter at consulting firm North Highland. "Some form of mobile wallet will emerge, but I think we don't know enough about the consumer and their behavior to say which one will win."

Customer adoption of Apple Pay has been modest despite banks' excitement, industry experts said. This could be partly because there are several steps, including having an issuer sign up before cardholders enroll, before purchases can be made, Keenan said. Still, this hasn't dampened bankers' enthusiasm, he added.

While banks have the ability to embed contactless technology into their own cards, many may elect against it due to the cost, Keenan said. Adoption rates could increase if such costs start to fall.

Associated is still considering contactless technology as it plans its EMV-chip card, Tischler said, admitting that the costs make the effort less appealing.

"Even as institutions are very interested in mobile-base payments, it hasn't dampened their enthusiasm for chip cards," Keenan said. "We're in the first inning of the game for mobile-based payments."