In Apple Mobile Pay Plans, a Possible Opening for Banks

That Apple Inc. is targeting mobile payments is a foregone conclusion, but that doesn't mean banks must take a defensive approach.

The natural instinct for some is to put Apple in the same camp that many have put PayPal Inc. and Wal-Mart Stores Inc., that of the enemy. But banks that look for ways to leverage their direct access to credit and debit card holders and relationships with merchants — key ingredients for a scalable mobile payments system — stand a better chance of thriving when Apple goes to market.

"If we as a banking industry don't get our head around payments … we risk the chance of an Apple or Google or anybody else being a disrupter in the space and taking some of the volume, very similar to the way PayPal has become a disrupter in the industry," said Jeff Dennes, the director of online and mobile services at Huntington Bancshares Inc.

While payments analysts doubt Apple's ability to completely cut banks and existing payments networks like Visa Inc. and MasterCard Inc. out of the picture, they stress that Apple's influence must be taken into account. Apple could try to go it alone, creating a proprietary network and asking customers to link a checking account to iTunes, a setup similar to what eBay Inc.'s PayPal does. This would cause banks to lose revenue they would normally gain through card transactions, analysts said.

Apple's iTunes Store, which could serve as the mobile wallet used to store payment information on a consumer's payment-enabled device, generated net sales of $1.16 billion in its 2011 fiscal first quarter ending Dec. 25, according to Apple's earnings report.

"Apple's probably someone you want to work with than try to fend off," said Richard Doherty, the research director of Envisioneering Group market research firm in Seaford, N.Y. "They do touch tens of millions of Americans, hundreds of millions of people around the world."

Citing Doherty as its source, Bloomberg News this week reported that Apple is preparing to include near-field communication, or NFC, chips in coming versions of the iPhone and iPad. In an interview with American Banker this week, Doherty said he has talked with hardware makers and other manufacturers that work with Apple on accessories and other devices, in anticipation of Apple rolling out an NFC-based mobile payments system that would work with all devices that use the Cupertino, Calif., company's iOS mobile operating system, possibly this year.

For a mobile payments system based on NFC to take off, retailers must have payment terminals that are able to communicate with the chips inside of the phones. Getting merchants to upgrade their technology is tough enough during normal refresh cycles; convincing them to upgrade to a system that may only work with one player's system, as some have suggested Apple may do, could be more difficult.

"As a merchant … do you really want to be handcuffed to one type of phone?" said Nick Holland, a senior analyst with Yankee Group.

In many ways, the interests of banks and new entrants in the payments space are aligned.

Banks do not need to be technology providers to have a successful mobile payments strategy. For example, Bling Nation Ltd. has had many deployments where banks provide the merchant and consumer relationships and Bling Nation provides the underlying payment system.

The banks offer stickers with embedded payment chips, meant to be adhered to mobile phones; in its most recent deployments, the stickers simply say "Bling," excluding the bank's brand.

In taking the focus away from the bank's branding, Bling Nation says is subtly conveying to consumers that the payment system is bigger than any one bank. In this way, it can send the same message of reliability that Visa and MasterCard do by posting their brands in store windows and at the point of sale.

"Banks would like to make sure that people are confident that they can buy what they want and when they want it, and Apple has the same interest in making that as easy as possible," Doherty said.

Apple could then set its own pricing, but if its pricing is too high, merchant adoption will be slow, said Todd Ablowitz, the president of payments consulting firm Double Diamond Group in Centennial, Ohio.

"There are a lot of mouths to feed, but there are a lot of transactions to capture," Ablowitz said.

Apple could try to command a higher merchant fee by taking the "American Express approach, which says, 'Hey, we're worth more and you can pay a little more,' " Ablowitz said. "That might work, but I don't think it would adopt rapidly, ubiquitously, virally."

In the end, banks have a lot to gain by being willing to give pricing concessions to Apple in exchange for getting their payment card information directly located in Apple's mobile wallet service. Doing so could give those banks a first-mover advantage.

Payments companies that are already moving forward with their own mobile payments systems say the entrance of other players is not a bad thing.

MasterCard, which has been involved in a number of mobile payments trials around the world, is willing to work with new players, said Ed McLaughlin, the chief emerging payments officer at the Purchase, N.Y., company.

"I think across the industry there is a lot of technology that's coming to bear in the market," McLaughlin said. "We're looking to work with those organizations to make sure that we can make that successful."

Bill Gajda, the head of mobile at Visa Inc., said based on general discussions he has had with various players in the industry, including Apple and Google, he believes future mobile wallet applications will be open in nature.

"They realize that the customer really wants the choice of what payment brands and what bank they put on this wallet just like you have these choices in your leather wallet today," Gajda said in an interview Friday.

An open system would allow for Visa and other payments brands and banks to "make the load experience, that payment experience and … resources around it as frictionless as possible," Gajda said.

Visa recently made available to its bank partners commercial specifications for using a mobile payments system that is based on microSD card technology from DeviceFidelity Inc. The service involves a consumer inserting the microSD card, which contains their card payment information, into a smartphone's external memory slot. In the case of the iPhone, a special case must be used because the phone does not have an external memory slot.

The approach differs from that of what Apple and other device manufacturers are planning to do in that it does not rely on embedded NFC chips.

Embedding NFC — the approach many predict Apple will take — is often viewed as a smarter method because it may require consumers to take fewer steps to set up their mobile wallet.