The Apple Payment System You Never Saw Coming

Year after year, Apple fans have expected the company to make a splash with an iPhone-based mobile payment system. And year after year, Apple has let them down — but a lot has been going on under the surface.

Many mobile payment systems, including Google's, use near-field communication technology as the starting point. To use Google Wallet at the point of sale, a consumer must have one of the few NFC-equipped smartphones running its Android software. Similarly, a merchant must have a terminal with the proper hardware to read the chip.

For Apple, however, NFC is not the key ingredient. If it comes, NFC will simply be the icing on a cake that Apple has been baking — and will still be baking — for a very long time.

"Right now, Apple devices are not NFC-equipped, but they are a more flexible environment from a software perspective than traditional" point of sale terminals, says Rick Oglesby, a senior analyst at Aite Group LLC.

Google's Android is the leader in smartphones, according to Gartner Inc., but the Android product line is too fragmented to sustain the sort of payment ecosystem Apple is building. Android devices come in hundreds of different shapes and sizes along with operating systems that are often tweaked according to carriers' whims.

Apple's i-devices, by contrast, are not customized for different carriers and have fewer hardware variations (Apple typically removes older iterations of its hardware from stores whenever a new version is launched). This allows for a uniform experience across the entire product line — and a more practical foundation for a payment system, experts say. (Representatives from Apple did not respond to inquiries made by phone and email.)

Apple retail stores in Paris and London are currently using a device from Ingenico SA that slips over iPhone and iPod Touch devices, for chip-and-PIN transactions as well as for full access to the iTunes app store, says Svy Nekrasas, vice president of marketing for the French terminal maker.

"Apple is definitely a market leader, and we have nothing in the pipeline in terms of integrating other devices to this form of payment," Nekrasas says. Ingenico is also the hardware provider for a test of PayPal's wallet in Home Depot stores using traditional point of sale devices.

Most payment systems built around Apple's devices still rely on plastic cards. Square Inc. set the tone for mobile payment acceptance with a freely distributed reader that lets small merchants accept transactions through the iPad and iPhone.

Square's reader was designed for small merchants such as flea market vendors, but other hardware makers are bringing Apple's devices into established retailers.

For example, when customers go to the women's clothier C. Wonder in New York's SoHo district, salespeople greet them with Apple's iPod Touch devices equipped with a card reader from VeriFone Inc.

The reader turns Apple devices into mobile point of sale machines that tap into the store's enterprise resource planning system.

"The Apple devices provide a more dependable platform," Paul Hoffman, vice president of business development and strategy for J. Christopher Capital, the management firm for C. Wonder, wrote in an email. Vendors offer more products that work with Apple devices than with other mobile hardware, he said.

And "there is the inherent coolness factor with Apple products," he wrote.

Perhaps even cooler: the platform cost less than $500,000 and took about four months to implement.

Hoffman claims it would have taken more time and cost millions of dollars to do a terminal and system upgrade and to manage Payment Card Industry data security standard compliance for all of its stores. (VeriFone's sleeve, like Ingenico's, encrypts transaction information.)

VeriFone recently announced a bluetooth version of its hardware to work with other mobile devices, but its current version works only with the iPad.

If Apple chooses to turn its iPhone into a payment device, it will not have to deal with the hassle of enrolling consumers into a new payment system.

Apple already has the payment details of countless consumers enrolled in its iTunes digital media store. As some of Apple's patents have shown, the company has explored adapting this system for other payment settings.

And the iPhone's status as a consumer-friendly handset that can handle business functions positions the device well to serve small-business clients — a group that banks and payment companies are largely ignoring in their mobile payment deployments with big-name retailers like Duane Reade and Home Depot.

"There is a big set of merchants that traditional bank merchant acquirers have ignored" and that Apple and its partners "could bring into the electronic payment ecosystem by making the process simple and not requiring the purchase of point of sale" equipment, says Gil Luria, senior vice president of Wedbush Securities.

Another advantage to Apple's approach is that people typically update their phones a lot more frequently than merchants update traditional point of sale systems, says Larry Berlin, a vice president and research analyst for First Analysis.

"The market is ripe for some fierce competition," says Sandeep Bhanote, vice president and general manager of mobile retail for VeriFone.

But, Bhanote adds, "The only way to compete on par with Apple is for someone to come up with some standardization across the [Android] OS and form factors."