Apple could disrupt mobile payment industry, analysts say

Vast iTunes base makes it a 'PayPal on steroids,' one analyst said

Apple could cause some serious disruption in the mobile payments space if it enters the field as reported, say analysts.

Reports noted earlier this week that Apple is planning to embed Near-Field Communications (NFC) technology into its next-generation iPhones and iPads . Such NFC-enabled systems would let users pay for purchases by waving their mobile devices near payment terminals.

Similar contactless payment technologies have been around for years and have been received with lukewarm support at best by consumers. What's likely to make Apple 's entry into the space vastly different, however, is its huge base of 160 million iTunes users, said Avivah Litan an analyst at Gartner.

That base gives Apple the ability to operate largely as a "closed payment system" with minimal need to interface with credit card companies and banks, she said. "They can largely shut out credit card companies if they choose to," and operate in much the same way that PayPal has done in the virtual world, she said.

iTunes users will probably need to continue using their credit cards and bank accounts to fill up their iTunes accounts, but that could be the extent to which these financial institutions will be involved in an Apple mobile payment system.

"I see Apple as being a PayPal on steroids," Litan said.

Apple's rumored plans in the mobile payment space come at a time when interest in NFC appears to be ramping up. Last November, AT&T Mobility, Verizon Wireless and T-Mobile USA announced a project called ISIS under which they are working with Discover Financial Services and Barclays to introduce an NFC-based mobile payment system in the U.S.

Google added NFC capabilities with its Nexus S Android smartphone made by Samsung and even PayPal has begun partnering with companies such as Bling Nation in an attempt to let consumers use their PayPal accounts when making mobile payments at physical locations.

Such moves signal the seriousness with which large providers are approaching mobile payments, said Gwenn Bzard, an analyst with the Aite Group. The big advantage that Apple has in this increasingly crowded space is that it already is a processor of mobile payments, Bezard said.

Already, tens of millions of iTunes subscribers are using their accounts to make payments for songs and iPhone apps. By NFC-enabling Phones and iPads, Apple will essentially be giving such customers the ability to use their iTunes accounts to pay for a whole lot of other things as well.

"They have 160 million users with digital wallets in iTunes accounts. They don't have to do anything other than to NFC-enable their phones," Litan said.

For merchants, an Apple payment system could prove attractive. Many merchants are raring for alternative payment systems, to avoid having to pay the hefty fees that credit card companies charge for every transaction.

Apple could offer substantially lower payment fees to such merchants, and offer various loyalty applications to entice customers into using their iPhones or iPads for making payments, Litan said. "You can imagine going through a turnstile at a concert, paying with your iPhone and instantly getting an offer to download all the music you hear at the concert," she said.

Similarly, merchants could work with Apple to start offering coupons and discounts to customers making payments using their iPhones.

Questions remain about how long it will take for all of this to play out. In the past, such mobile payment systems have failed to impress consumers largely because they offered little real value-add compared with other payment options.

So Apple will need a compelling value proposition to get merchants to sign up for its payment system, Bezard said. Basically the company will need to figure out a way to reward users for using its mobile payment system while also driving more traffic to merchants, he said.

Given Apple's marketing savvy, that may not be as difficult as it may appear. All it takes is for Apple to get one or two marquee merchants to sign on to its payment system for it to catch on, Bezard said. "They could become bigger than PayPal literally over night," he said.

Merchants will also need to upgrade their payment systems to be able to accept NFC payments. However, those upgrades might be cheaper and less complicated than some might assume.

For example, special payment stickers are available already that allow merchants to NFC-enable their point of sale terminals by simply affixing a sticker to the terminal, Litan said. Such stickers go for as little as $18 and could sell for potentially less in volume, she said. And an increasing number of new, point-of-sale systems are enabled to handle NFC transactions.

A lot of attention is being paid to how long it will take for NFC to gain traction in the U.S., Karen Webster, of consulting firm Market Platform Dynamics (MPD), said in commentary on pyments.com . "The one thing that no one talks about, maybe because it's too scary -- is the real advantage that I see Apple having over ISIS, Google, PayPal and even Facebook,' she wrote.

Apple's iTune customers give Apple a compelling story to take to merchants, Webster wrote. "Can you imagine the persuasive case that Apple could make by simply offering to bring merchants their iTunes account customers?"

"That is a much more persuasive case to merchants than bringing 17 million AT&T subscribers using iPhones enabled with NFC chips in their hands," she added.

Jaikumar Vijayan covers data security and privacy issues, financial services security and e-voting for Computerworld. Follow Jaikumar on Twitter at @jaivijayan or subscribe to Jaikumar's RSS feed . His e-mail address is jvijayan@computerworld.com .

Read more about mobile apps and services in Computerworld's Mobile Apps and Services Topic Center.

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Jaikumar Vijayan

Computerworld (US)
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