Apple Pay aims to revolutionize mobile payments

Contrary to the wisdom imparted to a confused young Benjamin Braddock in the movie “The Graduate,” the word “plastics” doesn’t actually sum up the future — at least, not according to Apple.

The consumer technology giant, based in Cupertino, California, is hoping that plastics in the form of credit cards to pay for transactions will go the way of the gramophone, becoming technologically obsolete.

Along with its much-hyped iPhone 6 and iPhone 6 Plus and a brand-new smartwatch that can track heart rates, Apple introduced Apple Pay, its long-rumored mobile payment system, during its widely viewed unveiling event on Tuesday. The tap-to-pay system will use near-field communication, or NFC, in which a smartphone transmits payment information over short distances using radio waves.  

While the company was short on in-depth technological details, the Apple Pay system creates a one-time number for each payment transaction rather than sharing a user’s credit card information, which is encrypted and stored only on the phone. That’s a departure from the normal swipe of a credit card using a magnetic strip, in which the card number is transmitted to a retailer. 

“Apple Pay will forever change the way all of us buy things,” Apple CEO Tim Cook told the rapt audience, adding that some 200-million e-commerce transactions take place in the U.S. daily, to the tune of $12 billion.

He called the current process of shopping with a credit card “antiquated,” showing a video in which each step of a credit card purchase was depicted with exaggerated slowness — a woman pulls her wallet out of her purse, digs around for the proper credit card, swipes it twice after the first attempt fails to register and then must wait for the transaction to be approved.

“The whole process is based on this little piece of plastic,” Cook said, “and whether it’s a credit or debit card, we’re totally reliant on the exposed numbers and the outdated and vulnerable magnetic stripe interface.”

Apple Pay users will instead use their iPhone’s camera to take a picture of a credit card. If your phone is lost or stolen, you can stop payments using the Find My iPhone feature, Apple said. The account information won’t be shared with retailers.

The company announced partnerships with the three major credit card companies — American Express, MasterCard and Visa — and the six biggest banks in the U.S. Apple has also forged agreements with retailers such as Macy’s, Bloomingdales, Whole Foods, Disney, McDonald’s, Walgreens and others.

NFC isn’t exactly new. Some Android and Windows smartphones have already incorporated the technology, for example, so users can tap their phones together to exchange small amounts of data.

And mobile payments aren’t new, either. Systems like GoogleWallet, Square and Softwallet have attempted to entice consumers into using their mobile phones for payment, but none have caught on widely. According to a recent Bain report (PDF) 3 to 7 percent of U.S. consumers currently use in-store mobile payments to buy things like coffee and books.

“That’s about to change, given an unprecedented rise in the momentum among consumers and investors — providing that the players can overcome the technical and behavioral hurdles that remain,” the Bain report said, adding that twice as many consumers used mobile payments in 2013 as in 2012.

In the same vein, technology experts have said mobile payments haven’t caught on because of a splintered market in which no one system has been made widely available.

“Apple’s starting with a very different base” because it has access to the stored credit card information of some 800 million people in the form of iTunes account holders, said Denée Carrington, a senior analyst with expertise in mobile payments at global research firm Forrester. That’s four times the number of people who use PayPal.

And the fact that Apple has already formed relationships with all sorts of retailers, from grocery stores to restaurants to department stores, is “different than what other merchants have been able to accomplish,” Carrington said. “They’ve certainly launched with large retailers but not across the categories” of stores that Apple has.

While mobile payments may cause trepidation among those who equate it with recent data breaches in which thousands of shoppers’ credit card numbers were stolen from stores like Home Depot and Target, experts say NFC technology is actually far safer than magnetic strip credit cards.

Slava Gomzin, a security and payments technologist at Hewlett-Packard in Houston who blogs about payment security and technology, said he would prefer to use Apple Pay than the typical magnetic strip credit card. A swipe of that card involves the transfer and storage of one’s credit card number at each retailer, but Apple Pay’s system does not.

“[Apple Pay] is a completely different system,” he said. “From this perspective, this solution is much more secure than a regular card swipe.”

And while Carrington said many people will still be perfectly happy to use their credit cards, iPhone users tend to be early adopters in terms of mobile payments, and its 40 percent smartphone market share doesn’t hurt either.

“This is not something that’s going to revolutionize payments overnight,” she said. “But I do think it’s an important step in the U.S. market’s evolution in terms of mobile payments.”