Some of the details of Apple's new mobile payment system, Apple Pay,
have been revealed in a report by Britain's
The Financial Times. As briefly alluded to by CEO Tim Cook, Apple does get a
small commission on sales made using Apple Pay, to the tune of 0.15 percent (15 cents on every $100 spent), though this does not affect the purchase price.
Apple's cut comes out of the two-to-2.5 percent fees charged by the credit card companies to merchants when a purchase is made using their cards, so the merchant is not impacted by Apple's system either. Banks, card issues and other payment companies are essentially paying to be involved, but prefer Apple's approach over a
rival but similar approach developed by some big-box retailers such as Walmart and Best Buy, which is attempting to cut out the payment networks.
Other details of the system involve exactly how the process works, and why it was recently described by a MasterCard executive as "considerably
more secure" than existing forms of payment, including the more-secure chip-and-PIN options more widely adopted in Europe and Canada (and being rolled out in the US). The NFC-based technology relies on a one-time-use token, which is verified by the card issuer, while the identity of the purchaser is verified using Apple's Touch ID.
Another MasterCard executive, Jorn Lambert, detailed the process for the newspaper. In addition the standard cryptogram generated by the point-of-sale terminal (this is normally done with conventional debit and credit card sales), Apple Pay also employs a one-use token (which is built into the NFC specification) so that every step of the process can be encrypted. What's new, compared to NFC payment systems, is the identity verification using Touch ID.
Cards added to Passbook also have a "Dynamic Account Number," another form of token. Because this is stored in the Secure Element of the iPhone 6, the actual account details are never transmitted anywhere except during the initial card verification process. For transactions, Touch ID prompt the Secure Element to generate a new cryptogram for each purchase, which along with the point-of-sale cryptogram and Apple Pay token from the merchant is verified by the payment network. The merchant receives no data other than an approval code for the transaction.
Part of the reason Apple appears to have already secured more success with its payment system than rivals have to this point is to do with the enhanced security, which both encourages merchant and customer acceptance as well as likely lowering fraud risk quite significantly for the payment networks, one of their largest expenses. Other than the underlying technology, Apple is uninvolved in the transaction, which banks and issuers see as less of a threat to their systems than rival payment options.
Merchants will also like the lower "card present" rate they will be charged for the service, as opposed to "card not present" rates that are normally charged using some NFC and alternative payment options that have been tried thus far. There is another incentive for most retailers to adopt Apple Pay as well: most are having to change POS terminals in the near future to adapt to the forthcoming chip-and-PIN systems more card issuers will be requiring, as well as supporting other NFC-based payment options. There is some speculation that Apple Pay could work even at NFC-supporting stores that don't explicitly sign on to Apple Pay, as there is enough compatibility (and a fallback PIN system for use with the Apple Watch and iPhone 5 family) for some systems to likely be compatible.
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