Mobile payments have been boring so far. Here’s how to make them more interesting.

By Greg Blumstein, Managing Partner, Onyx Venture Advisors

September 8, 2014

Back in April I started writing a blog post that discussed the merits of Apple beginning to offer a mobile payments platform, the technology they have and could leverage towards providing such a service, and the new feature-set that it could bring about in payments. That article was over 13,000 words in its draft form, so I simply scrapped the article and never posted it. The most interesting part of that article, to me, was writing about what should be exciting in mobile payments, rather than the limited enhancement of replacing your plastic credit card with your phone.

After years of rumors, in the last week, additional rumors have started circulating that Apple will finally introduce its mobile payments solution in partnership with the major credit card payment networks, and include NFC in the upcoming iPhone 6, likely to be introduced tomorrow.

Below I briefly address two major points – Why Apple hasn’t launched a payment system until now, and what Apple and others could build into mobile payments and the payment networks of the future.

Why has Apple waited on introducing mobile payments?

While Apple is a global company, with roughly 60% of its revenue’s coming from outside the US, it still introduces most of its new products and services in the US first. At least part of the speculation has been that Apple was trying to get agreements in place with the major credit card networks, and perhaps some major retailers as well. Beyond that, to date, contact-less payments are not widely accepted in the US, whether you look at NFC, QR Codes (Passbook and others), WiFi or BLE (Bluetooth Low Energy, a.k.a, “iBeacons”).

That said, the US market is likely to start changing rapidly. Brick-and-mortar merchants in the US are going to be updating their Point-of-Sale (PoS) hardware to meet the October 2015 deadline to support EMV (“Chip-and-PIN” / “Chip-and-signature”). After the deadline, merchants who don’t support EMV will start being held liable for card-present fraud, when an EMV equipped card is present and processed.

Most of the major PoS hardware manufacturers seem to be including NFC as part of their newest PoS equipment that supports EMV, meaning NFC will finally start seeing wide deployment. You’ve likely already seen newer PoS hardware that supports EMV and NFC at some larger retailers such as pharmacy chains, which have already started rolling out new PoS equipment.

Replacing your plastic credit cards with your phone is boring. Here are some features that could make it more interesting.

Much of the aforementioned 13,000-word article revolved around how Apple could implement such features. That included discussions of Apple becoming a full-fledged payment network similar to American Express, Discover, MasterCard, and Visa, and the potential for Apple to also become a credit issuer similar to major credit card issuers, i.e., the banks (American Express, Bank of America, Chase, Citi, Discover, etc).

Many of the ideas below would be difficult, if not impossible, to implement if Apple just replaced your existing card with an iPhone, and continued to utilize the existing card networks’ limited legacy functionality. I hope Apple will do something more revolutionary than what Google has tried in the past with Google Wallet, or Coin is trying to do with its product for example.

Adopting the consumer standpoint, the benefits of not carrying around their existing plastic credit cards are fairly limited, especially if one can’t use your phone to pay 100% of the time. Therefore, more interesting features that could be enabled with both mobile payments and updated payment networks might include:

• Real digital receipts. One-stop for all of your receipts perpetually, with much more information such as the exact items purchased, serial numbers, individual item prices, and real dates and times (instead of just a posting date). This would give you detailed information on each purchase instead of just a store name and total amount. Businesses could receive this information in real-time, imported directly into accounting software like QuickBooks for example, without having to recover receipts (paper or digital) from their employees. Imagine never receiving a paper receipt ever again, or giving out your email address for a digital receipt. [Square is rumored to be working on a product like this]
• Location information. See the exact location on a map of the merchant for a transaction. Ever tried to remember what/where a purchase was made when it’s from a national chain, or a merchant name you don’t recognize? This feature will eliminate the doubt.
• Zero fraud liability, including never needing to replace your expired, worn-out, lost, stolen, or hacked “credit card” or credit card number. See the recent examples of card information being stolen from Home Depot, TJ Max, Target, Adobe, Neiman Marcus, etc. Apple could leverage its “Secure Enclave” technology to provide a real solution to this, with one-time-use credit card numbers for every transaction, and/or per merchant, and for both web based transactions and in-store transactions. If your card number were stolen, it would be completely worthless and impossible to use at any other merchant. If your iPhone were stolen, no one could use it to purchase anything without your fingerprint via Touch ID.
• No network / network offline transactions. Trying to pay at a parking meter with a cellular connection that’s slow or down at the moment? At a retailer and their credit card network connection is down? Using the Secure Enclave built into the iPhone, Apple could allow smaller transactions to be processed completely off-line, similar to a stored-value card. This could also replace other stored value cards such as transit cards.
• Identifying the charging entity. On some multiple-card shared accounts (such as couples, with children, or business accounts) which person made the purchase is difficult to discern. With this feature, it would always be clear who and what device made the purchase.
• Easy Card  (De)Activation. For businesses, the ability to instantly assign and revoke “cards” to employees on an as-needed basis, with real-time adjustable credit limits per employee. This could also apply to family members.
• Streamlined functionality. One payment app, one process, and “Apple Simple”.

Adopting the merchant standpoint, additional enhancements should be created on that front as well:

• Lower rates. Apple can undercut the existing payment networks by providing an in-house end-to-end system and still make a profit. Imagine saving 1%-2% per transaction vs. traditional credit cards. If the necessity of upgrading to newer POS terminals to support EMV and avoid the fraud-shift doesn’t do it, this would surely pay for the cost of new POS terminals in a short period of time. The savings are even more pronounced for card-not-present (web-based) transactions.
• Lowered 3^rd party fraud rates. Card-not-present (web based) fraud amounted to $282 Billion in losses in 2012 in the US. Using push alerts and TouchID, Apple could finally offer online merchants a 100% no-chargeback guarantee for stolen “credit cards”, even on non-physical/digital goods and services that aren’t shipped to a cardholders address. For card-present (brick and mortar) purchases, even with existing zero-fraud liabilities, Apple wouldn’t need any documentation (such as signed receipts) from the merchant to resolve a card-stolen situation as they’d have all of the data in-house including a digital “signature” from the iPhone (the users fingerprint) that authorized the transaction. Even EMV doesn’t solve this problem completely. As mentioned previously, Apple’s new system could also completely eliminate stolen physical credit cards and credit card numbers altogether.
• Micropayments. To date there’s no great solution to micropayments for online merchants, due to high per-transaction fees for credit cards. If Apple owned the entire system (end-user account, network, merchant account), they could finally enable a financially viable solution that would work for micropayments online.
• Better data. Traditional payment gateways (PayPal, Authorize.net, First Data, etc) and merchant account providers aren’t very good at giving merchants easily decipherable data on their transactions, especially when it comes to fees, disputes, and chargebacks. Square and Stripe are doing a better job at this, but at least in the case of Square, it’s questionable if they’re making money by offering one price transactions, without the typical and additional per-transaction fee. Apple could offer merchants even more data that provides insight into their customers’ habits and spending. This could open a can-of-worms from a privacy perspective, unless cardholders decided to opt-in, potentially for discounts from merchants. This would be similar to loyalty cards used at many retailers today that offer discounts.

While the above features are certainly difficult or even impossible to achieve today, they should be where Apple, other consumer-facing companies, and payment networks focus their attention, rather than replacing your piece of plastic with another form.