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`Apple wages war on the wallet
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`Apple wages war on the wallet
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`P U B L I S H E D M O N , S E P 1 5 2 0 1 4 • 7 : 5 2 A M E DT
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`U P DAT E D M O N , S E P 1 5 2 0 1 4 • 1 : 3 6 P M E DT
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`Tom Braithwaite, Camilla Hall, Tracy Alloway, Tim Bradshaw, Sarah Mishkin, and Richard Waters
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`S H A R E
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`When Steve Jobs unveiled the iPod in 2001, he saw an opportunity to reshape an industry. The device sold hundreds of
`millions and its pairing with iTunes became so successful that it unbundled the album and killed the CD, destroying
`music industry revenue in the process.
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`Read MoreApple Pay faces huge challenges: PayPal exec
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`Fast forward 13 years and Apple is again looking to revolutionize an industry with Jobs’ successor Tim Cook revealing
`this week its entry into the finance sector with Apple Pay. Payments, he said in language reminiscent of Jobs’ original
`comments, is a “huge business”, with $12bn worth of daily transactions in the US alone, restricted to using an
`“antiquated” card swipe system. The banks, technology companies and retailers that have “dreamed of replacing” the
`wallet with the smartphone have “all failed”, he declared.
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`V I D E O 0 2 : 5 8
`Apple Pay opportunity for rivals?
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`It was an iPod moment for cash and credit cards. Analysts believe that Apple’s popularity and market share might allow
`it to do what so many others – among them Google – have struggled to achieve.
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`Apple controls the hardware and software in its iPhone, improving security from the silicon to its fingerprint reader. As
`the world’s most valuable company, it has the clout to cajole banks and retailers to adopt its technology. What Apple
`must now do is persuade consumers that tapping their mobile to pay is easier than fishing in a handbag for a card.
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`As the iTunes example shows, Apple’s profit is often another industry’s loss. Wall Street already views Silicon Valley as a
`competitor for the best graduates but tech companies could also grab profits from the banks. ”[They] all want to eat our
`lunch,” Jamie Dimon, chief executive of JPMorgan Chase, the largest US bank by assets, said this year.
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`Read MoreWhy ApplePay Will Hurt PayPal
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`But such is the sway of the tech company that JPMorgan, Visa and the other banks and payments networks sent senior
`executives to Mr Cook’s presentation on Tuesday to pay homage. Bank chief executives fawned about the “exceptional
`customer experience” and the “exciting move”.
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`They are also paying hard cash for the privilege of being involved: 15 cents of a $100 purchase will go to the iPhone
`maker, according to two people familiar with the terms of the agreement, which are not public. That is an
`unprecedented deal, giving Apple a share of the payments’ economics that rivals such as Google do not get for their
`services.
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`“That makes Apple Pay unique,” says Dickson Chu, chief product officer at start-up Ingo Money, who worked at PayPal
`and, while at Citigroup, on the Google Wallet. “It’s somewhat surprising that Apple was able to negotiate something
`Google couldn’t.”
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`The list of early Apple Pay partners is impressive, including the 11 biggest US card issuers, representing 83 per cent of
`the market, and retailers such as McDonald’s and Walgreen which together have 220,000 US stores ready to receive
`iPhone payments.
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`While it lacks retailers such as Walmart and Best Buy, which in 2012 teamed up to develop a mobile wallet of their own,
`Apple’s ability to wrangle representatives from three big groups of the payments world – banks, credit card companies
`and merchants – is no mean feat.
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`Read MoreIs ApplePay a bitcoin killer?—Commentary
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`Part of the reason the 50-year-old credit card system remains “antiquated” is because it relies on a complex ecosystem
`of players that rarely agree on how best to change their industry. However the chief executive of one payment
`technology company, who asked not to be named, said he was surprised that the banks were so willing to concede to
`Apple after what happened to the record labels.
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`Led by its iTunes and App Store chief Eddy Cue, Apple has been negotiating with banks and credit card companies for
`more than a year. In development, the project was kept under wraps, with the iPhone maker striking fear into its new
`partners if they stepped out of line.
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`“There were people working on the solution [at the bank] that didn’t even know what they were working on,” says Jim
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`Smith, head of virtual channels at Wells Fargo. “It was kept to a real, limited, absolutely need-to-know perspective.”
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`Whole Foods to offer Apple Pay
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`Bruce Dragt, global leader of ecommerce at payments processor First Data, says: “Everybody understood the drill of
`what they could and couldn’t say, who they could and could not talk to.”
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`If the world’s biggest banks see Apple as a threat, why did they get into bed with the technology company and agree to
`give up a slice of revenues?
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`One of the reasons it was able to corral so many partners was the absence of anything in Apple’s plan that would be truly
`disruptive to their businesses – at least for now. Apple’s model “still puts us at the center of payments”, says one bank
`executive.
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`The “near-field communication” technology that allows a customer to pay in-store by tapping a phone at a terminal is
`already in place, even though products that use it, such as Google Wallet, have failed to gain mass acceptance. Banks
`were already planning to adopt the secure “token” that generates and transmits a one-off code to pay for transactions
`rather than a signature or PIN, and see others following now that Apple has adopted it.
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`Read MoreHow hackers couldstill get around Apple Pay security
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`Absent from Apple Pay is the ability for users to send money to each other or Bluetooth technology, which would allow
`users to pay several meters from a terminal rather than a couple of centimeters.
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`“There’s nothing really technologically new in what they’re doing,” says Hans Morris, former president of Visa and now
`managing partner at venture capital firm Nyca Partners. But he says that the way Apple has assembled a group of
`companies more used to competing than collaborating is “analogous to iTunes.”
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`“Everyone knew that technology could deliver a better consumer experience, but you had record companies, artists and
`competing delivery systems in disagreement,” Mr Morris says. “Once Apple pulled it together in a compelling package
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`with key participants on board, everyone else came around.”
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`Banks are willing to lose a slice of revenues in the hope that Apple Pay will become ubiquitous. That would drive up
`transaction volumes – and therefore overall revenue – and could reduce losses to fraud through its tighter security.
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`MasterCard and Visa now cover the cost of card fraud, but from next year will hold retailers responsible if they do not
`use the “chip and PIN” technology that is widespread in Europe but nearly unheard of in the US. The new retail
`terminals often allow both PIN and NFC transactions. That could speed uptake of Apple Pay.
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`Even though the in-store payments were the centre of Apple’s presentation, banks are more excited by streamlining
`online shopping. Giving customers an Apple Pay button to press online, rather than typing in card information –
`particularly on a small screen – will be a real catalyst to more spending, banks believe.
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`“This is about ecommerce,” says Jud Linville, head of cards at Citigroup. “If there is an app where somebody is
`shopping, being able to close out that shopping experience by tapping Apple Pay delivers convenience and security.”
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`That would make PayPal a more obvious target for disruption by Apple. By bundling its rival with every new iPhone and
`Watch, Apple is already stealing some potential growth from PayPal’s own attempt to create a wallet app.
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`Despite the lessons from iTunes, for now the banking and payments industry is confident that Apple is a benign partner.
`“What Apple really announced was the end of the plastic credit card, but not the end of paying by credit,” says Jason
`Oxman, chief executive of industry group Electronic Transactions Association.
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`V I D E O 0 2 : 4 4
`Apple Pay’s unanswered questions
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`The onerous regulation involved with becoming a bank creates one big moat that Apple is unlikely to try to cross. Data
`protection, security and anti-money laundering processes are a long way from slick smartphones and cloud storage
`services. “There’s not a lot of people that say, ‘I’m really interested to hold a lot of capital and risk-weighted assets’,”
`says a senior executive at a US bank.
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`But future versions of Apple Pay could threaten the established order more deeply. Just as iTunes moved from music
`into movies, TV and radio, Apple could creep into more areas of financial services in that grey area between simple
`payments and full-fledged bank.
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`“Apple’s playing a long game. They could use [consumers’] adoption to run an end-game around the existing payment
`infrastructure,” says Ben Milne, founder of payments processor Dwolla. Their ownership of hardware, software and
`hundreds of millions of customers’ payment details, he says, means “they’re the only company in the world that can
`actually do that . . . Apple is not a company afraid to exercise control.”
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`Banks are giving up some of the profits from payments made through Apple but the 0.15 per cent charge may seem
`meagre in the face of competing mobile payment systems that are more ambitiously trying to cut out the financial
`institutions altogether.
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`Read MoreApple Watchdoesn’t matter, Apple Pay does
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`“It’s going to happen with or without you,” says Scott Galit, chief executive of Payoneer, which specializes in cross-
`border payments. “It makes sense to pick the guy who wants to play with you as opposed to the guys who are trying to
`cut you out.”
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`Just as the iPod killed the CD, Apple hopes to see off plastic and paper payments. While iTunes lightened the music
`industry’s wallet, banks must hope that Apple Pay will fatten theirs, rather than replace them entirely.
`
`—Reporting by Tom Braithwaite, Camilla Hall and Tracy Alloway in New York, and Tim Bradshaw, Sarah Mishkin and
`Richard Waters in San Francisco.
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