An Apple Pay Primer: The Future of Our Money and How We Use It
There’s something unsettling about the idea of Apple Pay. The issue probably isn’t electronic payment—we’ve become used to sending sensitive financial information over the Internet, and the success of PayPal and online banking are evidence of that. But even those companies have a sort of institutional purity to them; if our money isn’t safe, they don’t have a business.
It’s natural, then to feel a little anxiety about allowing a company that is in the business of taking, not protecting, our money and data to watch over them, like having a German Shepherd guard a flank steak. Increasingly, people worry that companies like Apple and Facebook have “too much control” over the things in our lives. This is the fear at the heart of our relationship with large, data-driven companies: how can we expect them to protect something that they exist to collect themselves?
It’s an understandable, if irrational, fear, but it doesn’t seem to affect how we use technology. In our dealings with Facebook, Yelp, Amazon and Instagram, we have proven that we will continue to use a service regardless of what it does with our personal information. In other words, any trust issues users might have with Apple Pay will probably not hinder the service’s success in the long run.
Besides, most of the recent advances in consumer technology have been marked by the desire to gather as much of our stuff onto as few devices as possible—a way to tidy up our lives. Over that last few decades, our personal media has slowly been consolidated: our magazines, our photos, our address books, our movies, and our music have all been drawn together and moved onto our computers and more recently, our phones. It’s natural that our money would be next.
The technology behind Apple Pay is easy to explain, but is conceptually challenging. It depends on the relationships between four pieces of technology: a near field communication signal (NFC), a chip in a payment terminal, a chip in a user’s iPhone and an Apple Pay-specific, extra-secure partition in that iPhone’s storage called the “secure element.”
Near field communication operates as a network over which two devices (smartphones and payment terminals) can share data with one another via chips embedded in the machines. Your financial information is stored locally on the secure element, instead of on a server, a security measure meant to shield users from the kinds of large-scale server hacks that have dominated the news over the past year. When you hold your iPhone up to the payment terminal and authorize the sale, encrypted transaction data (rather than personal financial information) is transferred to the seller, and no card number is required.
With the exception of the secure element, Apple is not the first company to use this technology. Competitors Google Pay and Square have each released electronic wallets that integrate NFC technology with smartphones as an alternative to traditional payment services. But there were MP3 players before the iPod, and personal computers before the Mac. BlackBerry produced the first major smartphone; since the release of the iPhone in 2007, BlackBerry has lost 54% of its global subscribers.
The truth is that, for all its talk of innovation, Apple is rarely the first company to release a product into a market that it will eventually dominate. Instead of being the source of the “big idea” behind a world-changing product, it’s often the company that elevates it to mass-market accessibility—not an inventor, but a communicator of technology. Apple, unlike competitors, has the market muscle to send new technology into the mainstream. It happened with MP3 players and smartphones, and we think it could happen with Apple Pay as well.
There are, of course, drawbacks to Apple Pay. Even though Apple’s security measures are significantly better than its competitors’, fraud is possible. The NFC transfer is still a signal—it can be intercepted and decoded like any other signal, and Apple Pay’s visibility and potential popularity will likely make it a target of hacking attempts. The user-level security measures have issues as well: both the PIN authentication and Touch ID authentication have been shown to be hackable. As incidents at Bank of America, Home Depot and Target have taught us, however, large-scale hacks can harm traditional credit and debit cardholders just as much and for what it’s worth, the secure element in Apple Pay would have provided some additional protection for users in these situations. Unfortunately, however, the issue remains that high profile, well-orchestrated data breaches are very difficult to prevent for any company, no matter which payment method is adopted.
Phone theft remains the primary issue, and represents the biggest barrier to the broad-market success of Apple Pay. Apple has stated that users will be able to disable Apple Pay using the Find My iPhone app if an iPhone is stolen, but that carries its own risks. Find My iPhone is not activated on all pre-iOS 7 iPhones out of the box, for one, so users who are unaware of the service stand to lose a lot if their phones are stolen and hacked. Similarly, there is the inherent risk in the ever-increasing consolidation of our personal information. As we move more and more data to a single device, we suffer worse repercussions when that device is lost or stolen. This won’t be an issue for many people, but it may slow down or limit the adoption process.
If some of these problems seem familiar to you, it’s because they should be. Possession theft, whether it’s of an iPhone, a wallet or a credit card number, will always be problematic. In a way, we see this similarity as a point in Apple Pay’s favor. People don’t necessarily want or expect Apple Pay to completely change the way that credit cards work—they just want additional convenience without additional risk. This is why we think that Apple Pay could take off: it makes daily transactions slightly easier without forcing people to make drastic changes. Credit card companies will have to add chips to their cards by this October, so vendors will have chip-reader machines anyway—Apple Pay just removes the physical card from the process.
There’s a lot that goes into Apple Pay, and so there are many companies that stand to benefit. Obviously, any credit card companies that get on board early (like Mastercard and Visa) have a good shot, as does Apple itself. But those companies are so large, so well known and offer so many different services that the most money will probably be made elsewhere, in companies that haven’t been “discovered” yet.
It’s often better to invest in the technology that makes a revolutionary product possible anyway, and VeriFone Systems (PAY 36) is the classic example of that technology. VeriFone is responsible for the payment terminals that will communicate with Apple Pay-enabled iPhones—anywhere that uses Apple Pay will need to have one. VeriFone was crushed in 2013 by a security fraud suit, but after resolving its problems began a steady, two-year rebuilding period. Right now, the stock is sitting just above its 50-day line, having consolidated nicely after hitting a new two-year high in late May.
Global Payments, Inc. (GPN 105) and Total System Services (TSS 42) provide processing services for electronic payment transactions. Global Payments has been powering higher and higher since 2013, and was good enough to be featured in last week’s Top Ten Trader. Total Systems Services broke out of a one-year base last October and hasn’t looked back since, logging only eight down weeks out of 34. Both of these companies has already partnered with Apple on Apple Pay, and will undoubtedly get more attention from investors as more consumers switch to Apple Pay.
This doesn’t necessarily mean that it’s best to go out and buy shares in these companies immediately. The market has to hold up and Apple Pay needs to be adopted by the public, but if everything pans out, these stocks are staged for growth. People are still skeptical of digital wallets, but that’s just the nature of ecosystem-shaping products: everyone is skeptical until the product takes off—and by then it’s often too late.