The Payments Problem Apple Pay Doesn’t Solve

Apple announced its payment product, Apple Pay, this week, and it was immediately touted by JP Morgan Chase’s Chief Financial Officer Marianne Lake as the future of payments. But is it all its made out to be by Apple executives and their partners on the project? Lots of questions remain, such as the fact Apple Pay will only be available in the United States at first. Once it is made available beyond US borders, the question remains – will it be adopted as a payment method in places where Apple penetration is lackluster?

The Apple Pay service will allow iPhone 6 and 6 Plus phone users to pay for items in stores or online with their phones, while still using their credit cards.

It’s The Future

Lake noted JP Morgan Chase will also be releasing an online payment service, but that this marks a possible entry by Apple into a financial services industry dominated by the status quo, old traditional banking system. “We think it will lead to significantly improved customer service,” Lake said. JPMorgan helped along the development process of Apple Pay.

JPMorgan Chairman and Chief Executive Officer Jamie Dimon stated in a release that, “JPMorgan Chase has been pleased to collaborate on Apple Pay to create a better, faster and safer payments system, which puts the customer first, creating an exceptional customer experience for consumers and merchants. Everyone wins.”

“We’re delighted to be able to participate. It’s the future, so it’s great,” Lake said of one of Apple’s newest complementary products. (hardware, after all, is where Apple makes its money)

Payments Are Broken

Apple Pay aims to revolutionize the “fairly antiquated payments process” with near field communication (NFC), something which has been around quite some time, Touch ID, Pass Book, and something Apple calls Secure Element, a dedicated chip for storing encrypted payment information. CEO Tim Cook said “payments are broken” and, according to him, Apple is in the position to fix it.

“This whole process is based on this little piece of plastic, whether its a credit or debit card,” Cook said during his speech today. “We’re totally reliant on the exposed numbers, and the outdated and vulnerable magnetic interface — which by the way is five decades old — and the security codes which all of us know aren’t so secure.”

In a store, you’ll hold your iPhone in front of a reader and place your finger over the fingerprint sensor so it knows it is you making the transaction. In an App you will select Apple Pay and confirm with Touch ID. “That’s it!” Cook said on stage today. “It is so cool!”

Apple has partnered with Subway, McDonalds, Disney, Walgreens, Macy’s, Sephora. Apple’s 258 retail stores will also participate. Groupon, Uber, and Panera have also integrated Apple Pay. The company has also partnered, in addition to the retail stores, with American Express, Mastercard, and Visa and JPMorgan Chase to intermediate. “Apple Pay works with the top bank issuers that handle 83 percent of the credit card purchase volume,” according to Apple.

Apple Pay security comes down to Touch ID, Secure Element chip, and a dynamic security code generated for each transactions, which replaces the static security code on the back of your credit card. If your phone is lost or stolen, you can use the Find My iPhone app to suspend all payments from the device.

The company says this makes Apple Pay more secure than traditional payment methods. Apple also promises not to track transactions. “The transaction is between you, the merchant, and your bank,” Apple executive Eddy Cue said today.

The Payments Problem Apple Doesn’t Solve

Apple Pay is not the revolutionary payment system it claims to be. What is interesting about it is its integration of Near Field Communications (NFC). This technology is not new, but if Apple can mainstream it, this would be an evolution over the current card paradigm. Of course, NFC is already in some smartphones, just not Apple’s…yet. That Apple’s new watch supports Apple Pay is something that is pretty cool and futuristic, potentially one of the most enticing aspects of Apple’s announcements.

Apple Pay serves as a compliment to the current SWIFT system. It is not a breakthrough technology, and Apple investors should perhaps consider bitterly selling their stock. Moreover, Apple Pay is built on top of the existing banking system which is itself just antiquated as the debit and credit cards Cook laments are fifty years old. The banking system the SWIFT system is built on top of his three hundred years old! THAT is where the innovation lies, and Apple falls short. The payments problem Apple doesn’t solve is a moral payments problem. With Apple Pay, we will still be using the legacy banking system, with all of its downfalls. This means continued bailouts, fraud and other corruption.

Can Apple Compete?

Apple is a centralized entity, and in the 21st century centralized entities are losing out to distributed networks. There is a new type of corporation – the peer-to-peer corporation – and these could prove to be more efficient, in some industries, than the old type of corporation.

Apple Pay has nothing to do with Bitcoin. The only relation is NFC technology, which could mean iPhone 6 would allow third party NFC apps making Bitcoin payments streamlined on the iPhone 6. The Nexus could do this in 2012. What Apple Pay stands to do is popularize NFC. But in the end it might just making Bitcoin easier for people to wrap their heads around.