4 Perils Of Apple Pay

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by Peter Cohen , via Forbes |

Apple Pay was launched October 20 and Apple’s Tim Cook is crowing. But there are four reasons why the wireless payment system is in peril.

Before getting into that, What is Apple Pay? It’s a wireless payment system that lets owners of iPhone 6 or 6 Plus pay for goods at retailers with payment terminals. Users put their phones near the payment terminals, their default Apple Pay card pops up, they put their thumbs on the Touch ID button, and the transaction is completed, according to Macworld.

Tim Cook is pleased as punch with Apple Pay. As he told the Wall Street Journal, “We’ve been at it for a week. In the first 72 hours, we had gone over the 1 million mark in activation of cards. We are already No. 1. We are more than the total of the other guys. We’ve only been at it a week. I feel fantastic.”

While Apple claims that it has signed up retailers such asMcDonald's MCD +0.35%, Macy's M +0.91% and Whole Foods Market WFM +0.04%, according to the Washington Post, two retailers have disabled their Apple Pay technology — Rite Aid and CVS. They have 4,600 and 7,700 stores respectively in the U.S.

Why would they do such a thing? Don’t they know that Apple Pay rules? Apparently, these pharmacy chains are trying to create their own payment networks that will enable them to bypass the credit card companies and their nasty transaction fees.

Rite Aid and CVS are part of a coalition of retailers — the Merchant Customer Exchange (MCX) that includes Wal-Mart, Best Buy, Lowe’s, and Dunkin’ Donuts — which plans to launch a wireless payment network called CurrentC at 110,000 locations in 2015 representing $1 trillion in annual sales (20% of U.S. annual retail volume).

Does this mean Apple Pay is in peril? Here are four threats to its adoption.

1. No economic advantage for retailers

Apple Pay does not offer retailers any cost savings. To be fair, if consumers throw out their cash, credit cards and bank cards and demand that all retailers let them buy with Apple Pay, those retailers will probably see the wisdom of letting consumers use Apple Pay.

But that will continue to require the retailers to pay fees to the credit card companies.

That’s because unlike Apple Pay, the Post reports that CurrentC will “draw money directly from a consumer’s bank account instead of charging a credit card like Apple Pay does. This would allow retailers to avoid paying credit card companies what are known as swipe fees every time a customer pays with a credit card.”

CurrentC now appears to be less convenient for consumers than Apple Pay. According to the Post, it will “require shoppers to use their smartphone’s camera to take a picture of a code generated by the retailer, a series of steps that may feel slower and more complex to consumers than Apple Pay.”

2. Provides less customer data

Retailers not only chafe at paying swipe fees, they also savor the chance to get access to data about customers that could help them make better marketing and merchandising choices.

For example CurrentC would also give retailers access to more data about shoppers which they could use to target coupons and merchandise selection to the knowledge that the MCX service would give them about consumers’ shopping habits.

Apple Pay hides customer data that retailers routinely get now, according to Tim Cook’s slide presentation on Apple Pay.

3. A solution in search of a problem

Of course, the key to Apple Pay’s success is convincing so many consumers to use it that retailers are forced into accepting the service. But the simple reality is that credit and debit cards are not a major consumer pain point — they generally work quickly and painlessly.

In short, Apple Pay is a solution in search of a problem. To be sure, I have learned from talking with hundreds of students who use Apple products that one of the principle reasons that they buy is that it makes them feel that they are part of the cool crowd.

I am guessing that this feeling gives them a temporary shot of dopamine. But from an economic standpoint, I would guess that most of my students would be happy to use a credit card to buy their Halloween candy at CVS.

4. Unproven security

It is already well established that hackers have figured out how to steal consumer information on credit and debit cards from the point of sale terminals at plenty of retailers.

Is there any real assurance that they won’t figure out how to hack into Apple Pay as well? Certainly hackers figured out how to break into photographs of some celebrities that were stored on the iCloud — indicating that Apple can be hacked.

Those hackers were reportedly able to guess the celebrities’ passwords — which tells me that Apple could have designed a security mechanism that made it harder for hackers to exploit the celebrities’ lack of skill at choosing hard-to-guess passwords.

Tom Pageler, chief of information security for DocuSign, told CNBCthat Apple Pay has the security advantage of not storing customer credit card information on retailers’ servers. Instead, Apple Pay uses tokenization that stores the credit card information in encrypted form on a chip inside the phone.

According to Pageler, that does not mean Apple Pay can’t be hacked. He said, “There are going to be smaller risks. People will find ways to try and take over accounts, whether it’s by stealing a phone or using social engineering to hack an account or by getting a legitimate login.”

In short, Apple Pay does not seem to me to offer compelling advantages to consumers over current payment methods and if MCX members can make CurrentC work — those retailers will pay less and get more insight into consumers than they would with Apple Pay.