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NEW YORK (AP) — Apple is betting that people want to pay with a tap of the phone rather than a swipe of the card.
The technology company on Tuesday introduced a new digital wallet service called Apple Pay that is integrated with its Passbook credential-storage app and protected by its fingerprint ID security system.
The announcement came as Apple introduced several new products including a new, larger iPhone 6 and a watch. Apple Pay is designed to let iPhone 6 owners use their smartphones to pay for purchases at brick-and-mortar stores as well as online via apps. The company says it’s easier and more secure than using a credit or debit card. And it puts Apple in direct competition with services like PayPal and Google Wallet.
As an early partner behind Apple’s foray into mobile payments, Atlanta-based First Data Financial Services is hoping this will be a game-changer for consumers, who until now have been slow to adopt technologies that effectively convert their smartphones into credit cards.
This is “absolutely the right moment in the industry,” said Barry McCarthy, president of First Data, which provided some of the underlying technology that will allow merchants to accept encrypted payments from customers’ Apple phones. “What we think is really different about this time is Apple,” he said.
First Data, owned by private equity firm KKR, is little known to consumers, but it is one of the biggest players in the payments processing industry, handling $1.8 trillion of credit card and other transactions a year.
So-called mobile proximity payments are expected to grow exponentially over the next few years. Citi Investment Research analyst Mark May said they could grow from $1 billion in 2013 to $58.4 billion by 2017. Still, consumers will have to weigh the convenience of not pulling out a card with the possible danger of storing important financial information on their phones, particularly as retailers like Target and Home Depot report data breaches, and hackers crack celebrities’ iCloud accounts.
In stores, the system uses a technology called near-field communication, which allows mobile phones to communicate with other devices at close range. Many Android phones already have a near-field communication antenna, but iPhones have not until now. Users will pay by holding a phone close to a pad-like reader with a finger on the phone screen, which has a touch ID fingerprint system. It’s also set to work with the Apple Watch when that debuts in 2015.
“Apple Pay will forever change the way we pay for things,” said Apple CEO Tim Cook.
Apple addressed security concerns Tuesday, saying Apple Pay is even safer than using a plastic card. Eddy Cue, Apple’s senior vice president of Internet software and services, said credit card information will be stored on the phone via a secure chip and payments will use a security code that changes with each use. The Find My iPhone service can erase the data if the phone gets lost or stolen — canceling a card will not be necessary. The service will be able to store Visa, MasterCard and American Express credit card information.
“A cashier doesn’t see your name, credit card number or security code,” when you pay with Apple Pay, Cue said. He also said Apple won’t track people’s financial data.
“Apple doesn’t know what you bought, where you bought it or how much you paid,” he said. “That transaction is between you, your merchant and your bank.”
Contactless payment isn’t new: Retailers like Starbucks and McDonald’s already have their own contactless payment system in stores, and Apple Pay is similar to Google Inc.’s Google Wallet, which is available on Android smartphones and iPhones. But Apple Pay adds some security features and makes a digital wallet option more accessible for iPhone users. About 15 percent of smartphones are iPhones, according to research firm IDC.
The service will be available beginning in October. Retailers will need to invest in updating their cash registers and point-of-sale units. Apple said department stores like Macy’s and Bloomingdales, drugstores including Walgreen’s and Duane Reade, and other stores including McDonald’s, Staples, Subway and Whole Foods are participating in Apple Pay.
McCarthy said about 220,000 stores have the updated terminals in place now, out of 8 million locations in the U.S. that accept debit and credit cards. He expects many more merchants to adopt the technology in coming months because they have to upgrade anyway. They face an October 2015 deadline to replace their old terminals with new ones capable of handling more sophisticated credit and debit cards that include a secure data chip.
Still, some of the largest retailers are not participating in Apple’s roll-out. Wal-Mart said it has no plans to participate. Amazon.com did not respond to a request for comment. And Target said it is currently participating only via its app.
Gartner analyst Avivah Litah said the payment system will only succeed if major retailers get behind it. Apple’s security features are a plus for merchants, but it’s not clear if that will be enough.
“It’s 50-50 if merchants will get on board,” she said. “The security aspects are attractive, but it’s not clear if the security features alone are going to be enough of a selling point.”
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