Apple Launches Apple Pay

Apple in late October officially launched Apple Pay, a mobile payment app for its newer iPhone models and the Apple smartwatch. But some retailers are boycotting the application because it does not share customer or card information with retailers.

Apple maintains it is keeping customer information private for security purposes. "Security and privacy is at the core of Apple Pay. When you're using Apple Pay in a store, restaurant, or other merchant, cashiers will no longer see your name, credit card number, or security code, helping to reduce the potential for fraud," Eddy Cue, Apple's senior vice president of Internet software and services, said in a statement. "Apple doesn't collect your purchase history, so we don't know what you bought, where you bought it, or how much you paid for it."

Because the customer information remains hidden to retailers, they cannot track purchases made via Apple Pay and can't directly market to users after a purchase.

So far, CVS and Rite-Aid have made it impossible for their customers to use Apple Pay. The two drugstore chains have joined retail giants Walmart and Target and others to field a rival app called CurrentC, which is more like a coupon and rewards app that gives retailers information about who its users are and what they buy.

When users add their credit or debit cards to Apple Pay, the card numbers are not stored on the device or on Apple's servers. Instead, the app creates and stores a unique device account number. Each transaction is authorized with a one-time number using the device account number, and instead of using the security code from the back of the card, Apple Pay creates a dynamic security code to securely validate each transaction.

"Apple is tokenizing the credit card number, which does not offer much benefit to the merchant," says Aaron Frank, cofounder and chief technology officer at Final, a credit card issuer that offers a similar credit card number format to make purchases anonymous.

While Final works with Apple Pay, Frank is quick to point out that Apple "has done nothing yet to get merchants to want to accept it."

For Apple, "it's a trade-off between what's in the best interest of the consumer and the merchant," Frank adds. Apple clearly has sided with the consumer for now.

Some industry experts say these types of issues have delayed mobile wallets for years. Pinar Ozcan, a professor at Warwick University Business School in England, wrote in an email that apps such as Apple Pay could have thrived 15 years ago "if it wasn't for a clash of egos."

Ozcan blames the lack of adoption of mobile wallets in the past on "squabbling and a lack of compromise" among the industry's biggest players. At issue were disagreements on a single architecture, who would control the customer relationship, and responsibility for securing transactions, he says.

But for all the controversy, many expect Apple Pay to wake up the mobile wallet segment, which Juniper Research had predicted would grow by 40 percent in 2014 to reach $507 billion. This will likely put stores in an awkward position.

"More and more people want to use their smartphones to pay for things," says Jeff Kagan, an independent wireless industry analyst. "Stores have an important decision to make over the next few years: to accept all of [the mobile wallet apps] or none of them."

Frank says accepting all mobile wallets could be inevitable. "If consumers want to pay with Apple Pay and not carry a wallet, merchants will have to start to accept it" or risk losing the sale, he states.

And while Apple Pay is likely to resonate with consumers increasingly concerned about data security, Kagan says it will still only be limited to Apple fans. "You're not going to get people abandoning their Android phones for the iPhone because of it," he states.

Nonetheless, Apple's foray into mobile payments is noteworthy. "Until now, no one has been able to make a connection with their users," Kagan says. "With Apple Pay getting into the space, it will be transformational."

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