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Apple enters mobile payments market

Out-Law News | 11 Sep 2014 | 1:02 pm | 2 min. read

Apple has announced its entry into the payments market with the launch of its 'Apple Pay' service.

Apple Pay, which is a mobile payment system that utilises 'near-field communications' (NFC) technology, will be available in the US from next month. It will work with Apple's new iPhone 6 and iPhone 6 Plus devices as well as with the company's Apple Watch which is due for launch next year. 

Apple said the new service would provide consumers with "an easier way to simply and securely make payments with just the touch of a finger". It has become the latest business from outside of the traditional financial services sector to explore new payment systems through mobile devices. 

According to the technology giant, consumers using the latest Apple devices will be able to input their payment card details into the Passbook application on those devices. To make a payment using Apple Pay inside a retail store, consumers would have to hold their devices close to an NFC-enabled point-of-sale terminal and press a button to confirm the proposed transaction. 

NFC technology allows contactless payments to be made using radio waves to transmit data between devices that support the technology. To effect a payment, the compatible device and terminal must be in close proximity in order for there to be a connection and for the data transmission to work. 

Apple said that consumers' payment card details are not stored on its servers nor shared with retailers. It said the payment card numbers that consumers will use for Apple Pay will be replaced with "a unique device account number" and that these numbers will be encrypted and stored securely in a "secure element" on the consumer's device. The device account number will be used along with "a transaction-specific dynamic security code" to process payments made through Apple Pay, it said. 

The company claimed that it will not store the details of what consumers purchase via Apple Pay and that this transaction data will only be retained in consumers' Passbook for their own convenience.

A number of major US banks, including Bank of America and Wells Fargo have already signed up to participate in the Apple Pay scheme, alongside payment card providers Visa,  MasterCard and American Express. According to a report by Bloomberg, Apple will collect a fee from participating banks for every transaction made via Apple Pay. 

Apple said that, from launch, consumers will be able to pay for services using Apple Pay in more than 220,000 stores. Retailers whose systems support payments via Apple Pay include McDonalds, Nike and Disney Store. Consumers will also be able to use Apple Pay to pay for goods and services through a number of other retailers' mobile apps, including Starbucks and Groupon, it said. 

The way in which payment services provided in the EU are regulated is subject to significant reform and could have an impact on Apple's Apple Pay service should it be launched in the trading bloc, telecoms law expert Diane Mullenex of Pinsent Masons, the law firm behind Out-Law.com, said. 

"In its proposed update to the existing Payment Services Directive, the European Commission is seeking to bring payment services that were previously outside the scope of regulation within scope as well as make the market for payments more flexible for newcomers," Mullenex said. "Companies providing 'payment initiation services', which will account for technology companies involved in providing innovative new mobile payment services, will be subject to the new rules." 

"The effect of the changes will be to alter existing business models at banks and payment card providers and open up competition in the market. For new entrants, the price of entering the expanding market for mobile payments in the EU will be the need to obtain a licence to operate and adhere to stringent regulatory requirements, particularly around data security," she said.