Opinion: iPad, iPhone 5, iTunes, Authentec and Apple's mobile payments plan

There's been years of speculation claiming Apple [AAPL] plans a payment system using Bluetooth and/or NFC along with its future iPhone 5. Will the system see iPads deployed as Point Of Sale terminals? Read on for hints this might be part of the plan.

[ABOVE: iPhone 5 prognosticators, seers, dreamers, imagineers and r&d types from competing firms will probably find the latest iPhone 5 glass video interesting.]

Feed the need

Apple's move to deploy iWallet systems based on its iDevices inside its retail stores last year stirred interest -- these seemed to be a nice secure testing ground for the company to work with payment systems. This morning we learned AT&T intends using iPad-based POS systems inside its stores in future. While these two things aren't necessarily related, they suggest how things are going to play out.

A report on 9to5Mac informs that in the next two years AT&T plans to: "Completely rid its stores of computers and counters, moving completely over to the iPad with a feature-complete version of OPUS." (OPUS is AT&T's own POS system, which integrates inventory control and internal communications features.)

The iPad-based OPUS system will completely replace computers inside AT&T stores, and "will feature expanded functionality," the report explains. Initial deployment begins "early next year".

Given the advanced nature of these plans, it is revealing that the report states AT&T has "yet to finalize" how it will take payments with the new system. At present employees will manually input credit cards. There is of course the possibility the company could deploy Square's iPad/iPhone friendly payment systems, or…

Or…

Imagine for a moment that AT&T knows something we don't. Imagine it does not. The company's move to use iPads in stores leaves that territory wide open for any payment system Apple might choose to use -- even if such a system requires add-on devices to read cards.

However, if you look to NFC payments, then perhaps there's a chance for NFC-enabled credit card payments to be authorized using these terminals. After all, if you imagine NFC-equipped iPads in early 2013, then you can imagine these devices being used not just to make, but also to take, payments. And, of course, Bluetooth 4+ integrates its own technology for payments. Apple has options.

There's a business here.

Screen_shot_2011-11-08_at_10_54_24.jpg

[ABOVE: Apple's EasyPay system.]

The business case

The theory is pretty solid. Right now, retailers are forced to spend a lot of money deploying Point Of Sales devices. Software costs upwards from $1,000; terminals cost $3,000.

A July report from Global Information, claims: "Handheld point of sale computer unit market shipments posted $1.1 billion in 2011, a value anticipated to reach $3.1 billion by 2018."

That's opportunity Apple, if it can develop a payment system…for which I suggest one involving credit card payments via an iTunes account, authorized by your iDevice or other supported NFC-enabled device and approved by a retail-based iPad system.

Equipped with such a solution, Apple could deliver POS systems that cost significantly less than those systems in use today. These systems could even open up opportunities for the smallest retailers to take credit card payments without the major fees they currently have to pay. (Monthly fees to credit authorization agencies, equipment maintenance, new equipment and software costs, for example -- it mounts up).

Not only this but the iPads they use to take payments could also be used to check email, keep up with the news, play games or watch some TV in between sales. Subject to the changing world of iOS device security, naturally.

Assuming Apple uses it -- and once again, it could choose to use Bluetooth systems, or both -- NFC is driving interest in the retail segment. Technavio forecasts the global market for NFC POS Terminals will grow at a CAGR of 17 percent between 2011 and 2015.

The idea of using iTunes as the payment system behind such a service really isn't so far-fetched. Here's how it could work:

  • A user could assign an amount of money to their Payments account.
  • This would be the maximum ceiling for any exchange made.
  • This would prevent them being completely ripped if they were to lose their device.
  • If they planned a big purchase, they could raise the amount.
  • That amount is then charged to the payment card they use on iTunes and made available to them.
  • Then they can spend it.
  • Because iTunes acts as a buffer between the device and the payment card, consumers should be somewhat protected from wholesale fraud. And their real payment card stays at home.

Simple.

Screen_shot_2011-03-18_at_15_10_09.jpg

[ABOVE: Not so long ago and Apple had 200 million credit cards tied to iTunes. These days it has double.]

Software

Google Wallet 2.0 uses a similar system. It lets users store a single prepaid MasterCard as source of the cash. When you buy something, this prepaid card draws on a user's preferred payment system.

"When you add credit or debit cards to the Google Wallet mobile app, you will be issued a virtual MasterCard card by The Bancorp Bank, Google Wallet's partnering bank. This virtual MasterCard is referred to as the "Google Wallet Virtual Card" in the Terms of Service," Google's T&C's explain.

Merchants never get the original card details and users can reset their account remotely in the event their device is lost or stolen.

Spare a thought for Vivotech. This NFC POS terminal and software supplier, once discussed as a takeover target for Apple, now seems to be in trouble. Only last month it was forced to make a statement denying it intends ceasing operations.

"Over the last six months the company has been executing a strategy to divest its reader business to a qualified buyer," the company said. "This sale has moved slower than anticipated."

The company is restructuring its business, has cut staff, and is focusing on its software offering. Software being pretty key to future NFC payment processing technology, and hardware set to become less interesting as that side of the POS industry sees its expensive offerings replaced by NFC-equipped mobile devices, a move to dump the hardware business makes some sense.

Assuming Apple has the devices, the payment system and, possibly, access to industry-standard NFC payment software, what else might it require to make an iWallet?

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[ABOVE: Can you find the Authentec chip in here?]

Security

Security is a problem. Anyone who has ever been mugged knows just how tempting it is to hand over your PIN number once the knife is at your throat and you've been bumped around a little bit. Passcodes are only as secure as the user.

That's why Apple's move to purchase fingerprint biometrics specialist, Authentec, is so interesting.

As NFC World explains: " Amongst the fingerprint sensor company's products is the AES2750, a device specifically designed to protect access to NFC mobile wallets. Features include the ability to interact directly with payment applications stored within an NFC secure element and to provide direct NFC radio control, based on positive authentication of the user -- ensuring that only the registered user of a device can gain access to the mobile wallet.

"The sensor is also small enough to be mounted on the edge of a smartphone or tablet and, for touchscreen phones, can also be built into the screen using a "through-hole" glass mounting."

Even if Apple isn't choosing to deploy NFC, its acquisition of a fingerprint sensor industry leader promises some interesting times ahead for iPhone/iPad/Mac users.

The conjecture is all quite interesting, but do we need these contactless payment systems?

Passbook is a new iOS 6 feature that lets iOS users store digital coupons, boarding passes, tickets and loyalty cards in one place. It seems set to work quite well with Apple's future Product+ app.

[ABOVE: Passbook. It is what it is, or...]

But... do we need it?

Some see it as a step toward a digital wallet, but the analysts at Forrester Research don't agree. They think it shows that most consumers don't really need these systems yet -- they're quite happy with what's available now.

Analyst Denee Carrington in "Why The Digital Wallet Wars Matter," writes: "Neither consumers nor merchants are struggling with the swipe mechanism of traditional card payments, leading many to wonder if mobile digital wallets are a solution in search of a problem."

The analysts do concede NFC could open up other new industries. There's an infographic explaining some of these areas here. And Apple has an interesting patent in which it deploys NFC as a control system here.

What does all this data prove? It proves there's huge interest in NFC.

Carriers, who hope to profit from the data traffic and have a vested interest in making mobile devices even more essential to users, drive a lot of this interest.

Payment processing firms are also interested in the technology, not least because it could lower their costs by reducing the number of cards they need to issue, though a stronger reason will be to make such payments pervasive. (In truth, they've been sniffing round the iPhone's potential for years).

Device manufacturers are evidently interested in adding new features to their products in order to make them more interesting. That's why Android supports NFC, after all, though this has not been a huge success, so far.

My thoughts? Apple is in a good position to deploy and end-to-end NFC-based mobile payments infrastructure, leveraging its iPad, iPhone and iTunes. If it did it could reasonably hope to take a big chunk out of the $3.1 billion PoS industry, along with fees and device sales.

The rash of NFC-related patents and unusual activity at Vivotech, AT&T and Authentec suggest it is moving forward with these plans. The only sticking points are: do consumers actually need the technology? Will it introduce NFC support within iPhone 5?

On that I'm open to discussion: let me know what you think in comments below.

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