Nowadays, we are moving towards the cashless world where we prefer to use a credit or debit card for all kind of payments. It’s good to not to carry cash everywhere and this also helps to keep track of our expenses. But, at the same time, we cannot deny that – credit card frauds also are increasing day by day. There are many machines introduced to capture your card details as soon as you swipe to POS terminal or ATM machines.
Recently, people have started talking about the Apply Pay and there is a lot of BUZZ about Apple Pay being the safest way of cashless payment as it adds an extra layer of security. Well, let’s try to understand, What is Apple Pay? How it works? and What makes it special? and how it is making money? So, tune in to this article.
I would recommend reading my previous article on credit card companies to understand this article better –> How do credit card companies MasterCard and VISA making billions?
What is Apple Pay?
Apple Pay is a mobile payment and digital wallet service by Apple Inc. It allows the users to make payments in person at the store, in iOS apps, and on the online websites. It is supported on the iPhone, Apple Watch, iPad, and Mac.
It digitizes and can replace a credit or debit card chip and PIN transaction at a contactless capable point-of-sale terminal. Apple Pay does not require Apple Pay-specific contactless payment terminals and it works with any merchant that accepts contactless payments. It is very similar to contactless payments already used in many countries, with the addition of two-factor authentication via Touch ID, Face ID, PIN, or passcode. The service lets Apple devices wirelessly communicate with the point of sale systems by using a near field communication (NFC) antenna, a “dedicated chip that stores encrypted payment information” (known as the Secure Element), and Apple’s Touch ID and Wallet.
How Does Apple Pay Really Work?
Before we discuss Apple Pay’s process, let’s get familiar with some common terminology to understand it better.
Secure Element (SE):
A Secure Element (SE) is a microprocessor chip which can store sensitive data and run secure apps such as payment. It acts as a vault, protecting what’s inside the SE (applications and data) from malware attacks that are typical in the host (i.e. the device operating system). Here, the Secure Element securely stores card/cardholder data and manages the reading of encrypted data. During a payment transaction, it acts like a contactless payment card using industry standard technology to help authorize a transaction. The Secure Element could either be embedded in the phone or embedded in your SIM card.
Tokenization is the process of substituting a sensitive data element with unique identification symbols that retain all the essential information about the data without compromising its security. The unique identification number referred to as a token, that has no extrinsic or exploitable meaning or value.
The token is a reference (i.e. identifier) that maps back to the sensitive data through a tokenization system. The mapping from original data to a token uses methods which render tokens infeasible to reverse in the absence of the tokenization system, for example using tokens created from random numbers. Only the tokenization system can tokenize data to create tokens, or detokenize back to redeem sensitive data under strict security controls.
Tokenization is often used in credit card processing. The Payment Card Industry (PCI) Council defines tokenization as “a process by which the primary account number (PAN) is replaced with a surrogate value called a token. De-tokenization is the reverse process of redeeming a token for its associated PAN value.
Adding Card to Apple Pay
iPhone 6 and above, and in Apple Watch, an SE is embedded into the device’s near-field communication (NFC) chip. This is used at payment terminals to perform transactions over NFC. SE emulates a payment card during an Apple Pay transaction. Apple Pay uses SE to store secret information associated with tokenized cards. Following a series of event happens while adding a credit card to Apple Pay.
- Adding a credit card to Apple Pay is very easy. Users can add payment cards to the service in any of four ways: through the payment card listed on their iTunes accounts, by taking a photo of the card, being provisioned from within the card issuers app, or by entering the card information manually. Then this information is submitted to Apple servers.
- Once, cards details are submitted to Apple Server, Apple sends the card information to the relevant card network (Visa, MasterCard, AmericanExpress, etc.) to validates the card submitted card information with the issuing bank.
- After the validation, the card network acting as a TSP (Token Service Provider) creates a token (which is called a DAN or a Device Account Number in the context of Apple Pay) and a token key. This DAN is generated using tokenization mechanism and is not the actual card number.
- At last, this information is sent back to Apple servers. Once, the device receives this information from Apple servers, it is saved in the device’s secure element (SE).
Using Apple Pay
Apple Pay could be anywhere which supports the contactless point of sale (POS) terminal. To pay at points of sale, users hold their authenticated Apple device to the point of sale system. iPhone users authenticate by holding their fingerprint to the phone’s Touch ID sensor or facial recognition via Face ID, whereas Apple Watch users authenticate by double-clicking a button on the device. To pay in supported iOS apps, users choose Apple Pay as their payment method and authenticate with Touch ID or Face ID.
When the card network receives the transaction request, it identifies whether it’s an actual card number or a tokenized card number. If it is tokenized (which is the case for Apple Pay transactions), the card network validates the cryptogram (or dynamic CVV) using their copy of the token key (the card network is acting as a TSP here).
After some other additional validations, the card network de-tokenizes the DAN and obtains the original PAN (primary account number).
This transaction request is sent to the issuer along with the original PAN. The issuer authorizes the transaction and sends back the response which eventually reaches the POS terminal.
That’s it! Your transaction is complete.
Apple Pay availability countries.
Apple Pay has got a very impressive and loyal user base. Currently, it is available in the United States, United Kingdom, Canada, Australia, Brazil, United Arab Emirates, Saudi Arabia, Russia, China, New Zealand, Singapore, Japan, Taiwan, Hong Kong and most recently Germany, as well as various other European nations.
Why makes Apple Pay different from traditional credit card transaction?
- Traditional Credit cards are easy to hack these days. There are lot more devices which can easily capture credit card details when it is swiped at POS terminals.
- Tokenization makes it more difficult for hackers to gain access to cardholder data, as compared with older systems in which credit card numbers were stored in databases and exchanged freely over networks.
- Encrypted credit card data held on the Secure Element is not uploaded to iCloud or Apple’s servers. Nor are credit card details transmitted to merchants. Apple uses a method called tokenization to scramble this information and send it with a unique dynamic security code that, if intercepted, cannot be re-used for fraudulent purchases.
- Once you use Apple Pay, the retailers will not be able to track your private information like credit card details, address and others. No information is stored for your transaction.
- Apple pay minimizes the risk of your credit card information being stolen. It doesn’t need credit card details to process payment rather it uses a device account number thus making your credit details more secure.
How does Apple Pay make the profit?
Apple Pay adds additional security to the credit card payment and also has got huge userbase which encourages more cashless transactions. In return, Apple Pay charges a very small portion of each transaction.
- Financial Times reported that Apple receives 0.15% of each transaction from the bank in the US (if purchases made with the Apple Pay Service).
- But, following the UK launch, reported that Apple’s cut is much lower in the UK. This is large because Regulation (EU) 2015/751 capped interchange fees in the European Economic Area at 0.3% for personal credit cards and 0.2% for personal debit cards with effect from June 8, 2015.
- In Russia, Apple receives 0.05% for debit cards and 0.12% for credit cards of each purchase, in addition, the bank pays 45 rubles a year for each card added in the service.
Addition to this profit sharing, Apple Pay makes apple products more desirable, and thus sell more devices.
The profit may seem to be very less if we look at the single transaction, but they are making really good money. The total number of Apple Pay transactions during Apple’s 2018 third fiscal quarter topped the 1 billion mark. That breaks down to at least 10.98 million transactions per day, every day, during the quarter.
If you apply simple math and then the apple is smartly making 150 million (0.15% of the 1 billion) dollar as the transaction fee in this quarter.
Every day Apple Pay subscription is increasing, as per the recent report, Apple Pay had 1.8 billion transactions in the quarter, with increasing adoption of the technology among U.S. retailers and foreign countries – Q1/ 2019.
Deutschebank reports more Apple Pay activations in Germany in a week, comparable to any Android service in a year.
Apple Pay completed more total transactions than great companies like Square and more mobile transactions than PayPal in Q3
Check out my article, How do credit card companies MasterCard and VISA making billions?
Supported Payment Network?
Apple Pay supports the following popular Payment Networks for processing payments.
- V Pay
- American Express
- Discover Card in the United States
- CB in France
- Interac in Canada
- Eftpos in Australia
- China UnionPay
- Suica, iD, QUICPay in Japan
- SPTC in Shanghai, China
- Yikatong, Beijing Transit Card
- Mada in Saudi Arabia
- Troy in Turke
Pros and Cons of Apple Pay
That’s a lot about Apple Pay, let’s see Pros and Cons of the service to know whether it is best suited for us or not.
Apple Pay Pros:
- Usability, Speed, and Compatibility: The Apple pay is compatible with the major banks and supports all credit cards like Visa, MasterCard, AmEx, among others. It has a user-friendly interface making it easy to use. Your smartphone can easily read your fingerprints and let you click ok to authenticate the payment. Biometric security features are easier to use.
- Secure: Apple pay minimizes the risk of your credit card information being stolen. It doesn’t need credit card details to process payment rather it uses a device account number thus making your credit details more secure.
- Private transaction: Once you use Apple Pay, the retailers will not be able to track your private information like credit card details, address and others. No information is stored for your transaction.
- No risk of stolen credit cards: You don’t need to carry your credit cards everywhere you go. Although the phone can get lost, the find my device feature can help to relocate the device in case someone steals it and make payment with it.
- No Additional Charges: Credit card payments, PayPal payments, and banks charge a transaction fee. Apple pay is free of charge thus, retailers will be able to sell goods or services without any fee charges.
- No internet connection: You don’t need an internet connection for you to use Apple Pay. It can be used everywhere and does not accumulate any roaming charges. It can also be used when your phone is in airplane mode.
Apple Pay Cons:
- Limited use: Apple pay is available in iPhone 6 and above and iPad 2 or higher versions
- Acceptance: Not all retailers use mobile payment terminal thus, you have to carry your wallet to do shopping.
- Tech or Software hitches: In some countries, the payment machine has had issues resulting in failure while processing payments.
- Dependency on iPhone: Apple pay can only be used when your iOS device is on. Otherwise, you can’t rely on it if your phone is off.
You may find my recent article on Credit Card (MasterCard and VISA) interesting, as I have tried to explain the detailed business model in layman language and it will also help you to understand this article more useful. How do credit card companies MasterCard and VISA making billions?
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