DIBS blog

How Apple Pay will affect e-commerce

Last Tuesday, many people followed Apple's presentation of new products and of course, Apple Pay caught my attention. Right after U2's final chord it was difficult to fully understand how this would affect e-commerce in the Nordics and many drastic conclusions circulated on Twitter during the evening.

A few days after the presentation of the new payment service Apple Pay (already nicknamed “apple pie” here at DIBS) it starts to become somewhat more clear how the service will work for e-commerce.

These are the advantages that Apple highlights:

- Just one press on the home button to pay

- Integrated with Apple Watch (hmm… you need TWO clicks of a physical button to pay, Apple has become lazy;-)

- Works both in stores and in apps

- Works instantly for those who have already stored their payment cards in iTunes.

- Easy registration of new cards using the camera

- Easy to cancel the card if you lose your cell phone

- High integrity - Apple saves no transaction information

- High safety

What will change with Apple Pay?

Apple does not alter the current payment system with payment service providers, card acquirers and card issuers. The big change is the minimized risk of having your card details stolen, since the card number is never sent upon purchase.

And how has Apple solved this challenge? By replacing the card number with another number (called tokenization) and storing it in a safe place in the hardware of the iPhone.

How does registering a new card work?

1. The iPhone camera reads the card details by OCR

2. Apple sends the card number via encrypted communications to a Token Service Provider

3. Apple receives a token (a replacement number for the regular card number) which is stored safely.

I wrote earlier that Apple is not changing the roles in the current the payment system. However, Visa and MasterCard have been developing a new role required for Apple to be able to succeed with their plan. The role is called Token Service Provider (TSP).

When Apple wants to replace a genuine, theft-prone card number with a relatively harmless token they send in the card number to the TSP and get a token in return. The neat thing with this token is that it has the length of a normal card number and Apple also produces a dynamic CVC (popularly known as "the three-digits-on-the-back-of-card"). Additionally, a token can be limited to a particular store or for transactions from a particular type of device, such as mobile phone.

This means that the token is compatible in the current card payment system. At the end of the journey to the card-issuing bank the real card number replaces the token.

How to use Apple Pay in e-commerce

Apple Pay is a way to easily charge for physical goods (such as groceries, clothes and electronics) and tickets (events and travel) in iOS apps. That is a difference from Apple's own In-App purchase where you only can get paid for the purchase of virtual goods and subscriptions to digital content.

How an Apple Pay app payment is completed:

1. The app requests a token from Apple´s Passbook

2.  The app sends the token to DIBS using our in-app library (or the token is sent to the merchants’ own server that communicates with DIBS via our APIs)

3. DIBS sends the token to the merchants’ acquirer and returns the answer

(Note that DIBS does not support Apple Pay yet. DIBS is used to exemplify.)

So what does this mean for e-commerce in the Nordic countries?

Apple Pay is a very simple and secure payment method for payments in apps. The restrictions consist of the consumer who must have an iPhone 6 and the app which must support Apple Pay. In addition, both payment service providers and acquirers have to make some changes for Apple Pay to work. The service is launching in the United States within a month and is entering other markets during next year and it will probably take more than a year before Apple Pay is relevant to the Nordic market. It is likely that consumers' mobile payment behaviour already has changed at that point. In Denmark, MobilePay has come a long way, Swedish Swish is on also track and soon MasterPass will launch its service for mobile payments in several Nordic countries.

Sales via apps in the Nordics is not very big in terms of physical products. It consists mainly of services like parking and transportation and event tickets. In the U.S., we see a completely different trend where apps represent an important channel for many e-commerce companies. Perhaps Apple Pay will boost e-commerce via apps, even in the Nordic countries in the long run.

Other resources:

Forbes is dubious: http://www.forbes.com/sites/stevenbertoni/2014/09/10/apple-pay-is-doomed-unless-it-can-do-these-7-things/

One big problem: http://time.com/money/3311917/apple-pay-iPhone iWatch-passbook/

About Visa Token Service: http://www.zdnet.com/visa-token-service-to-take-apple-pay-innards-beyond-apple-and-us-7000033506/

What analysts are saying? http://fortune.com/2014/09/09/apple-pay-what-the-Analysts-are-saying/

What do you think Apple Pay will mean for e-commerce? Feel free to comment. Found any errors? Please comment. 

Photo used with kind permission from techcu.com.


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