Yvette Bohanan and Russ Jones celebrate the 10-year anniversary of the announcement of Apple Pay by reflecting on its origins, challenges, and successes. The episode highlights key features like tokenization, encryption, and biometric authentication, emphasizing Apple Pay’s focus on security, privacy, and convenience. Tune in to take a look back at Apple Pay’s significant impact on the payments industry and a look forward to its continued expansion.

 

 

Yvette Bohanan: Hello, I’m Yvette Bohanan, a Partner at Glenbrook and your host for this episode of Payments on Fire. We are sitting here today on October 14th, 2024, the 10-year anniversary of the announcement of Apple Pay. And joining me for this episode to talk about all things Apple Pay and kind of take a look back and a look forward is our Partner Russ Jones.

Russ, welcome to Payments on Fire.

Russ Jones: Thank you, Yvette. I am delighted to be here on such a notable day.

Yvette Bohanan: It’s a momentous occasion. I think this is actually going to air like maybe a week after the actual event so hopefully everyone celebrated appropriately in the industry.

Russ Jones: Yeah, hopefully people’s heart rate has slowed down from the celebration.

Yvette Bohanan: That’s right. All of the festivities, raising a glass. You know, it’s funny because it doesn’t feel like it’s been 10 years, does it? It’s like Apple Pay’s always been with us. And then you think about it and it’s only been here for 10 years.

Russ Jones: Yeah, it’s one of these things that, the original value proposition was a little bit startling. At the time it seemed that way. Now it doesn’t seem that way at all. It seems like, Hey, this is the way things work. This is the way things should work.

Yvette Bohanan: What was that original value proposition?

Russ Jones: It brought together three things, which were not really typical. It brought together convenience, security, and privacy.

Yvette Bohanan: Privacy.

Russ Jones: Yeah.

Yvette Bohanan: So convenience and security were always talked about, right? They still are, but we ask people, what do you want in your payments? You want it to be convenient.

Russ Jones: Yeah. But, when Apple Pay launched, the conventional way you used payments on the smartphone, it was always inside of an app. You had to unlock your phone, then you had to unlock the app, and then you had to go from there.

Yvette Bohanan: Oh, wait, wait, you’re bringing up something really important here. Now I’m remembering. It feels like it was yesterday, but it was 10 years ago. You go back 10, 12 years, 15 years ago in the industry, I remember counting at one point there were 126 different wallets, quote unquote wallets, payment apps available for phones, for different phones, different apps worked on different phones and all that kind of stuff. But you’re right, you had to log in, you had to give a lot of information, it wasn’t exactly an easy thing to do.

Russ Jones: Yeah. The thing that was, at the time, the conventional wisdom in the payments industry was that there were going to be wallets and there’s going to be lots of them and they were going to be apps that ran on devices. And Apple just brushed that aside and said, this is so fundamental, payments is so fundamental to these consumer devices. It’s not an optional app. It’s actually part of the operating system. And people were taken aback. Like, My app is going to compete with something inside your operating system? That doesn’t seem real stacked in my favor.

And the other thing that was audacious was, what were these wallets going to do? They were going to manage credentials. And Apple brushed that aside and said, the credentials are too important to leave inside your app. We’re going to put the credentials, the management of the credentials inside the operating system.

So the wallet, the payment mechanisms, the security, the credentials were all part of the operating system. And that was like a wow thing where you knew something was becoming ubiquitous when it changed from being an optional app, to being an app that everybody had, to being part of the operating system. Microsoft had made that part of their playbook for several decades. And now here we were with payments inside of an operating system. That was pretty revolutionary at the time.

Yvette Bohanan: Yeah, and it really settled a lot of debate, right? There was debate raging, we called it the wallet wars for a time, right, in the industry where it was the phone carriers, carrier networks, it was the banks, well, obviously, people want to use a payment wallet from their bank, right? That was an assertion being made. Apple was out there, and this wasn’t the very first thing they came up with. I think Microsoft, Apple, Google at the time, they were all kind of churning for years on different payment pipelines and payment products and all of that. But this kind of coalesced into the right combination.

Russ Jones: Yeah. And the other thing, just on this convenience thread, was it didn’t work on just one or two select devices. It worked on the entire iPhone family, the current iPhone family at the time, it worked on the tablets at the time, and in a very startling way, it worked across all carriers too.

Yvette Bohanan: That was a big deal.

Russ Jones: That was a really big deal.

Yvette Bohanan: The carriers were part of the debate and part of the gridlock that was forming. And there was even a coalition of carriers at one point that were trying to get their idea off the ground.

Russ Jones: Right.

Yvette Bohanan: So there was a lot of tug of war going on in this whole space because people knew it would be very valuable once it was figured out and very important.

Russ Jones: So it also married together a lot of stuff that Apple had already put in place at the time. We already had the Apple Wallet. Apple Pay comes after the Apple Wallet. And the Apple Wallet was innovative because it was, once again, inside the operating system and it was geolocation aware. The wallet could pop up offers when you walked into a store, it could be integrated in an interesting way with the home screen. It was just a lot of stuff. A lot of building blocks were already in place, including biometric authentication, which wasn’t a revolutionary thing in the sense that people weren’t surprised by that. People had been expecting that, and it finally arrived, a decade after they started expecting it, but it arrived.

Yvette Bohanan: Do you think the average consumer at the time really understood what they were holding in their hand at that point? I don’t think people got it right away.

Russ Jones: I don’t think they did. And I was referencing that earlier that it took a long time for Apple Pay to ramp up. And people were used to things just like exploding in usage in the internet age. New idea, people love it, you have a million users three weeks later. Apple pay didn’t start like that. It had a ramp to it. And part of it was familiarization. You had to have a combination of things at your fingertips to make it work. First off, you had to have an iPhone, it had to be a current generation iPhone, and you had to have a credit card or a debit card from one of the major issuers in the US. It wasn’t available outside of the US. You had to have a credit card or debit card from one of the top 10 issuers, which in itself was like ubiquitous, almost, given their prior attempts at digital wallets had very limited issuer participation.

This had very serious issuer participation and very serious endorsement and backing of the card networks and all the major card issuers in the US. And if you had all that stuff, then you still had to be aware that you could make payments with your device. Some people were like, Yeah, I know I can do this, but I don’t know if I want to do this.

And then people who went all the way through the process, wanted to do it, then they had to remember to do it. It was worse still and I was as guilty as anybody. I’d be at the grocery store, I’d be standing in line behind eight other people reading the news on my iPhone and when it came time to pay, I’d pull out my card because I had –

Yvette Bohanan: Always done it that way.

Russ Jones: I had decades of conditioning that when your groceries go in the bag, you pull out the card. And then I’d be walking out into the parking lot and I’d say to myself, Oh man, I could have used my phone.

Yvette Bohanan: And people weren’t really sure if it would work. The clerks were hesitant if you pulled your phone out, they all looked at you like, hmm –

Russ Jones: Yeah.

Yvette Bohanan: Oh, you’re one of these people, you’re gonna hold up my line, maybe. And then it was fine.

Russ Jones: On this security thread, this was and is a serious part of the value proposition. This is a super safe way to buy things. You had the biometric authentication. You had your card credentials stored as encrypted tokens.

Yvette Bohanan: Well, yeah, let’s pause there for a second and put a pin in this. They were the first.

Russ Jones: Yes.

Yvette Bohanan: They were the first token requester out there, right?

Russ Jones: Yeah. You know the joke at Glenbrook, we can’t stop talking about tokenization.

Yvette Bohanan: That’s right.

Russ Jones: Today’s the 10 year anniversary of talking about tokenization.

Yvette Bohanan: Exactly. And people didn’t, they didn’t get into all of this in their advertising, but when they said secure, to your point, it was like super secure. They went to great lengths here.

Russ Jones: Yeah. And it actually, in addition to the encryption and the tokenization and all that type of stuff, the idea that Apple did not manage these tokens, they weren’t stored on Apple devices, your PAN, your primary account number was never shared with the merchant, I mean, all these things just added up to a really strong security story. And it’s only now that we appreciate the way these tokens are bound to devices and bound to merchant IDs and bound to user IDs. How that makes everything more secure across the whole ecosystem.

Yvette Bohanan: Yeah. And they really set themselves up here. I mean, I don’t think people realized going back to your comment about all the things that this could do, and then being device specific, when you look at what they were probably looking at for their roadmap with watches and all this other stuff that’s come out, they’re looking at this probably 10 years out when they were sitting back there in 2014, figuring out how all these building blocks would continue to expand this whole ecosystem, because fast forward today, and your phone is next to your laptop and you can make a payment, right? Like

seamlessly with continuity.

Russ Jones: In the world of Apple, it’s not just your phone and your tablet. It’s your watch. It’s your MacBook. It’s even your AR virtual reality goggles, Apple Pay ready. And that really speaks to one of the big expansion vectors for Apple Pay.

Starts in the US, expands virtually worldwide today. Starts with 10 issuers, now we have over 8,000 issuers participating. It starts with just a handful of devices and then expands up and down the Apple product line in this payment ubiquity type of thing. And then it expands use cases. So it starts with the point of sale, tap and pay, in-app payments, those launch at the same time. Then it expands to online checkouts, expands from there to P2P payments and ability to hold a balance inside the Apple wallet. And it jumps apps. It starts off with third party developer apps, it jumps into Safari as an app, it jumps into Messenger as an app.

Keep on expanding, expanding, expanding where you can use, where payments can be used.

Yvette Bohanan: It keeps coming back though to, it’s in the operating system, it’s using the secure element, and it has the device tokens assigned, right? Like those primary building blocks have just, and to some degree the geolocation, right? All of that is basically underpinning everything that they’ve been able to do for a decade.

Russ Jones: Yeah.

Yvette Bohanan: When you look forward, fast forward a little bit in the history and the evolution from when it was first announced to say five, six years in, what did you see that was the most, Hey, I wasn’t expecting that to happen kind of thing?

Russ Jones: There were a couple of things that weren’t at all obvious on month number one, when Apple pay was launched. One of those things was, I’m not sure if this was deliberate or not, but they had invented the idea of a passive wallet that is not a direct participant in the transaction flow and the settlement is not in the chain of liability. Up until that point in time, the existing wallets in the marketplace were all, you could call them wallets, but they were payment systems.

You had to sign a contract with them. You had to pay fees to use a wallet. If you were a merchant, you had to get the separate settlement flow. You had to reconcile it. You had to agree to a different set of dispute procedures. And Apple said we don’t need to be involved in payments.

We need to do the end user facing things, which is bring convenience, bring security, bring privacy. But we don’t actually need to handle your money. We don’t need to know what you buy, who you buy it from, how much you pay. And that tracks right into Apple’s whole corporate philosophy around privacy, but it really set the stage for the distinction between what now in the industry is called a staged wallet and what alternatively is called a pass through wallet.

And those are specific names, but I think of them as active and passive. And there’s just so much behind the adoption when you don’t have to sign contracts to use it. You don’t have to change your back office procedures to accept Apple Pay.

If you were a merchant, if you were already accepting contactless payments, you might very well be accepting an Apple Pay and not really know it.

Yvette Bohanan: Yeah, what you’re touching on, I think, is interesting because it’s a very elegant sleight of hand in a sense with the pass through paradigm that they defined with these building blocks, because they put themselves squarely in the middle of the interaction between any time someone’s using an Apple device and how the payment is initiated, but they left room for everyone else to operate in the payments industry more or less undisturbed. And a big part, if you go back to the wallet wars days before the announcement, a big part of the debate, we used to say, there’s too many mouths at the trough. Too many people in the economics of this thing, trying to get sub pennies out of every transaction that they know will be going through all of these devices all the time in the future. And everybody thought, I deserved more. The PSPs thought they were enabling it, the mobile folks thought they were enabling it, the banks thought they were enabling it.

And basically with this, the economics that they set up with this technology and this philosophy said, We want compensation for doing the initiation as Apple. We’re going to set up how this thing works for our consumer, our customer, right? So safe, secure, tokenized, et cetera, et cetera, that we’ve been talking about. And the rest of you just keep doing what you’re doing.

Russ Jones: Right, Right,

Yvette Bohanan: And it really, it was a technology advancement, if you will, with pass through, but it was also an economic declaration of kind of the economics of how this was going to work, because there’s only one way for the economics to work, essentially, with this technical declaration.

Russ Jones: Yeah, and that pass through approach meant that Apple was hands off and they really didn’t have any, they were a little bit ambivalent about debit cards versus credit cards versus private label cards versus loyalty cards versus transit cards versus domestic cards in different countries around the world, they were just ambivalent about that.

And they created a level playing field where general purpose and private label issuers of any payment instrument could plug into to Apple Pay and they wouldn’t feel they’re being disadvantaged or advantaged relative to their competitors.

Yvette Bohanan: The other side of it was Apple’s big enough, right? The footprint of the iPhone, even then, right? The footprint was so significant that, and I think this is a key to it too, it’s like the only way this could work is if you had enough consumers with these devices, that people would want to put their whatever card or transit cards, whatever, private label, whatever, they’d want it in the wallet.

They’d feel like, I’ve got to be there, for my customer and to remain relevant and to be part of this whole thing, if it takes off.

Russ Jones: Just to close off about how things have changed. One final thought about this pass through stance. We see that even in today’s world, just in the last six months, Apple announces they’re end of lifing the Apple Buy Later product, which put Apple in direct competition with others in the ecosystem.

They realized that it was inconsistent with their whole approach to Apple Pay and they would be much better served, rather than having their own product competing against several dozen products around the world, they’d be better served by just being a neutral initiation service for other buy now pay later providers to plug in and integrate with.

So we’ve already seen Affirm, as an example, jump in, both feet. And there you have Affirm inside the Apple Wallet now with a really super smooth integration, visually pleasing user interface. And for the Apple end user, they’re able to manage installment loans inside the wallet but they don’t have to get those installment loans from Apple, if you will.

Yvette Bohanan: They did end up releasing their own card, but it’s more, of Apple is a merchant, right?

Russ Jones: Yeah, exactly. That’s the Apple co-brand card. It’s really not part of Apple Pay.

Yvette Bohanan: You can use Apple Pay with, without it. You can use that card with or without Apple Pay. It’s fairly decoupled.

Russ Jones: You don’t have to love Apple Pay to love Apple financing.

Yvette Bohanan: Yeah. Exactly. Exactly. So where is this all leading to?

Russ Jones: Well, we’ve seen the continued expansion and Apple driving Apple Pay deeper into different apps in their ecosystem, different devices in the ecosystem. Their big expansion vector now is really on the ID and identity related stuff. So you have Student ID inside the Apple Wallet now. There’s this big thrust to get driver’s licenses inside the Apple Wallet, so you see that going on. And recently they’ve jumped, they’ve introduced, I guess in June at the Worldwide Developers Conference, they introduced some new approach to Apple Pay that makes it usable on non-Apple devices. You could take your HP or your Dell laptop, and you could still make an Apple Pay payment on that laptop if you had your iPhone sitting next to you, ready to do the biometric authentication on the phone, do QR codes on the laptop.

Yvette Bohanan: So a bit of a mashup of technologies for initiation and kind of bringing the continuity in, which is smart.

Russ Jones: Yeah.

Yvette Bohanan: I remember sitting in a Merchant Payment Roundtable, a Glenbrook Merchant Payment Roundtable, when this was announced 10 years ago, not as a Glenbrook employee, but as a participant in the roundtable working at another company. And I remember Allen Weinberg getting up and showing this slide in the meeting and saying, Okay, Apple announced this Apple Pay thing. Here’s what it does.

Russ Jones: There’s your Allen Weinberg summary.

Yvette Bohanan: Here’s what it does. And then he kind of shrugged his shoulders and said, I don’t know, what do you think? So, sitting here 10 years later, are we going to go out on a limb and say, well, I think this was a success.

Russ Jones: I think it has been a success and here’s why. It really was the early vector into the market for EMVCo tokenization. And there’s all sorts of goodness that goes along with that as we forever talk about in Payments on Fire. But today, both Visa and Mastercard talk about one out of four transactions on their network are done with tokenized credentials.

Those are not all Apple Pay tokens for sure. Apple Pay can’t claim that as a success story but it kind of started the wheel turning and got everybody going in the same direction on, let’s manage card data credentials in this particular way, in this secure tokenized format.

And it’s expanded on. The model that they came out with jointly with the card networks has been embraced by other smartphone manufacturers, it’s been embraced by, particularly by online merchants as a better way to store card credentials. So there’s a lot of goodness that’s come out of it.

And I think you’re going to see, it’s one out of four transactions today, it’s just going to keep getting more and more usage inside the card system. And to the point now, we’ve talked about this on other episodes, to the point now that the basic default Visa transaction is, with the lowest possible interchange for online merchants, is a tokenized transaction. And you’re kind of a little bit economically disadvantaged if you’re not using tokens because of all the security benefits that accrue to everybody in the ecosystem. The other thing that’s happening with Apple is they’ve been roundly criticized, largely by competitors, for having a closed ecosystem that is all integrated with itself and has pretty good integrity characteristics, if you will.

So in the last year, they have finally made a number of concessions in the marketplace to open up various aspects of their ecosystem. In Europe, using a host card emulation approach for third parties. And in a couple other select countries, including the US, giving third party developers, fintechs, if you will, direct access to the NFC radio and the devices and access to the secure element.

Yvette Bohanan: Yeah, the secure chip. Which is a big deal.

Russ Jones: Yeah, it’s a big deal, I think. And you’ve already seen, that’s going to have a big, over the next three years, it’s going to have a big ripple effect in the marketplace. We’ve already seen the CEO of PayPal come out swinging that they’re going to have tap and pay payments inside the PayPal app, inside the Venmo app to do contactless payments at the point of sale.

But there’s no technical barriers any longer for a major bank to tap and pay enable their banking app. So you could see a Chase or a Citibank or a Wells Fargo with, if you’re completely wedded to them, to those banks as your issuer, you could use them as your tap and pay provider and not have to provision your cards into a third party wallet, if you will.

And the other side of this continual opening of the ecosystem is, really for 8 of the last 10 years, the NFC chip inside the iPhone has been for emulating contactless cards. And in the last 2 years has been for reading contactless cards.

So now you see this whole rise of what is called in the industry, soft point of sale, where you no longer need a terminal. You no longer need a dongle or any sort of third party attached reader on a device. You can simply tap two phones together, tap a phone on a tablet, and the payment data can jump across the ether.

Yvette Bohanan: Yeah, which is a massive change and I mean just point of sale period, right? The fact that you can do this stuff. So it’s continuing, when you talk about ripple effects I think that’s an interesting ripple effect of this technology that people have started to use. And it’s not just Apple doing that, other devices are doing it too, but it just shows you how there’s very intentional direct lines. And now we’re starting to see all the tentacles of the technology kind of come out after a decade, which also shows you how long it takes for this stuff to really take hold and grow and adapt.

But I want to go back to the secure element for a second, just to clarify something, if we can. When we say they opened up the secure element, they’re still controlling what’s going on in the secure element, right? It’s like it’s open for storage and use. Adding and retrieving information.

Russ Jones: Yeah. Yeah.

Yvette Bohanan: They’re still very firmly in control of this whole environment that they’ve created.

Russ Jones: Yeah and by, by opening up the secure element, they’re effectively providing a software development kit to third party developers who sign a contract with Apple and presumably are vetted by Apple, so that Apple’s comfortable with them not screwing up or doing something that would compromise the integrity of what’s happening with the secure element, but they’re not opening up the Apple Wallet to third parties. They’re opening up the storage mechanism, the same storage mechanism that the Apple Wallet uses.

Yvette Bohanan: So third parties are not in the operating system. Only the Apple Wallet’s in the operating system. But they can get to the secure element, keep everything tight, secure, private, all that stuff. Yeah, I just wanted to make sure we were very clear about that because I think people get confused and they marry up in their brains all of the technology into one monolithic thing. And it’s not. It’s a series of building blocks still.

Russ Jones: It all comes together in one eight word headline in a blog post. And if you can’t capture the complexity of the global payments industry in that eight word headline, you just need to cut a couple corners here and there.

Yvette Bohanan: That’s right. So happy birthday to Apple Pay.

Russ Jones: Happy birthday, Apple Pay. Who knows, maybe there’s some Apple Pay developers in Cupertino popping some champagne today.

Yvette Bohanan: Yeah, popping some champagne, maybe eating some pizza. That would be a very developer thing to do.

Russ Jones: Right.

Yvette Bohanan: Oh, excellent. Well, Russ, thanks for a little walk down memory lane and a review of some of the things that make Apple Pay what it is and what it’s become. This is cool.

Russ Jones: Thanks for having me on, Yvette.

Yvette Bohanan: All right. And to all of you listening, keep up the good work. We’ll see you soon. Bye for now.