Apple Pay virtual wallet looks like an also-ran

By Features Consumer Reports

Apple's entry into the crowded virtual wallet market, Apple Pay, is supposed to "transform mobile payments" today. We've downloaded iOS 8.1, which contains Apple Pay to judge for ourselves, and as soon as our review is ready, we'll report and update our head-to-head review of Google Wallet, Softcard, and Loop.

In the meantime, here's our preliminary assessment:

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Apple Pay, the new mobile wallet introduced with the iPhone 6 and iPhone 6 Plus in September, has issued a bold new proclamation for shoppers: "Wallet, your days are numbered."

But three year ago, Google also declared that its mobile wallet, introduced in 2011 was "the next big shift" in payment technology and would not only replace leather wallets but the plastic credit, debit, and prepaid cards inside them, too.

Since then, a joint venture of AT&T, T-Mobile, and Verizon Wireless, launched its own wallet-killer app nationally in 2013, Square Wallet came and went, and Loop Wallet debuted earlier this year with what appears to be a better mousetrap.

But meanwhile, physical wallets and payment cards have managed to avoid going the way of the dinosaurs.

Is the Apple brand name a game-changer for mobile wallets? Apple Pay provides some new advantages, but overall we think it looks more like an also-ran in a more crowded field.

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Here's our preliminary assessment, based on key details we know from Apple's materials; the company did not respond to our requests for an interview for this report.

Acceptance by retailers. A mobile wallet isn't much use if it's not widely accepted by merchants as a way to pay for purchases. Apple Pay is accepted at only 220,000 U.S. merchants. That's less than 2 percent of the 12 million to 15 million merchants that accept credit, debit, and prepaid cards.

At Apple's promotional event, Eddie Cue, senior vice president of Internet software and services, tried to paper over the low acceptance problem by noting that Apple is working to get more retailers to accept Apple Pay. "The Disney Stores will be adding Apple Pay by Christmas," he said. OK, that will add another 200 locations, an infinitesimal gain.

The Achilles Heel is Apple Pay's dependence on near field communications technology, which transmits data over the inch or so between the iPhone and an NFC receiver connected to the store's payment processing system. Merchants have been reluctant to throw away their existing magnetic stripe card readers that work just fine and pay hundreds of dollars per terminal to buy NFC-capable readers.

Apple is not alone in this critical predicament. Google Wallet and Softcard also rely on NFC-equipped retailers, so their users are equally hemmed in by this constraint. But Loop Wallet operates on a different technology, which induces a magnetic pulse containing the payment card data into existing magnetic-stripe card readers.

That means Loop can be used at 90 percent of those 12 million to 15 million mechant locations that accept plastic, the company says, and we found support for that claim when we independently shopped around the San Francisco Bay Area using Loop Wallet

Apple Pay won't be the "killer app" for the new iPhone 6 or iPhone 6 Plus. Here are the other, more useful advantages of these models from our first hands-on look at them yesterday.

Security. The Touch ID feature on Apple Pay is different. Instead of opening the wallet with a PIN code, the iPhone authenticates the user by recognizing his fingerprint. We like the fact that the phone doesn't store your actual credit card numbers but creates new substitute account numbers that live only on your phone. If a hacker gets them, the stand-in account numbers are useless. Meanwhile, cashiers never see your name, real card number, or card security code.

But other security features are copy cat. Apple's "secure element" encryped SIM card was used first by Softcard (though the chip is built into the iPhone, while it has to be installed free for Softcard). The strategy of generating unique security codes for each Apple Pay transaction was first employed by Google Wallet and Softcard, and those two also give users the ability to remotely disable a lost or stolen wallet, similar to Apple's disabling feature.

Consumer protections. Because mobile wallets use your existing payment cards, which get loaded onto your app, the same federal regulatory and industry voluntary protections apply whether you swipe the physical card or use it to pay by smart phone. But those protections vary by type of card—credit, debit, or prepaid. We recommend that you link a credit card to your mobile payment app before you link a debit or prepaid card, because credit cards provide consumers with the best loss liability limits. Get more mobile payment tips from our colleagues at DefendYourDollars.org.  

Setup. Apple Pay seems easier and cheaper to set up than some other mobile wallets, because the necessary hardware is built into the phone and doesn't have to be purchased separately at extra cost. But unlike Google Wallet, which works on hundreds of Android smart phone models, and Softcard and Loop Wallet, which work on Android phones and iPhones (with the addition of extra-cost hardware), Apple Pay works on only two models. Granted, those two phones will probably be very popular, but if you're midcontract or still paying installments on your current phone, or if you simply prefer Android models or brands over iPhones, you won't have access to Apple Pay, at least temporarily.  

Apple Pay can load cards from six major issuers—American Express, Bank of America, Capital One, Chase, Citi, and Wells Fargo—with five more big financial institutions coming soon. That's better than Softcard, which only works with select cards from three big issuers, and, practically speaking, on-par with Google Wallet and Loop, which accept almost all cards.

Fees. None of the mobile wallets charges per-transaction fees, so Apple is like the rest in that respect. But Loop requires additional-cost hardware, and Softcard requires extra-cost accessories to work on pre-iPhone 6 models. 

Apple promises to shake up the way the world pays for retail store purchases, but that change looks like it will be more evolutionary than revolutionary.

Yes, more smart phone owners are finding that their handsets are a convenient payment device, with 30 percent using them to make online purchases and 24 percent to pay bills. But so far only 17 percent use their smart phone to pay for store purchases, according to a recent Federal Reserve study, and if that's to grow, mobile wallet providers will have to break out of the NFC prison.

Until then, mobile wallets will provide only one more payment option in today’s cell savvy world.

—Jeff Blyskal

This article was updated on October 20, 2014, for the planned launch day of Apple Pay.

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