Does Samsung's Rumored Apple Pay Rival Stand a Chance?

Apple Pay in action. Source: Apple.

It should come as no surprise that the South Korean conglomerate Samsung is hard at work developing a rival to Apple's new Apple Pay service. Launched in late October, Apple Pay has already gained some early traction, grabbing 1% of digital payment dollars in November, according to ITG.

Last week, Re/code reported that Samsung was in talks with start-up LoopPay, hoping to launch a new smartphone in the first half of 2015 with a mobile payment service to take on Apple Pay. Does Apple's biggest rival stand a chance?

How it worksFirst off, it's worth acknowledging that Google Wallet has long been available on a variety of Samsung devices. Google Wallet faces its own challenges, but right now we're talking about a separate service that Samsung is trying to put together. Notably, LoopPay uses a different data transmission technology than Apple Pay and Google Wallet, both of which rely heavily on near-field communication, or NFC. Google has since broadened support for non-NFC devices.

LoopPay has developed a patented Magnetic Secure Trasmission technology that wirelessly transmits the same data contained on a credit card's magnetic strip. The primary benefit is that this makes it compatible with all existing point-of-sale systems and does not require merchants to upgrade their payments infrastructure which has long been one of NFC's biggest hurdles.

Instead, users need to use one of Loop's products that are capable of transmitting these magnetic signals, such as its fob, card, or smartphone case in conjunction with the LoopPay app (available on iOS and Android). The company also says that smartphone maker could potentially choose to embed the necessary hardware for less than $1 in component costs.

LoopPay is also planning on adding tokenization next year for added security, and it can similarly store a wide range of credit cards, gift cards, and loyalty cards. Visa has also decided to invest in the start-up.

How it performs in real lifeNumerous tech media outlets had a chance to test drive LoopPay earlier this year, including The Verge and Re/code. For the most part, the service works as advertised, and its compatibility with existing payment terminals means that LoopPay is accepted in more places than its NFC-based rivals. There are a few hiccups, not working properly at a handful of retailers.

The most common complaints of LoopPay in its current form are that LoopPay's own hardware leaves a little to be desired in terms of design and convenience, and that virtually no cashiers are familiar with how it works. The time that it saves is effectively offset by the extra time required to convince cashiers that it works in the first place. As a start-up, most people have never heard of LoopPay.

How Samsung could help overcome LoopPay's biggest problemsThis is precisely where Samsung could potentially come in. If the small inductive loop used to transmit magnetic signals could be integrated directly into a smartphone, then that would streamline the hardware and negate the need for a bulky case.

But awareness is easily LoopPay's biggest challenge right now. No one knows what it is, and cashiers are naturally a little skeptical when a customer wants to pay with what looks like a small keychain. Even in LoopPay's promotional video embedded above, the CEO has to reassure a waitress that it will in fact work like a regular credit card.

Samsung certainly has the resources and likely the willingness (even amid other cost cutting initiatives) to invest in a marketing campaign that educates the broader public on LoopPay if it ends up inking a deal with the smaller company. But the challenge here would be branding. LoopPay is a cross-platform service, but Samsung would inevitably want to use it as a point of differentiation. Perhaps this differentiation will only come in the form of hardware integration though.

Samsung is reportedly interested in implementing its own fingerprint recognition technology to rival Apple's Touch ID, but Samsung's recent Galaxy devices that include fingerprint sensors have poor performance.

What are the odds?Partnering with LoopPay could also be a smart move for Samsung as a shortcut, accelerating its time to market. Apple has spent years developing all of the pieces of Apple Pay, including Touch ID. If Samsung wants to live up to its "fast follower" reputation, it needs to offer an alternative as soon as possible.

For LoopPay, partnering with Samsung would do wonders in terms of awareness, education, and adoption, but the likelihood of a co-branded service could be confusing for consumers. Such a deal would give LoopPay a much better chance at succeeding, but the odds would still be stacked against it considering Apple's sheer size and demonstrated ability to catalyze adoption among all of its stakeholders, including business partners and consumers alike.

The article Does Samsung's Rumored Apple Pay Rival Stand a Chance? originally appeared on Fool.com.

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Visa. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.