Apple Pay delivers a double whammy, bridging in-store and online mobile payments

Apple didn’t just deliver one mobile wallet at its iPhone 6 and Apple Watch launch event on Tuesday. It delivered two. Its new Apple Pay service, which will launch on the iPhone 6 and iPhone 6 Plus in October, combines two mobile payment methods that are often conflated to represent entirely different types of transactions: using your phone in lieu of plastic to pay at the cash register, and buying goods online over your mobile phone.

[company]Apple[/company] will bridge the two using a unified wallet that consumers will actually want to use and merchants will actually want to accept, Apple CEO Tim Cook said during his keynote (check out Gigaom’s liveblog for all the details from the event). The problem with previous mobile wallets, Cook said, is that they’ve been designed around self-interested business models – for instance, driving dollars into carriers’ own wallets, in the case of Isis/Softcard – rather than focused on creating a great consumer experience.

While Apple still has plenty of self-interested reasons to get into the mobile payments game, it definitely appears that Apple Pay is addressing many of the problems plaguing other wallets. And as my colleague Kevin Tofel predicted last week, Apple is integrating Pay with a lot of other services and features readily available and popular on the iPhone and the overall Apple ecosystem.

Apple Pay inside Passbook

First off, Apple Pay will become part of Passbook, storing your credit cards in tabs the same way it stores your boarding passes and loyalty cards. It will use Touch ID to verify consumer identity and presence at the point of sale. And it will make use of the 800 million credit cards it already has on file attached to users’ Apple IDs. As soon as you activate Apple Pay, you’ll already have a credit card loaded: the one you use for your iTunes purchases. Apple Pay will also be incorporated directly into the new Apple Watch.

The new pieces Apple is adding to the puzzle are a near-field communications (NFC) chip and secure hardware element in the iPhone 6 and iPhone 6 Plus where credit card information is stored. In that sense, Apple Pay will work very similarly to Isis/Softcard and other contactless wallets.

The element will store unique virtual credit card numbers different from the digits imprinted on your plastic. After a transaction is complete, the virtual numbers are replaced so your previous transaction data can’t be used for fraudulent purchases. That way the merchant never sees your credit card number, security code or even your name, said Eddy Cue, Apple SVP of internet software and services.

Apple Pay will work at 220,000 merchant locations in the U.S., including some of the biggest retailers in the country like [company]Walgreens[/company], [company]Macy’s[/company], [company]Subway[/company], Whole Foods Market and McDonald’s. McDonald’s will even begin accepting Apple Pay in its drive-thrus by the end of the year, Cue said.

Apple Pay retailers
Credit: Apple

Not coincidentally, Cue’s list of point-of-sale partners doesn’t include any of the retailers in the Merchant Customer Exchange, a consortium including [company]Best Buy[/company], [company]Walmart[/company], [company]Target[/company] and dozens of other big brands launching their own QR-code smartphone payment system called CurrentC. Despite Apple’s claim to have cracked the mobile payments code, we could be seeing a showdown brewing between it and some of the country’s most powerful retail brands — at least in the smartphone point of sale space.

On the m-commerce front, Apple is clearly expanding its online purchasing might beyond iTunes and its various online and app stores into other retail apps and websites. [company]PayPal[/company] has already been treading this turf since it acquired Braintree. Last month it launched a new One Touch payment service for mobile apps that stores your card credentials in the PayPal or Venmo apps, allowing consumers to instantly purchase goods or services with a single tap. Apple Pay looks to do the same, except it will draw from the virtual one-time card data stored in the iPhone’s hardware secure element.

Apple has also signed up some big web commerce companies to take advantage of its in-app payments, including [company]Uber[/company], [company]OpenTable[/company] and even Target, which is part of the MCX consortium. While Target may be working on its own wallet for in-store payments, it appears to have no qualms with Apple making it easier for consumers to order its goods from their mobile phones.

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