Home Depot’s (HD) credit card data breach, the latest in a long string of retail hacking incidents, is helping set the stage for an upheaval of the payments landscape. And one of the biggest beneficiaries may be Apple (AAPL), which is expected to roll out a new mobile payment offering during its highly anticipated event in Cupertino next week.
After hackers stole an unknown number of credit card accounts used in Home Depot stores, CEO Frank Blake said Thursday the chain will upgrade the checkout systems in all 2,200 of its locations by year end, switching to modern payment terminals that can accept more-secure chip and PIN credit cards. Target (TGT), the victim of one of the biggest hacks ever, is doing the same, as are an increasing number of once reluctant retail chains.
More widespread use of chip and PIN credit cards should reduce fraud from stolen credit card numbers, though it’s not a panacea. In Europe, where chip and PIN is common, thieves focus their efforts on cracking online transactions.
But the new terminals have another feature that could help spark even more significant changes. That’s because the devices being installed by Home Depot and others are compatible with an encrypted wireless technology included in some smartphones, known as a Near Field Communication, or NFC, chip. And Apple, a longtime NFC holdout, is adding the chips to its latest iPhones and new watch-like wearable devices.
NFC allows users to pay for something by just tapping their phone or smartwatch on a terminal – very handy. Apple’s fingerprint reader could provide an additional layer of security. Older iPhones won’t have the chip, however, limiting the number of potential customers.
Previous mobile-payments efforts have garnered somewhere between a minuscule and zero market share of all retail transactions. Even the most successful, eBay’s (EBAY) PayPal app, logged only $27 billion of transactions last year, less than 1% of total U.S. retail commerce of $4.5 trillion. Despite numerous initiatives, the biggest story in the past decade has probably been that one system, Isis, lost a public-recognition battle to a Middle Eastern terrorist group and had to change its name.
Entering the fray
But now Apple is about to enter the fray, and, for reasons large and small, it’s poised to succeed where previous efforts have failed. The many failures have given Apple leverage to design a system consumers will like, not to mention terms that could be more profitable for Apple. And all the retail hacking incidents are finally prompting stores to upgrade to mobile-ready checkout terminals, despite significant upfront costs, ending the chicken-and-egg problem that bedeviled some earlier efforts.
The mobile payments landscape is littered with previous failures, including Google (GOOGL) Pay and Isis, now called Softcard, which is backed by Mastercard (MA), Visa (V), American Express (AXP) and major wireless carriers. Less than 4% of smartphone owners used either system in a monthly survey released by the Yankee Group in February. The PayPal app led the field, but even it was used by only 15% in the survey, and often just to send money from one friend to another.
Previous NFC efforts foundered because so few stores had capable checkout terminals. That shouldn’t be a problem much longer. And Apple’s Touch ID could give consumers a greater feeling of security than using credit cards, which are being stolen by the millions in the hack attacks. And Apple could put some of its massive advertising budget to work promoting the payments system; prior attempts got little to no mass-media marketing support.
Apple also reportedly negotiated lower fees from its credit card partners, rumored to include the largest credit card companies and bank issuers. That should encourage retailers to play along, if Apple passes the savings along, or to boost Apple’s bottom line if it keeps those additional basis points of profit for itself.
To be sure, Apple could flub its mobile payments effort. The company’s handy Passport app has made little headway against more-popular individual apps of transportation, retailers and other companies, not to mention the continued use of paper and emailed ticket images.
Another complication is Apple’s own recent hacking incident, as naked pictures of Hollywood celebrities stolen from its iCloud service made headlines worldwide this week. Even a well-designed and genuinely useful payment system won’t catch on if people lose confidence in Apple’s security.
But Apple is already moving to enhance security on iCloud. And the ease of tapping a watch to pay for your next cup of coffee may be just that much more convenient and secure to get the long moribund mobile payments market flying.