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Apple's iPhone payment system won't disrupt current power brokers

Just a day after Home Depot (HD) disclosed that hackers might have stolen as many as 60 million credit card numbers, Apple (AAPL) jumped into the payment security maelstrom with a new iPhone-based solution.

Consumers, who have largely ignored prior smartphone-based payments offerings, are likely to start using Apple's solution in much larger numbers, analysts said. But by working closely with the biggest players in the current credit card ecosystem, Apple isn't threatening to disrupt the entire payments landscape.

The new “Apple Pay” system lets a consumer with a new iPhone or smartwatch tap the device on a special check out terminal and pay -- without transmitting a credit card number or other details hackers have sought. The system relies on a special piece of hardware, called a Near Field Communication (NFC) chip, that will be included in the new iPhone 6, iPhone 6 Plus and Apple Watch.

Apple employees demonstrated the slick and speedy payment system in a special, temporary building across from the Flint Center auditorium in Cupertino, Calif., where Apple made its announcements. A customer could pre-load credit cards using the camera in their phone and make payments just by putting their phone near a terminal and putting their thumb on the fingerprint sensor to acknowledge the transaction.

Big backers

Apple won the backing of the biggest players in the credit card industry, including Visa (V), Mastercard (MA) and American Express (AXP). The six largest card-issuing banks, including Bank of America and (BAC) JP Morgan Chase (JPM), also signed on.

Apple’s own security record is hardly unblemished, as last week’s iCloud nude celebrity photo scandal demonstrated, but its new solution for securing payments looks to be a big improvement over current practice. The massive credit card thefts from Home Depot, Target (TGT) and other chains are prompting retailers finally to upgrade their check out systems to support more-secure mobile payments.

And Apple customers are wealthier on average than users of phones running Google’s Android; they also tend to spend more online and via their mobile devices. Analysts cited Apple’s massive iTunes customer base and easy-to-use fingerprint reading technology as advantages over prior efforts. Apple also signed up major retailers as partners, including Macy’s, Staples (SPLS) and McDonald’s (MCD). McDonald’s is even enabling Apple Pay for its drive-through lines, Apple said.

By working so closely with the existing power brokers of the credit card ecosystem, Apple isn’t doing much to shake up the system in other ways, or save consumers money. The payments will end up on customers' usual monthly credit card bills, and retailers will still pay the banks and card networks much the same fees they pay on credit card transactions.

When Apple Pay was initially unveiled on Tuesday, Apple shares shot up as high as $103.08, close to the all-time high of $103.74. But as it became clear just how small a role Apple would play – it won’t even be collecting data about the transactions – the stock fell back below $100. The shares closed at $97.99, down 0.4% on the day. Still, the news appeared to hit eBay (EBAY), which owns the current leading mobile payments app, PayPal. Shares of eBay lost 2.8% on the day.

“Apple Pay is backed by the iTunes account card, so Apple is working on top of the traditional credit card infrastructure as we expected,” UBS analyst Steven Milunovich wrote after Apple’s announcements. “Although financial terms were not disclosed, we don’t expect a substantial new revenue stream as much as differentiation of the ecosystem.”

Maybe after Apple convinces consumers that mobile payments are worthwhile, it can bring some innovation to the rest of the system.