Apple’s near-field-communication (NFC) chip, the technology that makes contactless Apple Pay and Apple Wallet work, has been a company jewel — and a proprietary one — since its introduction. In the European Union, it took regulatory action to grant third-party developers access to the chip. So why in mid-August did Apple announce its decision to voluntarily grant access to the NFC technology to outside developers of apps and even non-Apple wallets in the U.S. and elsewhere who are willing to undergo an approval process and to pay licensing fees?
Banking and payment analysts suggest that while the surprise move may have been prompted by what happened in the E.U., it isn’t nearly so simple as Apple throwing in the towel in the face of regulatory pressure.
In fact, some suggest that the reversal of past policy regarding access to the NFC chip and Apple’s related “Secure Element” technology may have been part of the tech giant’s strategy for some time.
Bankers and others in the financial services business tend to see things from the perspective of their own activities, i.e., how does this affect banking and payments?
There is speculation that the biggest beneficiary of Apple’s move among financial services providers will be PayPal and its Venmo operation. But beyond that, experts suggest, the greatest impact may be seen in a much different, and broader, capability of Apple’s technology: digital identification.
Digital identification is important to financial services, of course, but the significance of Apple opening up the chip could go far beyond that. Applications of digital ID in both governmental and private sectors keep growing. The move may be Apple’s way of moving in to claim territory while the getting is good. (Apple’s technology is not the only one vying for supremacy. Sam Altman, behind OpenAI and its GenAI technology, has been working to gain acceptance for a cloud-based biometric ID system based on iris scans, through his Worldcoin project.)
Indeed, in technical materials issued along with Apple’s Aug. 14 announcement, in-store payments represent only one of ten categories of use that the company envisions supporting through applied programming interfaces. The others include: car keys, closed loop transit passes, corporate badges, student ID, home keys, hotel keys, merchant loyalty and rewards, event tickets and government IDs.
“The digital ID aspects of this are far more interesting than the payment pieces of it,” says Erin McCune, expert partner in payments at Bain & Co. “Yes, other wallets will be able to exist on the iPhone with parity to the Apple Wallet, and be the default wallet instead of Apple’s.” But the digital ID possibilities dwarf the payments possibilities, she believes.
“I see this as another step along Apple’s road offering identity services,” says Richard Crone, head of Crone Consulting, payments advisors. “Whenever you need to confirm ‘humanness,’ especially in an artificial intelligence world, that’s where the real money is going to be.”
“NFC is nothing more than the dumb pipes that will transport the identities that have been multifactor authenticated and stored by Apple,” adds Crone.
What Apple Did and How It Will Work in Practice
When iOS 18.1 is rolled out in the fall of 2024, developers will be able to apply for the ability to offer NFC contactless transactions. As set out by Apple in technical materials, this won’t be a rubber stamp process, but one in which outside developers will be held to standards of service and quality.
“There’s going to be gatekeeping. It’s not like any random, fly-by-night app developer is going to be able to just start using the NFC chip tomorrow.”
— Erin McCune, Bain & Co.
“There’s going to be gatekeeping. It’s not like any random, fly-by-night app developer is going to be able to just start using the NFC chip tomorrow,” says McCune. “You’re going to have to go through an approval process and demonstrate that you are going to be able to meet the security expectations of Apple. Not just Apple but also EMVCo., which administers the NFC guidelines.”
By enabling third-party developers to apply to use the Apple NFC chip technology, the company will be opening the doors to an identity regimen that McCune says is vying to become the “gold standard.”
Richard Crone explains that what makes it special is a combination of how identity is proven and where the identity information is stored. The first relies on a combination of biometric multifactor authentication. The second concerns the “Secure Element,” a function of the Apple chip technology that permits the ID data to be stored on the user’s own device in an encrypted form, rather than in the cloud, which would expose entire databases to tampering.
The data residing in the 2 billion-plus iPhones around the world, creates a “radically decentralized database,” according to Crone.
Read more: Apple Shifts Focus As It Drills Deeper into Payments
Does Banking Have a Piece of this Pie?
None of this is to say that banking players won’t make use of the opportunity, if developers can make it over Apple’s hurdles to participation.
“This is something that will help to open the ecosystem and get more banks engaged in contactless and wallet-based payments,” says Peter Davey, venture partner for payments and identity at the Alloy Labs Alliance and a payments veteran.
“Apple likely looked at Paze as a potential loophole in their closed ecosystem and ultimately believe that this was a better route forward.”
— Peter Davey, Alloy Labs Alliance
In terms of the banking industry’s own efforts to develop a wallet, Davey suggests that Apple’s move could give Paze a boost. Paze, being offered currently by bank owner-members of Early Warning Services, was created to be an online-only wallet for banks for ecommerce.
Davey thinks a combination of Paze with access to Apple’s NFC process could create a point-of-sale capability that would push Paze into what still represents the majority share of commerce in the U.S. In fact, he thinks that “Apple likely looked at Paze as a potential loophole in their closed ecosystem and ultimately believe that this was a better route forward.”
Davey’s comment underscores the change inherent in Apple’s move. Apple has capitalized for years on its “walled garden” strategy. To be in the garden, people had to use Apple equipment and technology and hold Apple accounts — consider the interplay between Apple Pay, Apple Wallet, Apple Card and its ancillary products, and the Apple Pay Later buy now, pay later product that was shut down earlier this year.
Of course, Apple will be charging for use of its channels and its services, even for those that make it over the hurdles. Just what those charges will be hasn’t been disclosed in any of Apple’s materials yet. Part of what has kept many banks and credit unions from availing their customers of the convenience of putting their credit cards is the stiff fees assessed on each transaction. A payments or banking player who might have bridled at being part of Apple Pay because of price will still have to pay an indeterminate amount to use Apple tools with its own app.
“The displacement risk is very low for Apple,” says Crone. In fact, being able to use NFC chip services directly amounts to having another gate to enter the same stadium, but both gates charge for admission, Crone explains. And remember, Apple charges developers as much as 30% of app fees to market their apps via the App Store.
Davey believes Apple will also gain more insights to payment trends and specific customers’ buying habits by opening up NFC technology.
Read more:
- Mobile Debit Card Payments Are Ramping. But the Economics for Issuers Are in Flux
- Consumers Have Embraced Digital Wallets. But They Also Want Them to Be Better
- How to Unleash the Full Potential of Digital Wallets
Has Apple Changed Its Approach to Financial Markets?
Beyond that, Apple’s move can be seen as another example of a shift that began when the company dropped Apple Pay Later. Commentator Alex Johnson, in a recent edition of his Fintech Takes blog, points out that the other shoe was partnering with third-party BNPL providers. Johnson thinks this marked a sea change for Apple, being more willing to entertain partnerships with other financial players within its walled garden. (Some of this has already existed, such as the company’s work with Green Dot to provide its Apple Cash person-to-person payments option.)
Johnson thinks that even if opening NFC to others initially weakens Apple’s market position, in the long run building relationships with third-party developers will become a strength.
“Apple is very deliberate,” says Bain’s McCune. “They’ve been preparing this for some time.”
Crone estimates that Apple could produce $2.3 to $6.6 billion in new annual revenue by selling ID services. In time, he sees this becoming a $50 billion business.
Read more: Major Banks’ Mobile Apps Evolve into ‘Payment Central’ for Consumers
Will PayPal Be the Big Winner as Apple’s NFC Shift Gets Traction?
Payments consultant Richard Crone doesn’t see banks availing themselves much of the new capabilities. Individual institutions’ efforts to launch their own digital wallets haven’t taken off, he points out. And he’s been a vocal critic of Paze as it has proceeded thus far.
“It’s very expensive to jumpstart a wallet. If a bank thinks it can do it now, good luck.”
— Richard Crone, Crone Consulting
“It’s very expensive to jumpstart a wallet,” says Crone. “If a bank thinks it can do it now, good luck.”
However, Crone sees PayPal sitting pretty for the kind of opportunity it could mine from NFC technology. PayPal has 430 million active users and Venmo over 90 million.
“They will be the biggest winners from Apple’s decision to open NFC access,” says Crone. He jokes that Alex Chriss, PayPal president and CEO, must have “pinched himself when he heard the news — he’s very lucky.”
Crone says that PayPal has long been a dominant player in ecommerce, reflecting its roots, but has been champing at the bit to grow its use at the physical point of sale. Apple’s move provides the entrée.
PayPal bring all the moving parts necessary to making a success of the opportunity, Crone continues, and has the critical mass to pull it off. One of these is Honey (now PayPal Honey), the service PayPal acquired in 2020 that aggregates and automatically applies vendor coupons to online purchases. Bringing this capability to the checkout counter in stores opens a world of possibilities for PayPal. Banks generally lack the inventory of offers that PayPal Honey can muster, and through NFC access it can be brought to stores.
Crone notes that 82% of U.S. total purchase value still transacts in physical stores. Opening NFC puts PayPal right in the way of mining that fat deposit of possibilities.