Apple Pay will drive the value of NFC payments in the UK

Friday 26 June 2015 | 17:39 CET | Background

Apple Pay in the United Kingdom is under the 'Coming Soon' sign. The service will go live somewhere in July. The combination of an established NFC card infrastructure and a high market share for Apple could lead to a steep adoption curve. The iPhone based payments can go without a PIN code for high value transactions, adding further potential.

On 8 June, Apple announced that Apple pay would be coming to the UK. At launch, over 250,000 locations will accept Apple Pay, with support from eight of the UK’s most established banks, across all of the major credit and debit card networks. The installed base for NFC at point of sale is large in the UK. Apple has a market share just above 40 pct. according to Kantar World Panel. While this is a mix of models, the market share of the NFC compatible iPhone 6/6 Plus is growing.  

Apple has signed up first direct, HSBC, NatWest, Nationwide Building Society, Royal Bank of Scotland, Santander and Ulster Bank. Other major issuing banks will follow by this fall, including Bank of Scotland, Coutts, Halifax, Lloyds Bank, MBNA, M&S Bank and TSB Bank. All these banks issue credit and debit cards from American Express, MasterCard and Visa Europe. Barclays is unconfirmed.

There is however a question mark over the set limit for contactless transactions. Current contactless transactions can be done to an amount of GBP 20. Above that amount, the PIN code must be entered at point of sale to verify the card holder.

Verification method

A Card Holder Verification Method (CVM) is an essential requirement in any card implementation. Verification is used to evaluate whether the person presenting the payment instrument is the legitimate owner of the instrument, and affects where the liability lies for fraudulent transactions.

PIN is the most common method. With Apple Pay, Apple and the card networks have implemented a new verification routine that happens in the phone: Consumer Device Cardholder Verification Method (CDCVM).

With Apple Pay, verification is built into the iPhone. The card credentials are replaced by a Device Account Number stored in an embedded Secure Element. All TouchID equipped devices (iPhone 5s, 6, iPad Air 2 and iPad Mini 3) as well as the Apple Watch feature that SE.

That Device Account Number is linked to the TouchID fingerprint sensor to verify that the holder of the device is the right person. The Watch has no fingerprint sensor, so this functionality must be unlocked when the watch is put on the wrist. It then stayes unlocked as long as the watch is worn.

TouchID replaces the traditional method of PIN or signature. Whenever a card is presented to a payment terminal, terminal and the card exchange information and establish the highest form of security that is supported by both. If this is the CDCVM, that will be used. In that case, any payment can be confirmed by using TouchID.

The payment terminal must be equipped with the latest software that supports CDCVM. To a degree, there is confusion as to whether payment terminals are ready in time when Apple Pay launches.

Low value

In the UK, contactless payments have been introduced as a convenient option for low value transactions or specific low-risk categories, such as fast food, convenience and grocery stores. To limit potential misuse, transaction value was capped, currently at GBP 20 per transaction, but rising to GBP 30 later this year.

In legacy contactless terminals, this limit may still apply, says Sandra Alzetta, Senior Vice President Innovation, New Product & Channel development with Visa Europe. That means that contactless cannot be used beyond that value point.

For full card payments, the newer method must be implemented in the cash register as a software update. Bank, card network and payment service provider must align in this. The first reports surfaced in December last year that Apple was setting up an Apple Pay team in the UK. In its press release, Apple mentioned twenty merchants as launching customers.

While it is unconfirmed, it is likely that many if not all of those have implemented the newer verification. Payment will then replace dipping the card and entering the PIN code.

No PIN required

These higher value transactions can be an uptake driver for mobile contactless payment. A smartphone-based card payment in itself has not proven to be the killer application. Smartphone users still carry wallets and cards.

For low value transactions, either the contactless card or the phone will work - without entering a PIN. Many people however will pull out their phone that bit quicker than retrieving the card from the wallet, tipping the balance in favour of the phone. 

A higher value card payment requires entering the PIN code. Though this is a well-rehearsed routine, it takes time. Using the phone however goes without PIN. That is likely to tip the balance for a part of the users.

Until now, the GBP 20.00 limit on NFC payments is not an incentive for replacing non-NFC capable payment terminals for merchants where transaction value is typically over that amount. Some merchants may have postponed replacing terminals. However, all new systems on sale today are NFC capable. 

Alzetta explains that Visa Europe requires contactless terminals from merchants that wish to accept Visa cards. From October, all new payment terminals that connect to the network must be dual mode chip and NFC. 

Once the installed base of NFC capable terminals has grown to more than 50 pct. in a country or market, banks are required to offer their customers a contactless option. Swapping the card for a dual mode card is one way to meet this requirement, but banks can also opt for supporting a contactless scheme.

Weekly supermarket visits

The weekly shopping in the supermarket is usually far more expensive. Several of the larger supermarket chains already have installed contactless terminals, including Tesco, SPAR, Waitrose and Co-op. These newer terminals support the TouchID based verification. It would make sense for them to activate that feature from the start.

Some legacy terminals will not support higher value transactions, needing an upgrade first. That must be done in alignment between bank, merchant and payment service provider, but it can be expected that many retailers will implement this in the second half of this year.

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