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Beyond the Wallet: Apple Pay 'Cements the Future' of Mobile Payments

by Julianne Pepitone /  / Updated 

How Does Apple Pay Work?

Sep.11.201400:42

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We might be one step closer to a wallet-less future.

Apple Pay, the company's mobile payments system that lets you pay for everything from sneakers to groceries with the tap of a finger, finally launched on Monday -- offering long-awaited clarity for retailers and banks that saw a hazy future for mobile payments without a mandate from Apple.

Mention Apple Pay to an Android fan and they'll be quick to point out: very little is new here. Other services including Google Wallet and Softcard (formerly called Isis) have offered Apple Pay-style mobile payments for years.

But those services haven't taken off with customers, and the smartphone-as-a-wallet has remained a niche industry. Now that Apple has finally jumped into the market, mobile payments are as hot as if they were a new piece of technology.

"For years, so many of us knew mobile payments would be the future -- but we weren’t sure what exactly that would look like," Blaine Hurst, the executive vice president of technology at Apple Pay launch partner Panera Bread, told NBC News. "For us [Apple Pay] has really cemented and clarified the near-term future of mobile payments."

Here's what that future looks like, according to Apple: Like Google Wallet, Apple Pay works using a near-field communication, or NFC, chip. That technology is embedded in the new iPhone 6 and iPhone 6 Plus (older phones can use a version of Apple Pay for online purchases).

How Does Apple Pay Work?

Sep.11.201400:42

Wave the phone near a store's special NFC reader, confirm by scanning your fingerprint with the TouchID sensor and the payment is complete. For an additional layer of security, a one-time payment code is created for each purchase -- so even if a hacker grabs the information, it can't be used a second time.

Apple declined to comment on this article.

Apple Pay rolled out for new iPhone users Monday with an iOS 8.1 software update, and could be used at 220,000 retail stores including Nike, Walgreens and Whole Foods at launch. Right now the system works with Visa, MasterCard and American Express cards issued by big banks including Chase and Bank of America.

On Monday a representative from Panera walked NBC News through an Apple Pay transaction at a New York City location, a few minutes after the iOS 8.1 update came through. It worked almost exactly like a "normal" transaction: Tell the cashier you'd like a Mediterranean veggie sandwich (no onions), decline a 99-cent pastry ... and when it's time to pay, brandish a phone instead of a card.

"What's ... ? Oh, wow! OK, you're paid up!" said the Panera cashier, for whom it was the first Apple Pay transaction.

Apple Pay day

Oct.20.201401:36

Panera rolled out NFC terminals in mid-September and has been accepting mobile payments since then, said Hurst. Cashiers needed very little training, he said, as "the process is practically the same as it was before."

The soup-and-sandwich chain became an Apple Pay launch partner after a surprising meeting at the company's headquarters on June 2. Hurst expected to discuss Panera's in-store iPad ordering kiosks and iOS app but instead found himself signing a non-disclosure agreement about a secret new partnership.

"So we went out to build a relationship with them, really, and they said, 'Hey, we’re working on this new exciting thing,'" Hurst said. "That turned out to be Apple Pay."

Panera put a five-person team on the Apple Pay rollout, which Hurst considers part of his company's years-long "Panera 2.0" initiative to improve customer service with technology.

"I think Apple has pulled together the entire system, if you will, in a way that other folks haven't done," Hurst said. "It's a great additional resource for our customers."

Apple Pay may be a shiny new addition for retailers like Panera. But for banks and card issuers, it's not a value-add -- it's the core business.

"I've been at MasterCard seven-and-a-half years, and honestly, I was working on mobile payments on day one," James Anderson, senior vice president of emerging payments at MasterCard, told NBC News. "We’ve been trying to figure it out for a number of years -- but when Apple jumps in, it really changes everything."

Apple and MasterCard started discussing Apple Pay back in early 2013, Anderson said.

"We'd already been talking to Apple for years so they knew what we thought was important, and they either consciously or subconsciously included it in the design," Anderson said. ""We wanted to build on investments we’d already made, so NFC was a critical issue for us."

MasterCard assigned more than 100 people to build a new system called MDES -- MasterCard Digital Enablement Service -- which the company revealed on September 10, one day after Apple announced Apple Pay. It's a platform for all types of NFC mobile payments, not just Apple Pay, Anderson stressed.

"This is a huge validation of the choice we made to focus on NFC years ago. It's a great technology. But what's great about Apple is, they can take a technology and turn it into something consumers really want to use," Anderson said.

That consumer-friendly format coupled with Apple's cool factor is a combination prior mobile wallets have't been able to pull off, said Rob Shavell, the co-founder of Abine, which makes online privacy products including the DoNotTrackMe browser plugin.

"My personal opinion is that they’ve put together enough of the puzzle pieces -- security, software, hardware -- that it should drive real adoption," Shavell said. "I don’t think they’ve been combined before in mobile payments, although that’s a pretty low bar."

Apple was smart to push Apple Pay's security features, including the one-time payment token and the ability to hide card number information from retailers, when pitching mobile payments to consumers who may be unfamiliar with the technology, Shavell said. But he isn't convinced shoppers will be cutting up their credit cards anytime soon.

"The big discussion in payments is, how popular can this really be? I think the honest answer is nobody knows," Shavell said. "People in my business are skeptical that any more than 15-20% of merchants will accept this stuff. From my perspective, we are still a long way off –- no matter how successful Apple is -– from being able to leave our credit cards at home."

James Anderson of MasterCard is more sanguine. He thinks consumers will adopt mobile payments "quickly now," he said.

"Of course, everybody in the industry always thinks adoption of new services will happen immediately, and the skeptics say it won't be 100 million years," he said. "It typically ends up somewhere in between."

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