Apple Pay Will Change How You Buy Everything — Someday

“Apple Pay is going to be huge,” Apple CEO Tim Cook said last week. “It’s going to change the way we pay for things.”

Well, maybe. They key phrase is going to. Someday.

The good news
Technologically speaking, Apple has knocked this one out of the park. Apple Pay is the best thing Apple’s done in years.

Imagine that a cashier has rung up your purchase. Here’s the moment when you’d usually pull out your credit card. Now, with Apple Pay, you hold your iPhone near the card reader with your thumb resting on the home button.

The phone wakes, beeps, vibrates, and shows a picture of your credit card (minus the number). That means you’re done. You’ve paid. You can leave.

The whole thing doesn’t even take two seconds. I bought stuff in four stores without a glitch. I never had to sign anything, either (although I’m told that some shopkeepers sometimes insist on a signature anyway).

Onstage at the Apple announcement, Cook also said that Apple Pay is “an entirely new way to pay for things,” and that part’s not true. People have been paying with their phones in Europe for years.

And even in this country, Google has offered something similar for two years: Google Wallet. But it’s not as good an experience. You have to wake the phone, unlock it, hold it near the reader, and then tap in a security code. It’s slower than just swiping a credit card.

Almost nobody uses Google Wallet. (This week, at the 7-Eleven near my house, the clerk told me that the last person to use Google Wallet in his shop was me, when I reviewed it two years ago.)

Security
But Apple Pay is not only faster than swiping a credit card — it’s also much, much more secure.

You know all those breaches recently? Target, Home Depot, Staples? All those card numbers were stolen from the stores. If you could prevent your credit card number from sitting in the store’s database, then bad guys couldn’t steal it.

That’s how Apple Pay works. The store never sees, receives, or stores your credit card number. Instead, the phone transmits a temporary, one-time, encoded number that means nothing to the merchant. It incorporates verification codes that only the card issuer (your bank) can translate and verify. (Google Wallet works this way, too.)

In other words, the merchant never even encounters your credit card number. Or your name, for that matter.

Even the devious store worker who might be tempted to copy down your name and card number is thwarted; no card is ever handed over.

Apple, for its part, does not know what you bought. It gets only the “approximate time and location” of the transaction — anonymous information that’s not associated with you personally. (Google, on the other hand, has a complete record of what you buy.)

And what if your phone is stolen? Too bad — for the thief. He can’t buy anything without your fingerprint. And, of course, you can always go to iCloud and put your phone into Lost mode, making it further useless without your password and fingerprint.

(More details about the security system are in Apple’s white paper here.)

The setup
You can start using Apple Pay almost immediately with an iPhone 6 or 6 Plus. You open the Passbook app, which asks if you want to start using Apple Pay. If you say yes, it offers to use the credit card you’ve already got on file with Apple. In that case, you can go out and shop.

If you want to use a different card or add another card, you can either type in the name, card number, and expiration date — or let the phone’s camera read this information from your physical card. It’s a very neat trick, even if it doesn’t always get the recognition right the first time.

You have to type in the three- or four-digit security code manually.

Next, your bank has to verify that all systems are go for Apple Pay. With my Delta AmEx, that was a wireless transaction that took a few seconds to complete (and required me to type in a verification code). My Capital One Visa required me to install the CapOne app (or place an 800-number call)to do the job.

Once you’ve registered the card, you can approach a cashier’s terminal to pay for something in one of two ways:

• With your thumb on the home button. If you approach the card reader with your thumb lightly on the home button and the phone asleep, Apple Pay automatically pays with your default (primary) credit card.

• With your thumb off the button. If you approach the reader without touching the home button, the phone wakes and lets you choose whichever card you want. This is how you pay if you don’t want to use the default card.

Remember, this is just a regular credit card purchase. So you still get your reward points, frequent flyer miles, stuff like that. You can tap a card to see a list of recent transactions on it.

I tried returning something I’d bought, too. It works the same way: At the moment when you’d swipe your card, you bring the phone near the reader until it beeps. Slick.

Online apps
Once you’ve got Apple Pay going, you can also buy stuff from online merchants’ apps with your fingerprint — just not from websites like Amazon.com and BestBuy.com.

This aspect sounds great, because who isn’t sick of entering name, address, and credit card information over and over again online?

At the moment, though, it’s only a fledgling idea. Not even 20 apps accept Apple Pay at the moment. I tried buying stuff with the apps from Houzz.com and Fancy.com, which both worked fast and great: I just tapped the Pay with Apple Pay button at the checkout moment.

But, man, we need more than 20 apps to make this worth it. (By the way, the new iPad Air 2 and iPad mini 3 — which have the fingerprint reader — can also use Apple Pay to buy stuff from online-catalog apps. These tablets can’t pay for stuff in physical stores, because they don’t have NFC chips.)

The challenges
So, yeah, Apple Pay is fast and secure and brilliantly designed. But it has a tough slog ahead.

The phone challenge. Apple Pay requires an iPhone 6 or 6 Plus, because only those phones contain the necessary NFC (near-field communications) chip, as well as a special encryption chip that stores and runs the Apple Pay codes. Older phones lack these two special bits of circuitry.

Future: bright. If all future iPhones aren’t Apple Pay-ready, I’ll eat my hat.

The card challenge. Apple Pay works with Visa, MasterCard, and American Express — but so far, it doesn’t work with corporate cards (those issued by your employer) or prepaid cards. It doesn’t work with proprietary credit cards issued by chains like Macy’s or Bloomingdale’s, either.

Future: murky. Apple says it’s exploring possibilities.

The bank challenge. Right now, Apple Pay works only with cards issued by Bank of America, Chase, Citibank, CapOne, JPMorgan, Merrill Lynch, U.S. Trust, and Wells Fargo.

Future: bright. Apple says that 500 more banks’ cards will become compatible in the upcoming months.

The merchant challenge. A store can’t accept Apple Pay unless it has a “contactless” (wireless) card reader. Right now, that’s about 220,000 shops, including McDonald’s, Whole Foods, Subway, Office Depot, BJs, Toys ‘R’ Us, Panera Bread, Macy’s, Bloomingdale’s, Foot Locker, Nike, Sports Authority, RadioShack, Duane Reade, Walgreens, and others. More are coming online soon.

But that’s 220,000 — out of the 8 million businesses that can take credit cards in America. Don’t leave your credit cards at home yet.

Future: On one hand, the future is bright. Next year, America is finally adopting a new, more secure kind of credit card, called EMV (Europay-MasterCard-Visa). It’s the kind they already use in Europe, the kind with a chip, the kind that can require you to type a security code to confirm purchase, the kind that would have prevented the Target or Home Depot card thefts.

To prepare for the EMV revolution, thousands of U.S. merchants are already planning to upgrade their card-reading systems — which will become Apple Pay-compatible in the process.

On the other hand, Apple might have a real problem on its hands, thanks to CurrentC. That’s a rival standard being cooked up by a consortium of chains like Walmart, Lowe’s, Old Navy, Target, Southwest Airlines, 7-Eleven, Best Buy, CVS, Dunkin’ Donuts, Sam’s Club, Sears, Sunoco, Shell, ShopRite, Wendy’s, Banana Republic, Bed Bath & Beyond, Gap, and so on.

This group has its own phone-payment system planned (now in testing) — and you won’t be able to use Apple Pay at any of those stores anytime soon. CurrentC is less secure than Apple Pay and works very differently (it deducts money from your bank account, bypassing the whole credit card business entirely), but it works with any smartphone.

The Apple Pay future
At the moment, then, Apple Pay works in only a subset of a subset of a subset of a subset of transactions.

The good news for the future is that Apple seems to have engineered a win-win-win-win system. You win, because paying for stuff is faster and more secure than using credit cards. The credit cards and banks win, because they make more money from transaction fees. Merchants win, because anytime you take the friction out of buying, people buy more.

And, of course, Apple wins, because it gets a few cents from every transaction.

The technology of Apple Pay is magical enough. And designing a system in a very complex financial ecosystem that leaves almost all parties happy — that’s impressive engineering indeed.

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