Apple Pay s successful positioning in the mobile wallet market and CSP strategic responses

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1 Research Viewpoint Apple Pay s successful positioning in the mobile wallet market and CSP strategic responses November 2014 Enrique Velasco-Castillo, John Abraham and Martin Scott

2 2 About this report: Apple Pay threatens CSPs mobile wallet aspirations Apple Pay was launched on 20 October 2014 and was initially available at retail locations in the USA. It is poised to rapidly dominate against competing mobile payments platforms, including initiatives by communications service providers (CSPs). This report explores the increasingly competitive mobile payments space, and the challenges it presents for CSPs. It also identifies the key factors that have enabled Apple to position Apple Pay for success against competing mobile payments platforms, including: device leadership through handsets and smart wearable devices hardware and software security advantages: what they are and how they work key partnerships across the entire payments value chain physical retail, online commerce and digital content distribution experience an auspicious set of circumstances and timing, from changing patterns of user behaviour to the roll-out of Europay, MasterCard and Visa (EMV) chip-and-pin - compliant payments in the USA. Key questions answered in this report: What is Apple Pay, and what makes it different from competing mobile payments platforms? What is Apple s business model and strategy with Apple Pay? Will Apple launch Apple Pay in markets beyond the USA? What are the key elements by which Apple has positioned itself for success in the mobile payments space for both in-store and online transactions? How will Apple Pay impact CSPs mobile wallet and payments initiatives? How does Apple Pay s architecture allow Apple to completely bypass CSPs attempts to control users payment and transaction data? Who needs to read this report: Strategy executives, and directors and managers within mobile operators who are developing and implementing mobile payments initiatives, or designing the response to Apple Pay. Vendors and software developers involved in the development and integration of platforms and software who wish to understand how Apple Pay changes the competitive landscape of mobile payments. Industry experts and observers who wish to better understand Apple s strategy and how the company is positioning Apple Pay as part of its ecosystem.

3 21 Apple Pay at a glance: Token provisioning process Figure 12: Apple Pay token provisioning process (simplified) [Source: Analysys Mason and Apple, 2014] User scans credit card PAN details are sent to Apple Pay server Apple Pay server communicates with the user s (issuing) bank Issuing bank requests token from card network (for example, Visa) Card network stores PAN Generates a token and a token key associated with it Issuing bank receives token and token key, and generates CVV key Sends token, token key and CVV key to Apple Pay server Apple Pay server provisions token, token key and CVV key into iphone s Secure Element Apple s token provisioning process follows EMVCo s contactless payment specifications for chip-and-pin-compliant payments endorsed by the largest card networks, including Visa, MasterCard and American Express. When a user adds a payment card to the Passbook app the card s primary account number (PAN) details are transformed through a number of steps that involve the customer s bank (issuer) and the card network (such as Visa or MasterCard). The resulting token (and not the original card details) is then stored in the iphone s Secure Element.

4 24 About the authors Enrique Velasco-Castillo (Analyst) is a key contributor to Analysys Mason s Digital Economy research, focusing on the opportunities for communications service providers and vendors in emerging verticals such as mobile health, payments, commerce, and home automation and security. Previously, Enrique covered mobile financial services and M&A and funding activity for more than 2 years at research firm IHS, where he wrote several reports on the opportunities for mobile operators in mobile payments and venture capital investments in mobile. Enrique also has research experience in cleantech and healthcare from other previous roles. Prior to becoming an industry analyst, Enrique spent 3 years as a university lecturer teaching courses on globalisation and international relations. He holds an MSc with Distinction in Cognitive and Decision Sciences from University College London, and an MA in Global Studies from the University of Freiburg. John Abraham (Senior Analyst) is part of the BSS practice in Analysys Mason s Telecoms Software Research team. He leads our Revenue Management programme and contributes to mobile money research for the Digital Economy Software Strategies programme. John has been part of the telecoms industry since 2006, and joined Analysys Mason in early He has worked on a range of telco projects in Africa, Europe, India and the Middle East. Before joining Analysys Mason, he worked for Subex, a provider of BSS offerings. John holds a bachelor s degree in computer science from Anna University (India) and an MBA from Bradford University School of Management (UK). Martin Scott (Practice Head) is the head of Analysys Mason s Consumer Services research practice, which includes the Fixed Broadband and Multi-Play, Next-Generation Services, Mobile Services, Mobile Devices and Digital Economy research programmes. His primary areas of specialisation include the bundling and pricing of multiplay services, including quadruple-play bundling, customer satisfaction and consumer-facing marketing strategy. He also specialises in statistics, surveys and the analysis of primary research; he co-ordinates Analysys Mason's Connected Consumer and Consumer smartphone usage series of research.

5 25 About Analysys Mason Knowing what s going on is one thing. Understanding how to take advantage of events is quite another. Our ability to understand the complex workings of telecoms, media and technology (TMT) industries and draw practical conclusions, based on the specialist knowledge of our people, is what sets Analysys Mason apart. We deliver our key services via two channels: consulting and research. Consulting Our focus is exclusively on TMT. We support multi-billion dollar investments, advise clients on regulatory matters, provide spectrum valuation and auction support, and advise on operational performance, business planning and strategy. We have developed rigorous methodologies that deliver tangible results for clients around the world. For more information, please visit Research We analyse, track and forecast the different services accessed by consumers and enterprises, as well as the software, infrastructure and technology delivering those services. Research clients benefit from regular and timely intelligence in addition to direct access to our team of expert analysts. Our dedicated Custom Research team undertakes specialised and bespoke projects for clients. For more information, please visit

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