Apple Pay was introduced in the US in October 2014, and was followed in the UK over a gradual integration period by issuing banks through July 2015. Many view Apple Pay as a safer alternative to physically using one’s payment card in the checkout process. Due to its contactless nature, it is has become more widely accepted and valued for its ease of use.
In this post, we’ll take a look at how Apple Pay works, and examine the role of financial institutions in the process.
What is Apple Pay?
The process to use Apple Pay begins with the cardholder. They must initiate a request to add a debit or credit card to their mobile device.
The issuing bank then has the responsibility of determining whether the card and cardholder are eligible. In this stage, the cardholder might be prompted to accept certain terms and conditions specified by the card issuer, as well as provide additional verification to validate their identity.
Apple Pay works by replacing the traditional primary account number (PAN) with a device account number, which is also known as a token. The token is loaded into the built-in wallet application contained in the applicable Apple device.
One of the reasons Apple Pay is considered a more secure way of conducting a transaction is because the actual card number is never stored on the device. Instead, the device account number is kept in a certified chip within the device, which is specifically designed to store payment information safely. This secure element is isolated from all Apple operating systems, and is never stored on any Apple servers of uploaded to iCloud.
How are Transactions Made?
When the cardholder conducts an in-store transaction, Apple Pay draws from near-field communication (NFC) technology that exists between the device and the payment terminal. NFC is an industry-standard, contactless technology that was created to work only across short distances.
Whenever the connected device is switched on and detects an NFC field, it will offer the cardholder their default card. Then, in order to send the payment information, the cardholder must authenticate the transaction by using one of three options: face ID, touch ID, or a passcode.
Once the transaction is authenticated, the secure element transfers both the device account number and a dynamic, transaction-specific security code to the merchant’s point of sale terminal. It will also provide any additional information that is needed to complete the transaction. Nowhere in this process is the actual payment card number being sent.
Before the payment is approved, all parties including the bank, card issuer, or payment network have the opportunity to verify all payment information provided. They can do this by checking the dynamic security code to ensure it’s unique and paired with the cardholder’s device.
Apple Pay can also be used for card-not-present transactions. To do this, the cardholder will be directed to Safari and authenticated by using face or touch ID. For users on Mac models, they can even use bluetooth technology when their mobile device is nearby.
Finally, the cardholder also has the option to set up Apple Pay on more than one mobile device, which will require a separate setup for each card on every device.
Do Any Limitations Exist?
On a global level, there is no standard limit to Apple Pay transactions. Any limits imposed would have to be done according to merchant, issuer, network, or country/region. For example, Mastercard recently made the move to increase their limit above the previous £45 limit for participating businesses across the UK.
Similarly, HM Treasury and the Financial Conduct Authority have sanctioned the increase of contactless payments in the UK from £100 starting in October 2021. However, this only applies within the UK; it does not apply to the EU, for example.
As a general rule, the transaction amount limit will align with the contactless card payment limit for each country. In certain circumstances, if the transaction exceeds the limit, additional verification will be requested, such as the entering of a PIN.
It’s no surprise that cash purchases are slowly declining, especially as a result of Covid-19. Apple Pay offers shoppers the convenience of not having their credit card physically present, removing the threat of a stolen number. Once a cardholder has their credit card stored on their phone, they only have to hold the phone near an NFC reader and enjoy the ease of their payment being processed within seconds.
One of the bigger snags to Apple Pay is slower adoption rates among shoppers and retailers to use the service. Cardholders will need an iPhone, and retailers will need to support NFC terminals.
Despite this, Apple Pay now accounts for 5% of all global credit card purchases. In an age of contactless payments, Apple Pay could be the next big player in providing cardholders security, convenience, and peace of mind.