Quick Thoughts – Early iBeacon Trials are Encouraging for Apple
Digital wallet-provider LevelUp reports that mobile payments volume increased 22% over 30 days at the 50 merchants where it installed iBeacon. As discussed in our May 30th note, “Apple vs. Banks in Mobile Payments: Update”, the focus of iBeacon is not payments narrowly but as a tool for brick-and-mortar merchants to target and personalize communications to customers in-store just as e-commerce merchants do online; integrating payments into this new digital marketing channel reduces the barrier between sales and cart abandonment.
LevelUp provided free iBeacons installation to merchants in its pilot program, but will charge $50 for each iBeacon tower as it rolls the technology out over its 14,000 merchant base (with a planned installation at 1,000 merchants by September); we will track the results of this roll-out to update our thesis on Apple’s entry into payments.
We believe Apple’s intention is to extend its current Passbook app (which is integrated into the operating system and enables payment by gift cards) to support an iBeacon-enabled shopping experience similar to that piloted by LevelUp and including payment by Visa/MasterCard cards. Given its 800mm cards-on-file, Apple’s entry will dwarf LevelUp (which has only 1.5mm customers).
Unlike LevelUp payments (which use QR codes to authenticate customers and Bluetooth wireless technology to communicate card credentials to merchant POS systems), Apple will likely seek EMV compliance (and so use NFC wireless technology to communicate card credentials) in order to obtain card-present rates and pass fraud risk to issuers; in Level-Up’s non-compliant implementation, transactions are treated as e-commerce, not card-present, and so attract higher card-not-present rates and LevelUp bears the fraud risk.
To improve security, and specifically reduce the risks of a data breach at merchant systems, we expect Apple to implement tokenization – that is to replace the primary account number (PAN) it has on file with dynamic aliases or “tokens” that are valid for only one transaction and therefore worthless if stolen; a likely key negotiation between Apple, Visa/MasterCard, and the large issuing banks is over who will provide the tokens and maintain the “token directory” mapping tokens to PANs. Ownership of the token directory is strategically important because it can allow control over how payments are routed.