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Apple May Have 'Cracked the Code' to Wider Payment Security

Apple's Touch ID fingerprint sensor is the final piece of the Apple Pay puzzle, allowing users to confirm their identities with a finger tap.

Apple has big-name support for Apple Pay, its just-announced payment technology for having your iPhone replace your credit card.

Companies that are backing Apple Pay include Target Corp. and U.S. Bancorp., both based in Minneapolis. Other major retailers and banks are on board.

Gene Munster, the Apple-focused analyst at Minneapolis-based Piper Jaffray, is calling Apple Pay a game changer for the payment industry.

None of this will matter, however, if millions of iPhone users aren't persuaded to pay for stuff with a tap of the handset instead of the swipe of a card -- and it isn't clear that they ever will be.

Stores across the Twin Cities have terminals where customers can tap phones or tablets to pay for things, but these aren't used much. Tech titans like Google have recently tried making the case for such technology, to little avail.

Now it's Apple's turn.

The Cupertino, Calif., tech giant on Tuesday announced Apple Pay along with hardware products, including an Apple Watch smartwatch and two new iPhone models.

Apple Pay will allow iPhone users to store their credit-card information in the Passbook credential-storage app. The new iPhone versions build in a technology called near-field communication (NFC) that allows for interaction with those in-store payment terminals.

Apple's Touch ID fingerprint sensor, built into newer iPhones, is the final piece of the Apple Pay puzzle, allowing users to confirm their identities with a finger tap when finalizing a purchase at an Apple Pay-compatible brick-and-mortar merchant.

Apple Pay is due to become operational in October and eventually will allow payments via the Apple Watch, as well.

Apple Pay also will work with online transactions since the technology will be built into a range of third-party e-commerce apps, including Target's iPhone app. Authentication via the Touch ID sensor would occur during such Web purchases, as well.

This technology "aligns perfectly with what our mobile team is working towards," said Target spokesman Eddie Baeb. It is all about "streamlining and simplifying commerce."

Target, though, has no immediate plans to install NFC payment terminals in its stores, Baeb said. It initially will make Apple Pay available only for online transactions.

Target's rival Walmart, the world's largest retailer, said it has no plans to participate in Apple Pay in any capacity. Amazon.com, meanwhile, has been absent from the discussion.

Massachusetts-based Staples is one example of a retailer taking both Apple Pay tacks -- enabling in-store payments as well as building the technology into its iPhone app.

Beefed-up security is one of Apple Pay's huge advantages, said Dominic Venturo, chief innovation officer for payments at U.S. Bancorp.

Data transmitted between a consumer's iPhone and a merchant's NFC terminal is not the same information stored on his or her credit card, he said, and would be of no use were it to be somehow intercepted by evildoers.

This transfer of payment information is unique to that transaction -- via exchange of a one-time authentication "token" -- and thereafter becomes worthless.

What's more, Venturo noted, consumers would not have to cancel their credit cards if they lost their phones -- only transmit remote-deactivation commands to render their devices useless to anyone who comes upon them.

"We feel good about (Apple Pay's) security, and how it will work -- we absolutely do," Venturo said.

Apple addressed security concerns Tuesday, saying Apple Pay is even safer than using a plastic card.

"A cashier doesn't see your name, credit card number or security code," when you pay with Apple Pay, said Eddy Cue, Apple's senior vice president of Internet software and services. "Apple doesn't know what you bought, where you bought it or how much you paid. That transaction is between you, your merchant and your bank.

Piper Jaffray's Munster argued that "Apple Pay was the biggest announcement yesterday," eclipsing in importance the much-ballyhooed Apple Watch along with the new iPhone models.

"Ultimately, your phone is going to become your wallet," said Munster, and Apple has cracked the code to make it finally happen. The company "has a way of making people comfortable with doing new things."

This is particularly the case with in-store NFC-terminal payments, which haven't taken hold in large part because of a "consumer phobia" about such unfamiliar technologies, he said. "The friction is reduced dramatically" with Apple Pay.

Such brick-and-mortar transactions look to be more important than Apple Pay in-app purchases in the immediate future, Munster noted.

But not all observers are convinced payment-by-phone tech will take off anytime soon.

About six in 10 Americans said they'd never (44 percent) or hardly ever (18 percent) use their mobile handset to make a purchase, according to a recent CreditCards.com survey. About 4 percent said they would do so whenever possible, and 9 percent said they would do so most of the time.

Consumers will have to weigh the convenience of not pulling out a card with the possible danger of storing important financial information on handsets, particularly as retailers like Target and Home Depot report data breaches, and hackers crack celebrities' iCloud accounts for nude photos.

"Apple Pay makes for an exciting story," said Cathy Hotka, principal at the Cathy Hotka & Associates retail-industry marketing firm in Washington, D.C. "But expect adoption to be slow.

"A lot of consumers will have to be convinced that their data will remain protected," she said. "With a choice between shaving off a few seconds and having a safer transaction, consumers will choose safety."

©2014 Pioneer Press (St. Paul, Minn.)