Episode 2: What the Heck is Apple Pay and Why Should Banks Care?

Welcome everybody. This is Eric Cook with WSI, and I would like to thank you for joining me to the second of what I hope is going to be many, many more Banker Education Series webinar shows. This is for May of 2015, and today we're going to talk about Apple Pay. What the heck is it? And why should banks care? Before we go ahead and get started, just want to provide a little bit of a background here so you can see the Banker Education Series. You have— hold on just a second, we got the dog barking. Okay, I'm back. Did I mention that these webinars are also live? Sorry about that. Yeah, so the Banker Education Series, you can see we've got the Apple Pay here, but if you did not get a chance to join us last month, we do have the archived recording for the DotBank webinar, and you can access the recording here. And to keep up with the updates for future announcements, you can go ahead and click on the sign up for email reminders right there, and that'll get you on the email list. So some of you may have actually heard about this through Twitter or possibly through LinkedIn, so you can get on the list and join us that way. So with that out of the way, I want to also encourage you, if you have questions or comments that you'd like to share during today's webinar, please feel free to do that. You can use the control panel and the question and answer section there. Just go ahead and type those in, and when we have a break in the action or something that needs to be asked for clarification, I'll go ahead and ask those. We will get Kathleen to go ahead and comment. With that out of the way, it is my great pleasure to welcome a fellow recovering banker, Kathleen Craig, founder, president, CEO, and all-around great gal over at HT Mobile Apps. So I'm making the presentation controls go over to her so she can share her screen. So Kathleen, make sure that you've got that. There we go. So Kathleen, welcome to my show. Appreciate you joining us.

Thanks, Eric. Hi everybody out there.

And my dog says hello to you as well.

That's perfect. I know how that goes.

Yeah. So, as Kathleen and I were talking about kind of getting today's session started, and this is one of the things that I've been keeping an eye on because I was a banker for 15 years and Kathleen was as well, payments have evolved. And while we're certainly focused today on Apple Pay, I think Apple's involvement in the whole mobile payment arena, I think, validates that the checkbook is no longer going to be the de facto standard of how people get paid, and we're moving this into much more of a digital arena. We've seen services like PayPal and others put together ways to do person-to-person payments, and then some other apps on a case-by-case basis come along. But now that Apple is thrown its hat officially into the ring, I've got a lot of bankers that have asked me, you know, should I care? Is this something that I should be threatened by? Is Apple going to open up its own bank and they're going to be competing for my deposits? And community banks sometimes don't have the resources that larger banks do, and how do we participate in that? And a lot of data centers are starting to make it possible for you to participate in Apple Pay. So I heard a session with Kathleen at the Bankers Conference here in Michigan talking about kind of mobile and payments and thought it would be really great if she could come on and share some of her insight with us. So with that as a way of background, Kathleen, I'll go ahead and turn the microphone over to you. It is all yours.

Alright, great. Thank you so much, Eric, and hi everybody. So as Eric mentioned, this all came about because I was preparing for a Michigan Bankers Association talk that I gave a couple months ago on what's next for mobile And as I was preparing the presentation, I realized I have an iPhone 6, and I had set up my debit card for this whole Apple Pay thing I had heard so much about, but I still hadn't used it. I had had the phone for a month, set up my debit card, but then had done nothing with it. So in order to get up in front of the bankers and talk about it, I realized I really needed to dive in and learn a bit more. And so today we're going to talk about some of those insights that I found out and how I what I've learned. I definitely don't know everything, but I will attempt to tell you what I do know and answer any questions you have. And we're hoping today you at least walk away getting what Apple Pay is. I've seen a lot of buzz. There's articles coming at me every day in some form about Apple Pay. But again, I think it's important sometimes to just get the basics of what something is. So that's what we'll talk about. With that, here's our overview. We're going to talk about mobile adoption as it relates to payments to set the stage. We'll talk about what is Apple Pay specifically, why should you care about Apple Pay, a few best practices for engaging your customers in Apple Pay. So mobile adoption. 88.4%, just to level set us, I think a lot of us know a bunch of these stats, but always good to kind of To see where we're at. So 84% of the US adult population currently has a mobile phone. 59% of the US population have a smartphone. Only 10% of that 59% of smartphone users have made an in-store mobile payment. So only 10% of 59%. That means it has not yet reached critical mass. But here's what's interesting. 10% of the smartphone owners now have an iPhone 6. That's how quickly this new technology and products by Apple get picked up. And 30% of iPhone 6 owners have made an in-store mobile purchase. So what does this mean? The needle is moving, and it's moving quickly. Is it novelty? Is it just the new thing? Well, we're not sure yet, but with the power of Apple behind it, can we afford to be left behind? Apple has a habit of creating things we never knew we couldn't live without, right? The iPod, the iPhone, right? These are things we didn't even know we needed until Apple told us. So with them getting in the payment space, it makes us all kind of sit up and pay attention. So specifically, let's talk about Apple Pay. What is it? Apple Pay allows you to load your approved debit or credit card to your iPhone Passbook app and then utilize your phone at the point of sale and make easy payments via certain mobile apps as well. So here is where we as banks come in. You have to have your credit card or debit card approved as an Apple Pay card in order for your end users, your customers, to be able to load it on their phone. How does it all work? It is so easy. First, you load your approved debit or credit card into the Passbook app. I had this Passbook app sitting on my iPhone for the past years that I've had an iPhone and never have done anything with it until Apple Pay. But you select the Passbook app, a screen comes up, and you pick credit and debit cards, and you simply load in your information. Now you're ready to go. You can utilize your loaded debit or credit card within apps or at the point of sale. You simply Basically, if you look at this image right here, you don't even have to unlock your phone. You simply place your thumb over the home button, hold it up to the point of sale where you would normally swipe your card, it appears, you tap, and you're ready to go and out the door. So easy, so quick. You need an iPhone 6 or later, but now with the Apple Watch, Folks with iPhone 5s can also use Apple Pay, so even more people. And then within an app, there's this image down in the bottom right, it's easy, super easy again. Within Apple Pay compatible apps, you simply place your thumb over the home button again and done, paid, ready to go. So why isn't everyone using Apple Pay if it's so easy? Well, 75% of folks still say it is easier to just use a debit card or cash. That was me, right? Debit card. It was on my phone, but I just, again, I didn't get it yet. So it seemed easier to just do what I knew and what I had already always done. 62% have security concerns. As I was preparing for my mobile talk, it was just so interesting to learn how many people still have concerns about mobile banking, mobile technology, mobile anything. So any of you that are bank marketers out there, we have to remember to talk about security because it's still very top of mind for people. We also think there's still uncertainty, right? It does not work every time. The very first time I used Apple Pay, I was at Panera and I thought, okay, I'm going to give this a whirl. Here we go. My debit card's on my phone. I know Panera takes it because I looked on the Apple website. So I was ready to go. It was morning. There was a huge line and I went to use it and it would not work. It would not work. I felt like one of those poor people that have the e-ticket when you're boarding an airline and they're holding up the whole boarding process because they can't get their phone image to come up? That's what I felt like. It was so uncomfortable. And then frontline staff many times are not educated on Apple Pay, whether or not they take it, how it all works, or what to do if it doesn't work, right? In my situation with Panera, it didn't work and there was nothing the frontline staff member could do. They just kind of shrugged at me and said, okay, give me a different form of payment. Luckily I had my wallet or I wouldn't have been able to do it. And many merchants are not yet accepting it. Who— what merchants do take it? More and more merchants every day. There is a full list on Apple's website of who takes it. Most of the big companies are taking it, but a lot of the smaller merchants aren't yet, or if they are, it's not clear. Apple provides a lot of great resources and great tools for merchants. So here's another way as banks that we can come alongside of our small businesses, pointing them to these great tools, talking to them about what it means. It doesn't cost anything for merchants to accept it. So why do we need to care about all this? And the answer is simple. It's interchange revenue, right? You can't— while you can load multiple cards, One card wins, and one card is going to be my primary every time I'm out. So if we wait as smaller community banks to get on the bandwagon and I've already uploaded a card, what are the odds that I'm going to switch my card to yours once you're ready? And millennials are adopting these alternative forms, and the next generation of mobile natives will drive it even harder. Anecdotally, my 12-year-old daughter said, The first time she saw me use it at Meijer, she said, oh wow, that is so cool. All I'll ever need is my phone. Right? For her, it just seemed so— of course, yeah, absolutely. I'll never have to carry a purse or a wallet, just my smartphone, which I'm already attached to anyway. So best practices. How do we engage with Apple Pay? Train your coworkers. Show them how to use it. Have an iPhone 6, either yourself or someone on your team or bank iPhone 6. Talk with them about what it is. Again, I think so many articles out there are on statistics and high-level stuff, but tactically people just need to know what it is and how to use it, just like we talked about today. Reward them for trying it out. I think it's always a great thing when we have a new product or service that we're rolling out in our institutions to reward our coworkers. Have fun drawings, give away iTunes gift cards, make a lot of fun out of any new product or service that we're doing. Communicate regularly and simply to your customers that you have Apple Pay. Remember that the first time you do a marketing campaign, maybe someone doesn't have an iPhone 6, but if you do it again 2 weeks later or a month later, now they may have an iPhone 6 or an Apple Watch and be ready to go. Web banners, social media, lobby signs are all things that I've seen work very effectively. YouTube videos are cheap and easy to do and a perfect solution for this particular product. Again, being able to just YouTube you using it or someone using it at a point of sale and having that video on your website to again help people be comfortable with it, having a link on your website to the merchants who accept it so people can get over some of that discomfort as they're walking into merchants knowing that they take it is always great. And then address security. Do this with regular mobile banking also. Again, what I've learned is that mobile banking security concerns are still there, let alone a product like this. I heard someone say when I was discussing Apple Pay, as if losing my smartphone wouldn't be stressful enough, now I have all my card information on it, right? And those are real legitimate concerns. So we need to reassure people about that. And then communicate to your small business customers and help them understand Apple Pay, how to accept it, how to share it once they have it. I think this is a huge opportunity for us to be a partner with our small businesses and add value to what they are doing every day by coming alongside as an expert and helping them. Could you host a lunch and learn and invite them in and talk to them about how they can accept it and take them to the Apple website and show them the various tools that Apple Apple offers to help them. And lastly, security falls completely on the financial institution. So it's really important if you do decide to go down the path with Apple Pay and you do decide to sign up, a couple of things to be aware of. First, if you're thinking about doing it, there's long lines and wait times to get set up. So you want to talk to your merchants, your card merchants right away. And then the second thing is to not rush into it because security does fall completely on the financial institution. It is up to you to develop the process for how you verify a card being loaded onto Apple Pay is the real person. So a lot of the fraud— you may have heard about that there's been a lot of fraud with Apple Pay, and there has. Because of Apple's desire to make a frictionless process and to make it easy and simple, many banks rushed to get it out and didn't think through the verification process. So thieves now have a stolen debit card in their hand, they can quickly load it onto onto the phone with no verification and be off to Target purchasing things. So it's important that you have a solid verification process in place before folks can use it. You cannot explain and train enough. Again, with all the media out there, people at this point feel they should know, but most do not. And also talk with your credit and debit card providers and understand where they are at with Apple Pay. When they're going to roll it out, how much it is, how long it takes, so that you can be ready for when the time is right for your institution. We have some resources for you on our website. We have a gearing up for Apple Pay checklist. I gave a couple links of where the list of current merchants are if you want to give it a try at a local merchant in your area. Apple does list all banks and credit unions that take Apple Pay on their site, so you can see there currently is three. I believe banks and credit unions signed up, more every single day. So it is quickly becoming a must-have versus a nice-to-have. So with that, I'll turn it over and have a discussion. What questions do you have?

Excellent. As an Android user myself, I am somewhat envious of the Apple Pays out there because I'm not going to be able to experience that. I don't know if Apple Pay will ever go outside of Apple and make it available to the rest of the world, but, you know, I alluded at the beginning that there are other payment mechanisms that are coming along that are cross-platform. But certainly the fact that Apple is kind of leading the charge in this, I think, legitimizes the fact that we're to the point where this is something that needs to be given serious consideration. One of the comments that that I have heard a lot of, and I know you had talked about the security issues with regards to onboarding a card, and obviously there have been some hiccups there.

Mm-hmm.

But one of the things that I've heard about Apple Pay that has some positives behind it is the fact that the tokenization of the transaction itself is done as a one-time effort, and it's not something that can linger around in a database and be used to identify individuals or be reused again, like some of the big breaches that we've seen, like with Target and Home Depot and, and some of the others. Do you have any comment or thoughts on that with regards to the— it works once and then that's it— and how that's going to maybe benefit or change the way that other payments need to be processed, given the identity theft and security issues that are out there these days?

Yeah, absolutely. I think the tokenization is great, again, for the consumer. What Eric is saying, when I go to Panera and I hold my thumb down, I hold my phone up at the point of sale, what Panera captures is a one-time token from my phone that represents my debit card. I'm never actually sending my debit card information to Panera, which is really neat and a really interesting way to do it. And again, really nice because then my debit card information isn't sitting on Panera servers or P.F. Chang's servers. P.F. Chang's had a data breach that was pretty public. Target had a data breach that was pretty public. So that's great from a consumer standpoint, absolutely. With that said, knowing that Apple is holding all these debit cards, I'm sure people are looking to Apple and we are going to have to keep an eye on their security and make sure they are secure. And again, on a bank side, what we need to make sure is that the person person saying they're loading the debit card on their phone actually is our customer and the person that is associated with the account. That's the security sticky part on our side.

Maybe talk a little bit about that process because obviously you're an Apple Pay user and you added a card. What is an example of— did they ask you for the last 4 digits of your social? Did you have to provide a password that the bank sent you? How did that authentication process work so that Apple knew when you loaded your debit card that it really was Kathleen Craig doing it and not somebody that found your wallet and decided to start going shopping as you?

When I started, only the big banks had it, so I signed up through a larger bank and they really verified very little. They verified my debit card number, My, I think my last, maybe my last 4 of the social was the way they did it and that was it. It was very simple, very quick. But that again, when I signed up was in the heyday when they were trying to make it frictionless before all the fraud started happening and people realized they needed to add a bit more authentication. So I've heard things like the full phone number that they have on file with you is a good way, last 4 digits of again Soc, but there has to be some way as the bank has for you to verify who they are, even if that means again that they can't then use it till the next day, whether it has to be 24 hours. You need to protect yourself from fraud.

Gotcha, good. We do have a question that I'll ask here in just a second, but we've had a couple of individuals that have clicked on the raise hand icon in the control panel. At this time, we're not using the raise hand icon, so if you do have a question, just go ahead and go to the questions box and type your question in there, and we'll go ahead and we'll ask it for you. There's a few people, I see them waving at me, but unfortunately, we're not going to be able to wave back. One of the questions Ed asks, what What's the process of getting our debit card approved for Apple Pay? Where should a— let's say a community bank is listening— where should they start? Who should they go to? Their data center? Their card processor?

Great question. Their card processor. If you're using Fiserv Card Services, you'll go to them. Whoever your card processor is. Again, if you're using 2 different ones, I know at my community bank, we used someone for our credit cards and we used someone for our debit cards. If you want to have both as a part of it, you will need to go to both and work with them. Again, that's where some of the wait times and everything and getting in queue are important if you're considering it, to at least know what that lead time is for your merchant or your card provider. Again, if they're even there yet.

Right. Good, good, good, good. Okay, this may have more of a general, I guess, applicability to the iPhone than necessarily Apple Pay, but you talk about, you know, if you lose your phone and you've got Apple Pay set up, talk maybe a little bit about the security things when you're going through training and educating your customers about how to use it Because I know Apple Pay, being on an Apple device, the iPhone 6 is a very nice fingerprint reader. That same style of reader has now come to Android for the first time in the Samsung 6. And the Curve used to be you had to swipe your finger and hopefully it would catch. Now you can just touch it much like the Apple. But talk about locking your phone, maybe remote wipe capabilities. So if you lose your phone, you can go ahead and strip it of all the data. Any thoughts on that?

Yeah, you know, again, in order for Apple Pay to work, you need your thumbprint, so that's what's nice. The debit card number is not then locally stored right on your phone, so that's also nice. So if someone does get a hold of your phone, they can only use it if they also have your thumb, and they can't then back-read your debit card with the image that comes up of your debit card. Only has the last, I think, 4 showing, if that. I'm looking right now. Yep, the last 4. Doesn't have the security code on the back showing, doesn't have your signature, so they can't get very much from that. And iPhones can be wiped remotely if you do lose it. They're easy to turn off. I always encourage people to have My iPhone on, the locator where you can remotely lock the phone. It's a great service and a great app that comes within the iPhone that you should always, I think, if you're going to load financial information on, have.

Cool. Good, good. Another question came in. This one is from Ken. Is the tokenization process— makes this an EMV transaction if the bank is certified to process EMV transactions?

I don't know the answer to that. You'll have to ask your card provider. From my understanding, Apple Pay, even if you have EMV, Apple Pay is It's separate and a separate agreement. I believe also because banks have to pay a different fee structure for Apple Pay.

Okay, gotcha. All right, we have another question here. Wade says, at a certain level, Apple just becomes another kind of third-party Possession of our client's card number, etc., etc. Reg E liability remains unchanged. How is this less risky than a retailer? Does Apple underwrite any of the security?

Why it's less risky again is now as an end consumer, if you think about it this way, now Apple has my debit card, but Panera, Target, Target, Meijer, and P.F. Chang's, let's say, don't have it. Now only Apple does.

Right.

So again, it's the same risk that perhaps Apple will be hacked as much as Target, but they had it already for iTunes, they are used to this level of security, they are one company versus me having it all over. And then think about small businesses too, right. Now again, instead of small businesses having it, it's just at Apple.

Sure, but the Reg E disclosure— excuse me— the Reg E protection from a consumer, you know, let's say Apple gets hacked, you know, like Sony. You know, there's— I've heard an FBI agent present a number of times and he says there's 2 types of companies in this world. There's companies that know they've been hacked and there's companies that No, they haven't been hacked, but pretty much everybody could have very well been hacked. And of course, he's an FBI agent, he sees the underbelly of all these bad guys, so you kind of take that with a grain of salt.

Yeah.

But, you know, Reggie is still there obviously protecting the consumer, but the hope is, like Kathleen said, that, you know, you're not going to have as many of these. Certainly there is a little bit more risk from a single point of failure with Apple kind of holding the keys to the kingdom. But the Reg E liability protection from the consumer's perspective is still there. So if they notice that there's a fraudulent charge, whether or not it goes through Apple Pay, they still are required to notify the bank, and there's still going to be some protection the bank has to make sure that they're not at a loss as long as they abide by all the Reg E requirements. So I don't think Apple is taking that away as part of their process.

Yeah, absolutely. I wouldn't pretend to say that this means everything is more secure. What I would say is it's easier to use. Again, I already have my phone out, my phone is in my pocket, all I have to do is pull it out, tap it. It's easy to use. Millennials are adopting it very quickly. iPhone 6 users are adopting it very quickly. So not sure if it's more or less secure, but it's definitely, once you get it set up, more convenient. For whoever gets my primary cardholder position. So that's how I look at it as a bank, for sure.

Yeah. So one of the other comments that I just kind of was taking notes as we were going through the slide deck, I know one of the reasons why banks should be concerned, and I know you talked about interchange income and the fact that the consumers are preferring this, you know, but I think You need to take a look at consumer control and you know who ultimately is going to own that consumer. Is it going to be the big bank with the giant rewards program credit card that the customer is using, or is it going to be their community bank where they get great service and great attention? And that's the card that goes in there first. And because it's somewhat transparent, and once the card is set up, I don't see a lot of people going back in and making changes to it. The card's there; it's going to be easy just to leave it. But if you want to really make sure that you control that customer relationship and those transactions, you know, especially from a community banker's perspective, to remain relevant in the eyes of the consumer, you want to make sure that you're there to be able to participate. And then when you get there, most community banks are not early adopters to this because it was just available to the really big banks first. So when you start offering this as a service, as an option for your debit or credit card, like Kathleen said, make sure that there's a lot of education that goes around this so that you teach your customers how to go in and make a change. Hey, we now support Apple Pay. Here's how you can make our card the preferred card in your Apple Pay wallet. And so that you kind of walk them through, whether that's a YouTube video, how-to instructions on your website, statement stuffer in your statements if you're still mailing those things, handouts, those are all items that certainly are necessary to get them to be part of that. So we have an FYI, so let's see what Bill says. Apple requires the issuer to send notification when their customer provisions a token as part of the authentication process. FYI, and I know Bill has somewhat of an insider perspective here, so so we appreciate that. So there there is a requirement on Apple's part to make sure that the the token kind of gets sent through that whole process as part of that authentication. So that's good. And then as a follow up to the prior question with regards to to Reg E. Yes, that does make sense. But, but now there's the feeling that we're somewhat hyper-dependent on Apple's security. And certainly there is a— I hope that they appreciate this obligation.

Yes.

We agree with you 100% on that. So yeah, they're gonna, they're gonna have a lot of information as part of their process. And I don't know I thought I had read somewhere that the tokenization even goes to the extent at the Apple level, but maybe not. Maybe they actually do have the card information themselves and the tokenization just takes place as the transaction is completed. You know, that now causes me to think I'm going to need to do a little bit of research on this just to see if there is, you know, to what level Apple is taking steps to protect, because that's That kind of raises a good point there. I hadn't really thought about that, but yeah, that's a good point. Cool. Well, it looks like everybody that has raised their hand has now gone in and typed their question, so this is good. And again, if you have raised your hand and have not asked your question, please feel free to type it in the question box and we'll get that answered for you. So I guess as we kind of wrap this up, and bring it to a close. Any other closing thoughts that you would like to offer as part of your What the Heck is Apple Pay presentation for today, Kathleen?

No, just thanks everybody for coming on, and if we at HT Mobile can be of service, please let us know. And thanks, Eric, for having us.

Yeah, excellent. Well, good. Well, I think that that's going to be a wrap. Hopefully you all know how to get a hold of myself. You can go to the poweredbywsi.com/BES for Banker Education Series, and that will take you to the page. That will be the page where we will provide a link to the recording once it is ready. And those of you that obviously are registered, you'll get a notification automatically to let you know when the recording is online and available for viewing, so you can go back and Share it with others in your office, and then certainly if you've got any questions, by all means let us know. So we've actually got— I'm kind of going back between 3 or 4 different presentations for next month's Banker Education Series, and we've not finalized it yet because we're still looking at different dates and different speaker options. So I don't have a formal date next month, but we will be back again next month. For the 3rd installment of the Banker Education Series. So I hope that you decide to join us again and are able to participate. I also want to mention I do a weekly webinar show that is called Free Webinar Wednesdays, and that is not necessarily all banker-related stuff, but we get into areas with regards to social media, personal coaching, you know, just a variety of different things that people are interested in. And so I partner up with a gentleman by the name of Jeff Simpkins of Community Bank Consulting. He and I knew each other back in our banking days, and we partnered up and been doing our webinar show now going on our 6th year. So if you'd like to join us at that, visit freewebinarwednesdays.com, and who knows, we might see you Wednesday afternoon at 1 PM Eastern time on that show. But until then, signing off for this episode of the Banker Education Series. Appreciate you taking the time to join us today, and we'll hopefully see you back again in June for our 3rd episode. Until then, have a great week and a great month. And those of you that are joining us here from the States, have a great Memorial Day weekend. Take care.