The world of virtual monetary transactions took a sharp turn with the release of Bitcoin in January 2009, which allows for easy mobile transactions, and the industry has been growing ever since. As cash and credit cards become increasingly more obsolete, companies strive to have influence in the new money market. Applications such as PayPal-owned Venmo, Apple Pay, Square Cash, Samsung Pay and many others are revolutionizing the way people deal with their finances, by making money progressively easier to spend. A user of any of those applications no longer needs to reach into their wallets or type in security codes when trying to complete a purchase: the approval for a transaction lays, literally, within their fingertips.
How it works
When it first started with Bitcoin the technology was rudimentary and proposed the idea of using basically a new currency, bitcoins, that could be purchased in the bitcoin exchange or exchanged with users nearby. But to ensure user safety and efficiency the technology is more complicated than what it seems. As explained in bitcoin’s FAQ:
“Behind the scenes, the Bitcoin network is sharing a public ledger called the "block chain". This ledger contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called "mining".
After Bitcoin’s success, it wasn’t long until other companies joined, and took over, the market. Venmo also started in 2009 as a branch of PayPal for mobile transactions and has become the leader in the market, but by using a slightly different technology. Unlike Bitcoin, Venmo works with real dollars and encourages users to link their Venmo accounts with their bank accounts in order to easily transfer and deposit money. For the consumer, the mechanism is only beneficial: a way to effectuate person-to-person payments without the transfer of physical cash and without any implied fees, as long as the user provides an active debit card or bank account number. For the use of credit cards, though, a 3% fee is charged. But then the real question is, how does Venmo make billions of dollars every year?
Well, according to Investopedia, it doesn’t make any money itself, but instead, it raises the revenue of PayPal:
“Many of Venmo’s services do not incur transaction fees, including transferring funds between friends through a major debit card or checking account. However, to cover processing costs, Venmo charges a 3% fee for payments by credit card. In comparison, Venmo’s parent company, PayPal charges a 2.9% fee for all debit and credit card transactions. While Venmo presently reports zero revenue, its current operations help extend the reach of PayPal, which generated $9.24 billion in revenue in 2015.”
Since Venmo requires each user to input banking information, many were skeptical about the security of the service. Venmo’s software is equipped with bank-level security and data encryption for the safety of the users, but it is still not completely foolproof. According to Investopedia, “Hackers could change users’ passwords or email addresses unbeknownst to the legitimate user until their funds were depleted. Along these lines, horror stories have been reported of users transferring funds in excess of $2,000 without notice.” (Nath) But in the vast majority of Venmo transactions, consumers were safe and no damage was done.
Venmo was the first to make popular the mobile transactions service, but many others have followed since, with its biggest current competitor being Apple Pay.
Apple Pay in action.
Apple first introduced Apple Pay as a virtual wallet in which iPhone owners could input their credit and debit cards information, as long as their card issuers support the service, and use their phones as a payment method in several retail stores. The app would then create a digital payment card number specific to the person’s device, from then, all the costumer would have to do it approximate their phone to the credit card machine, and press the fingerprint-reading home button for the purchase to be approved. Apple never fails to revolutionize, so nothing less could be expected of Apple Pay then the introduction of a more efficient and secure way of completing transactions: “Apple Pay is the first of the new mobile payment solutions that utilize NFC to wirelessly and securely transmit your payment information to the POS and online through mobile apps, all while maintaining your privacy by not transmitting information such as name, phone number, and address, which can be stored on older magnetic stripe credit and debit cards.” (Bohon) Although Apple introduced the new technology in October 2014, it wasn’t until the second half of 2015 that the service really took off.
Only recently did Apple introduce a new person-to-person branch of Apple Pay that allows IPhone owners to send each other money through Apple’s IMessage. “If you get money from someone, it gets stored on an Apple Pay Cash Card until you withdraw it or transfer it to someone else… The new peer-to-peer aspect of Apple Pay might entice more people to use the service, which would help Apple compete more with PayPal's Venmo, a leader in peer-to-peer payments in the US.” (Rubin)
One of the biggest challenges to Apple Pay is getting users to start using the service, because once they do, they never want to let go of its convenience. There are many barriers to the adoption of Apple Pay, as listed in an article by American Banker: the limitation that Apple Pay only works on the latest IPhone models, and the fact that even though people may set up the service, it takes a while for them actually take advantage of it. (Wolfe) Banks, on the other hand, are encouragers of the product: “Banks have been strong supporters. In January of this year, 84% of banks and credit unions surveyed for Pulse's annual Debit Issuer Study said they were involved in a mobile payments rollout. At the time, Apple Pay was still near the height of its marketing push.” (Wolfe)
Why it isn’t perfect
Although Apple Pay works with an extremely secure process to get the costumer’s payment through to the retailer, not every step of the process is flawless. While setting up the card information into the Wallet app, the user is offered the option of taking a picture of their card or manually inputting the card number, in which case the card does not need to be physically present. From then, it is up to the banks to confirm and approve the addition of a card to an Apple Pay account, and, according to the Computer Fraud and Security journal, “in some cases, this is being done without further checks, and in other instances users are merely being asked for the last four digits of their social security numbers. This has made it easy for criminals with access to dumps of stolen payment card details to exploit those accounts.” (Elsevier)
What it led to
So how have all of these news services changed the banking system? In simple terms, it increased competition and is forcing banks to improve their services in order to maintain their customers.
Apple is currently on a legal war with Australian local banks in order to implement the service without harming local businesses. Apple argues that the Apple Pay-driven disruption in the banking system will only help customers by: “opening up the market to smaller lenders through the provision of an alternative to card payment systems, increased competition should force better rates, lenders should begin offering better promotional deals, such as air miles or cash back.” (Evans)
For small and medium business, adopting Apple Pay brings a lot of advantages, and it is not hard to accomplish. As a way to advertise its own service, Apple offers business’ the opportunity to specify the acceptance of Apple Pay in the Apple Maps app, which attracts costumers who are used to the convenience. Apple also provides businesses with an Apple Pay sticker as a mean of advertisement.
What we can expect for the future
Several things can be shifted with the implementation of the new virtual and mobile payment methods. Two that stand out the most are the future of physical cash or cards, and how it influences consumer shopping habits.
According to an article on Wired, the improved and easier ways to spend money will make consumers more willing to spend large amounts at a time since a virtual transaction has a smaller psychological effect and does not cause the same guilt as the spending of cash would. (Han)
“Whether it’s pressing a finger or tapping a smartphone, digital payment will bring a tangible dimension to the experience, too, and maybe even an emotional one. How it feels to use a device—one that feels far more individualized than a plastic card, that is linked to daily routines and your physical fingerprint—may influence how people feel about the payment technology on the device.” (Han)
Another article on the website, The Day Will Come When Your Credit Card Will Disappear, suggests that in the future people might be able to simply take the products they need from a store and simply walk out, without ever worrying about the payment process. It also talks about how brands such as Visa will have to adapt to the industry changes in order to stay on the top. (Finley)