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Apple Pay allows you to pay at the counter with your iPhone 6

Apple Pay allows you to pay at the counter with your iPhone 6

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After years of filing patents while publicly deriding NFC, the company is ready to bring the mobile payments tech to the masses

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Proud new iPhone 6 and Apple Watch owners will be able to use their devices to pay with a tap for everyday purchases, Apple announced today, a feature the company has been preparing for a long time.

The feature is called Apple Pay, and it aims to revolutionize the "fairly antiquated payments process" we're all used to by replacing it with a near field communication (NFC) antenna, Touch ID, Passbook, and something Apple is calling the Secure Element, a dedicated chip that stores encrypted payment information.

Payments are broken, CEO Tim Cook said on stage today, and it's exactly the kind of problem Apple is in the perfect position to fix.

"This whole process is based on this little piece of plastic, whether its a credit or debit card," Cook said on stage today. "We’re totally reliant on the exposed numbers, and the outdated and vulnerable magnetic interface — which by the way is five decades old — and the security codes which all of us know aren’t so secure."

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Apple Pay is going to change all that, Cook says. Here's how it works: add a credit card from your iTunes account, or add a new card using the phone's iSight camera. Once your card is on file with Apple Pay, you'll be able to use your phone to check out at participating vendors — both brick and mortar and online — by authenticating with Touch ID.

In a store, you'll hold your iPhone in front of a reader and place your finger over the fingerprint sensor to confirm. In an app, you'll select Apple Pay as your payment method and confirm with Touch ID. "That's it!" Cook said on stage today. "It is so cool!"

You can also use Apple Pay with a new Apple Watch synced to your iPhone 5, iPhone 5c, and iPhone 5s, although the device lacks the extra security of Touch ID.

Apple has announced a slew of partners for Apple Pay, including Subway, McDonalds, Disney, Walgreens, Macy's, Sephora, and of course, Apple's 258 retail stores. Partners like Groupon, Uber, and Panera have also integrated Apple Pay to allow customers to pay from their apps without having to enter any payment information.

Apple Pay will be available to US users after a software update in October of 2014

Apple Pay is built into the iPhone 6, iPhone 6 Plus, and Apple Watch, but won't be available until a software update for US users in October of 2014. Once it's available, US customers will be able to pay with all partner merchants without handing over their payment information. Instead, it's all facilitated by Apple, which reportedly took on some of the liability for fraudulent transactions.

The company is working with American Express, Mastercard, and Visa. "Apple Pay works with the top bank issuers that handle 83 percent of the credit card purchase volume," the company says. JPMorgan Chase also collaborated with Apple on the new feature.

Apple has also announced an API for Apple Pay so developers can build the capability into new apps. Apple Pay is only available in the US to start, but Apple is "working hard" to bring the feature to other countries.

There were already hundreds of thousands of stores in the US where you can pay with your phone in lieu of cash or credit, but hardly anyone does. PayPal, Google, and even Wal-Mart and Target are trying to build mobile payments networks, but none have gotten significant traction so far.

The holdup is partially due to hesitation from consumers and merchants, but the main problem is that it's just not that convenient for consumers. People are happy to use their phones to pay when it's seamless, as it is when Uber automatically charges your credit card once you hop out of the cab. But paying in stores requires some maneuvering. Does the store take mobile payments? If so, which app do I need? Google Wallet? Samsung Wallet? PayPal? Softcard, formerly known as Isis? Does that app work with the credit card I want to use? Do I need to connect it to my bank account?

It's a headache with little gain in convenience. With a one-tap solution and lots of major merchants already on board, Apple makes mobile payments a lot more appealing.

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The fragmentation in the market was partially because of Apple, which refused to support any mobile payments system on the iPhone until now. Businessweek points out that Apple's approach to mobile payments is typical for the company. "Let the first movers flail with the earliest versions of some product or service, then release a more polished version of the same idea," writes Joshua Brustein.

Cook even knocked other companies that have attempted to do mobile payments today, calling them out for acting in their own self interest "instead of focusing on the user experience."

With a one-tap solution, Apple makes mobile payments a lot more appealing

So can Apple make mobile payments mainstream? It has a good shot. The company already has 800 million credit cards on file, thanks to iTunes, and reportedly expects to sell between 70 and 80 million iPhone 6s. That gives Apple a lot of clout with merchants, which will help ensure customers have plenty of places to use their phones to pay.

The company has also been planning this for years, filing patents related to mobile payments, hiring payments executives, and acquiring relevant startups. And, the number of stores capable of accepting mobile payments is about to increase dramatically, a side effect of a policy change by Visa and Mastercard that strongly incentivizes merchants to upgrade their systems by October 2015.
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One potential setback? Celebgate. The massive privacy breach that leaked hundreds of private celebrity nude selfies, the vast majority of which appeared to be taken from iPhones, is fresh in everyone's mind. Apple says the attack was due to weak passwords and security questions, not a breach of its systems, but it's a reminder that the average consumer's data is relatively easy to steal. Any effort to get widespread acceptance of mobile payments will depend on consumers feeling safe.

Apple is hoping to counter these concerns with hardware and software, including Touch ID, the Secure Element chip, and a dynamic security code that is generated for each transaction, replacing the static security code on the back of your credit card. If your phone is stolen, you can use Find My iPhone to suspend all payments from the device.

These measures will actually make Apple Pay more secure than traditional methods, according to the company. Apple also promises not to track transactions. "The transaction is between you, the merchant, and your bank," Apple executive Eddy Cue said today. We'll see if consumers are ready to buy in.

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