Will Apple Pay on the iPhone 6 Finally Make NFC Payments a Reality?

Apple (AAPL -1.22%) has a habit of turning niche products, such as smartphones and tablets, into mainstream devices. With Apple Pay, the company's new mobile payments platform, Apple wants to work its magic with near field communication, or NFC, chips and mobile payments -- two technologies weighed down by niche appeal, stubborn consumer habits, and market fragmentation.

Apple Pay. Source: Apple.

Apple Pay lets users scan credit cards and digitally store them in the Passbook app. To pay, users simply hold their finger over the Touch ID fingerprint scanner and tap the iPhone on a payment terminal. On the Apple Watch, they can double click the button beneath the "digital crown," then hold it up to the terminal to make a payment. The company has said Apple Pay will work at over 200,000 merchants, including Whole Foods Market and Macy's (M -2.68%), and its application programming interface, or API, will be integrated into mobile apps from OpenTable and Target.

If all goes well, Apple can leverage the iPhone's dominant market share in the U.S. (42%, according to comScore) to replace physical wallets while gaining a fresh stream of revenue, since the company will earn $0.15 per $100 transaction, according to the Financial Times.

But Apple investors should remember that NFC technology has been around for nearly a decade, but no company -- not even Google (GOOG -1.10%), AT&T (T 1.10%), Verizon (NYSE: VZ), or T-Mobile -- has convinced mainstream consumers to transfer their cards to NFC chips. So can Apple Pay finally succeed where those prior efforts flopped?

Learning from the mistakes of the past
Right off the bat, Apple addressed two of the biggest reasons that NFC efforts failed: market fragmentation and a cumbersome PIN code verification system.

In 2010, AT&T, Verizon, and T-Mobile formed the Softcard partnership (then known as Isis Wallet) to store credit card data in SIM cards. This kept the data in a secure environment while allowing the carriers to control the payment platform.

When Google launched Google Wallet -- its NFC platform for credit, debit, loyalty, and gift cards -- for Android phones in 2011, Softcard banned the service from all of its devices. That crippled Wallet's ability to grow in the U.S., forcing Google to introduce a service known as host card emulation in Android 4.4 to circumvent Softcard's restrictions. However, Softcard and Google Wallet NFC services both still require users to enter PIN codes before tapping on a terminal, which means it's easier to simply swipe a physical card instead.

Google Wallet. Source: Google.

Unlike Google, Apple recently reached a surprising agreement with Softcard to allow Apple Pay on new iPhones, which will allow it to reach most customers in the United States. The move is surprising because Softcard is essentially a competitor to Apple's newly announced "Apple Pay" initiative. The iPhone 6 won't require a PIN code, while the Apple Watch only requests the PIN code each new time it is worn, which should make using both devices more convenient than swiping a card.

The business of NFC vs. BLE
While Apple Pay is a huge leap forward for NFC payments, it probably won't completely replace Bluetooth low-energy, or BLE, beacons. In fact, Apple Pay is compatible with both NFC and BLE (iBeacon) technology, which can be redundant since BLE tech can also process payments.

Bluetooth low-energy beacons, when placed around a store, have a range of several feet, while NFC tags only have a range of a few centimeters. Those BLE beacons, which cost at least $20 each, are pricier than NFC tags, which can cost as little as $0.10 each. However, the retail experience is vastly different. When customers enter a beacon-enabled store, they passively check in to the store, alerting the retailer's point-of-sale system of their presence. When it's time to pay, the clerk simply confirms the customer's identity to complete the purchase. For NFC tags, customers walk up to the cashier as they normally would, select the card from the phone, then tap it to the terminal.

Therefore, the BLE system requires a retailer to dramatically change the checkout process, while the NFC system does not -- which could make NFC tags the more attractive choice.

iBeacon-compatible devices that work with iOS 7. Source: Wikimedia Commons.

eBay's (EBAY 0.88%) PayPal stands to lose the most if Apple Pay catches on, since its brick-and-mortar strategy primarily consists of checking in and paying over BLE beacons. Unlike Apple, PayPal does not have its own NFC payments platform, and its BLE beacons could also be rendered obsolete by iBeacon-compatible devices. Macy's, for example, recently announced the addition of Apple Pay support and a new deployment of 4,000 iBeacons to prepare for the holiday shopping season.

A Foolish final word
If any company can finally make NFC payments a reality, it's Apple. The company has the market share, the right partners, and the right technology to finally convince consumers to leave their plastic cards at home. If it does so, Apple will gain two major new sources of revenue -- the Apple Watch and Apple Pay -- while BLE-backing competitors such as PayPal will be forced to retreat from brick-and-mortar retailers.