How Apple Pay (AAPL) Works And Why It's Better Than Android - Piper Jaffray's Munster
May 24, 2016 8:33 AM EDT
Piper Jaffray analyst, Gene Munster, believes Apple's (NASDAQ: AAPL) Apple Pay has had a slow start
compared to investor expectations (about 20% of new iPhones). However, the long term the usage of Apple
Pay should grow exceptionally based on the analyst's belief that Apple Pay using a Secure Enclave/secure
element inside of iOS has an advantage over Android Pay's host-based card emulation (HCE) in that it's
more secure, with a similar user experience. The secure element method utilizes internal hardware to
secure payment data, while the HCE method uses software.
How it works:
Apple Pay operates with two key components: the Secure Enclave and secure element. First, iPhones
running the A7 chip and beyond (post iPhone 5S) utilize a hardware technology called a Secure Enclave,
which is a separate co-processor embedded into Apple’s A-series chips. The iPhone’s Secure Enclave
handles both Touch ID authentication and enabling payments transactions to proceed. The Secure Enclave
has restricted access and is encrypted. Apple does not receive any data from the Secure Enclave. Second,
Apple Pay utilizes a secure element, which is a chip similar to the smart chips on modern credit cards, to
communicate with the payment networks. For in-store transactions, the NFC chip on the iPhone enables
direct communication between the contactless payment terminal and the secure element. The secure
element only allows payments to be processed after they are authorized by the Secure Enclave. The basic
process for paying in-app is similar: the user authorizes the payment with Touch ID (Secure Enclave), and
then the secure element processes the payment information. One difference for inapp vs in-store payments
is that the process requires the merchant to have a unique encryption key to secure transaction data being
passed to it from Apple.
No change to Buy rating or $153 PT.
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