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Apple Pay is a mobile payments service that allows users to make payments in-person, in iOS apps, and on the web. It digitizes and can replace a credit or debit card chip and PIN or magnetic stripe transaction at a contactless-capable point-of-sale terminal. It is very similar to contactless payments already used in many countries, with the addition of two-factor authentication via Touch ID, PIN, or passcode. The service lets Apple devices wirelessly communicate with point of sale systems by using a near field communication (NFC) antenna, a "dedicated chip that stores encrypted payment information" (known as the Secure Element), and Apple's Touch ID and Wallet.
The service is compatible with the iPhone 6, 6 Plus, iPhone 6S, 6S Plus, 7, 7 Plus, iPhone SE, iPad Air 2, iPad Pro and the Apple Watch. Users with iPhone 5, 5C, 5S, 6, 6 Plus, 6S, 6S Plus, 7, 7 Plus and iPhone SE can use the service through an Apple Watch, though it lacks Touch ID security. Instead, Apple Pay is activated with a passcode and will remain active for as long as the user wears the Apple Watch.
Apple Pay uses the EMV Payment Tokenisation Specification.
The service keeps customer payment information private from the retailer by replacing the customer's credit or debit card Primary Account Number (PAN) with a tokenized Device Account Number (DAN), and creates a "dynamic security code [...] generated for each transaction". The 'dynamic security code' is the cryptogram in an EMV-mode transaction, and the Dynamic Card Verification Value (dCVV) in a magnetic stripe data emulation-mode transaction. Apple added that they would not track usage, which would stay between the customers, the vendors, and the banks. Users can also remotely halt the service on a lost phone via the Find My iPhone service.
To pay at points of sale, users hold their authenticated Apple device to the point of sale system. iPhone users authenticate by holding their fingerprint to the phone's Touch ID sensor, whereas Apple Watch users authenticate by double clicking a button on the device. To pay in supported iOS apps, users choose Apple Pay as their payment method and authenticate with Touch ID. Users can add payment cards to the service in any of three ways: through their iTunes accounts, by taking a photo of the card, or by entering the card information manually.
In the United Kingdom, payments using contactless cards are limited to £30 (previously £20 until August 2015) as they have only one-factor authentication. Payments using Apple Pay have two-factor authentication and no transaction limit once retailers have upgraded the software in their terminals to support the latest network contactless specifications.
Apple assumes some liability for fraudulent use of the service. Banks are expected to carry the burden of the service, and Apple is said to have negotiated smaller transaction fees. In turn, the banks hoped to capture purchases that were formerly handled without credit. Financial Times reported that Apple receives 0.15% cut of US purchases made with the service, but, following the UK launch, reported that Apple's cut is much lower in the UK. This is largely because Regulation (EU) 2015/751 capped interchange fees in the European Economic Area at 0.3% for personal credit cards and 0.2% for personal debit cards with effect from June 8, 2015. In Russia Apple receives 0.05% for debit cards and 0.12% for credit cards of each purchases, in addition, the bank pays 45 rubles a year for each card added in the service.