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February 24th, 2016

The Inside Story Of How Apple Adopted Tokens, With A Little Help From MasterCard

Part of the "The Crossroads Of Ecommerce" Series

“But at some point in time they called us and say, hey, we are ready to go.”

The digitization of payments is accelerating not because Apple built Apple Pay, but because Apple decided to adopt one of the key technologies that makes Apple Pay work.

Really, it was MasterCard that brought tokenization and provisioning to Apple Pay. On the flip side, Apple helped validate a struggling technological vision that will help change the very nature of what it means to move money.

When Apple announced its Apple Pay mobile wallet it made a lot of noise about how secure payments would be through the app. Apple introduced the idea of “tokenization” to millions of people. Tokenization is the concept of when you pay for something either online or at a store, your own credit or debit card number is not actually being used to make the payment, but rather a randomized number that represents your card and is only used once. Tokenization is the abstraction of payment details to help make transactions more secure.

Among the Technorati, Apple often takes lumps for often not building its own technology. Every year when the new iOS, iPhone or iPad is announced, some smarty pants journalist or tech pundit will gleefully point out, “hey, Apple is selling this as its original idea, but it’s been available for years!”

The argument is perfectly valid because, really, Apple does adopt a lot of technology that makes it into the iPhone.

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Apple (of course) does build some of its own original technology. Apple is also notorious for pushing its partners and suppliers to innovate towards ideas it has for specific products so they can eventually be baked into the iPhone. In many ways Apple is like a master chef, taking readily available ingredients and mixing them up into something wonderful, unique and creative. Even if everybody has already had the original ingredients a dozens times before.

And so it happened with MasterCard and Apple Pay.

MasterCard Struggling Towards Mobile Payments

James Anderson joined MasterCard almost nine years ago and was tasked to figure out mobile payments. Anderson was given a small budget and team and set forth to figure it out.

“We basically bumped around for four or five years trying to figure out how to take something that had worked great on the card and make it work great on a mobile device,” said Anderson, now the MasterCard group executive for platforms – emerging payments, in an interview with ARC.

MasterCard was not alone in trying to figure out mobile payments. Around 2010 or so many companies started trying to figure out how to capture the market for mobile payments—smartphone-based transactions at physical locations—leading to a twisted hellscape of competing interests, apps, products, solutions and chaos.

Over the last year and a half the mobile payments space has begun to take some form of clarity. The massive upheaval of the payments industry that many predicted around 2011 did not take shape. Industry sectors that thought they could muscle into payments—like the cellular carriers—bowed out, leaving the payments technology stack basically intact and allowing the major players to do what they do best.

What MasterCard does best is build payments infrastructure: contact lists, provisioning, authentication, security, identity and so forth. The job of Anderson’s team was to figure out how all of the payment industry’s long-standing requirements could be adapted to the mobile realm.

“We tried different angles, we worked with different partners,” Anderson said. “We tried to figure out how we kind of bring the existing players into the digital arena. How we make it work. We tried a lot of different approaches. And could never really figure it out. It was really a problem.”

See also: 8 Payment Gateways Necessary To Making Money With Your App

One aspect of the struggle to developer and evolve mobile payments was the idea of payments itself. Everybody thought it was a really cool idea to pay for things at physical locations with your smartphone, but fundamentally the act of making transactions wasn’t broken. Everybody through Near Field Communications (NFC) chips would be how everybody makes payments within a couple of years (Anderson even served as the vice chair for the NFC Forum for almost two years). But the plastic credit/debit card system works just fine for most people.

The problem was that there wasn’t a problem.

And that was a problem.

“We were really kind of struggling. We had a vision of where we wanted to get to but we didn’t, frankly, have a motivating factor,” Anderson said. “To be honest, I have made multiple pilgrimages to Cupertino over the years to show them what we were doing. And they would very politely listen and thank us very much for coming. ‘We’ll call you. Don’t call us.’”

Eventually, Apple did call.

“But at some point in time they called us and say, hey, we are ready to go,” Anderson said.

Payment Tokenization Matures Into An Industry Standard

To a certain extent, payment tokenization was kind of Apple’s idea.

“We had done that in a couple of projects and we had called it PAN mapping, which was in the service and was built into the [MasterCard] network,” Anderson said. “In some of the conversations we had with Apple, they basically said that what we want to do is be able to take a leadership position on security. ‘We’d [Apple] like to find some way of not using the real card number.’ They didn’t know what they wanted but they sort of knew what they didn’t want, which was the real card number.”

Anderson’s team already had similar thoughts and built the initial version (PAN mapping). MasterCard had even deployed versions of it in in the United Kingdom with Orange and Barclays. All of a sudden everything that MasterCard was working on towards mobile payments took new shape, with the idea of tokenization bringing it together.


“And we were kind of like, ‘oh, we’ve done that,’” Anderson said. “And we proposed what was called PAN mapping which became tokenization. In these things multiple people are having multiple conversations. So I am sure we weren’t the only people who were proposing that but I know we definitely came up with it. And I know we were reasonably influential because they actually used some of our documentation and terminology. So that was kind of a subtle tribute.”

Apple introduced Apple Pay as an app and a service as part of the release of the iPhone 6 and iOS 8 in September 2014 and it went live October that year. From there, MasterCard has worked Google to bring tokenization to Android Pay and with Samsung (through its LoopPay acquisition) for Samsung Pay. Tokenization is now spreading through the entire payments and merchants industry.

“For tokenization to take off, it almost goes hand-in-hand with mobile payments taking off and the proliferation of OEM adoption plays into that,” said Will Graylin, the cofounder of LoopPay and now co-general manager of Samsung Pay, in an interview with ARC at CES 2015. “We are in a perfect storm right now to be able to combine tokenization plus ubiquitous acceptance plus having OEMs adopt.”

MasterCard has made tokenization on of the centerpieces of its fast growing MasterCard Digital Enablement Services (MDES) product. MDES is the result of what Anderson and his team spent years struggling to build with the effort finally paying off through one fateful decision from Apple.

“So that is where MDES came from,” Anderson said. “MDES was a platform to provision and tokenize MasterCards into the digital arena and the first one was Apple Pay.”