Apple is planning to launch its mobile payments service in Canada this fall, marking the start of its international expansion of Apple Pay. Canada is an attractive market for Apple Pay because of the high level of iPhone market share. Research firm Catalyst said iPhones account for about one-third of the Canadian smartphone market, compared with the iPhone's roughly 20% share globally. Additionally, unlike in the U.S., the vast majority of Canadian merchants are already equipped with machines that accept contactless payments through near-field communication, a prerequisite for Apple Pay.

Lenders in discussions with Apple include Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada. Together, those banks account for more than 90% of retail bank accounts, which could provide Apple with near ubiquity upon launch if final agreements are reached.

Security is a Sticky Issue

The one stickler in a deal is that "Canadian banks want Apple Pay to work in a way that requires a 'secondary authentication' to verify customer information before cards can be used with the phones. That means that a consumer could be required to enter a PIN, log-on to a mobile banking app or use a one-time passcode sent via text message before cards can be used on Apple Pay." The concern of course is that by adding a secondary authentication process, the "simple" Apple Pay method may end up being the same as using a credit card today. So the magic of Apple Pay could be marginalized.

The report further noted that "U.S. banks were hit by incidents of fraud through Apple Pay when criminals exploited insufficient verification systems by some institutions. The incidents forced some banks to change security procedures to ensure that the person who entered the credit card information into Apple Pay is the true account owner. As a result, the 'Big Six' banks have formed a consortium and hired consultancy McKinsey & Co. to help develop a security protocol for Apple Pay."

Whether the security protocol could be ironed out between the consortium and Apple in time for Q4 is unknown at this time. Having Apple Pay working this fall would provide Canadian Apple fans with more incentive to purchase an Apple Watch for Christmas. For more on this story, check out the full Wall Street Journal (WSJ) report.

Canadian Banks Concerned over Unregulated Competitors

In a secondary WSJ report they noted that "The banks, meanwhile, are worried that with Apple acting as a middleman of sorts via its Apple Pay service, they could lose control of their customers – a trend known as 'disintermediation' in industry parlance. Their angst about the introduction of new disruptive technologies was on full display at some of their recent annual meetings. Executives, though, were careful not to single out particular companies.

Back in March, Bharat Masrani, Chief Executive of Toronto-Dominion Bank, in his address to investors stated that "New technologies are raising consumer expectations of what banks do and how they do it. And in many cases, they are being deployed by non-traditional entities to compete in the banking space. Indeed, the emergence of a new class of competitors is now a reality. Many of them are household names and generally, they are not subject to the same regulatory rules as traditional banks."

The report further noted that "TD, Canada’s largest-credit card issuer, is advocating for regulatory oversight of certain financial services offered by new competitors. Mr. Masrani added that "Regulators would also need to consider that the safety and soundness of these non-traditional players matter to the overall stability of our financial system."

While the big six Canadian banks are obviously working with Apple to iron out a deal, their uneasiness over Apple's new financial service is shared by many other countries. We covered this subject matter in a report last week titled "Will it be a Rocky Road for Apple Pay outside the U.S.?"

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