Apple Pay – An attempt to demystify

Update as of Jan 3, 2015

This post was written in the early days after ApplePay’s announcement, when most of us didn’t have access to enough information on its inner workings. Even with such limited information, many parts of the post turned out to be correct, but some turned out to be wrong too. Consequently, I have taken a second attempt at demystifying ApplePay in this other post based on what we know at this time. The rest of this post is not modified.

When Apple announced ApplePay as a service on September 9th, 2014 and subsequently in their press release, they mentioned a few key terms like Secure Element, Tokens, One time unique number, Device account number, dynamic security code and such. Take a look at the 4th paragraph in their press release to see what I?mean. For the layman, this could mean that apple has used?some complex?security technology to make ApplePay secure; but for some people in the field of mobile payments and security, it was not very clear what Apple was trying to say. So, let’s try and dissect that, shall we?

For simplicity, we are only going to discuss about ApplePay in the context of a payment made at a physical POS?and not the mCommerce version of the service. This is only an educated attempt to understand the underlying implementation while the reality could well, be different.

Let’s start with the Secure Element (SE). ApplePay stores the payment credentials inside the SE. It does not store them in the cloud and it does not store them within the host operating system. This means that none of the iOS apps will have access to the payment information stored within the SE.

What exactly is stored in the SE?

When, you as a customer add a credit card to your Passbook (Mobile Wallet), the simplest thing for the wallet to do would be to store the real payment credentials like the Primary?Account Number (PAN) into the SE. But that is a naive implementation and Apple does not do that. ApplePay instead stores something called a token and some associated data inside the Secure Element.

What is a token?

Token is like a fake credit card number that looks and feels like a credit card number for most intents and purposes, but it is not the real deal. During transaction authorization the token would be de-tokenized into the real PAN before passing?on to the Issuer for authorization. The entity that places a request to de-tokenize differs depending on the tokenization standard used. In proprietary tokenization technologies, an Acquirer would be responsible for tokenization and de-tokenization. But,?ApplePay uses the latest in tokenization standard created by EMVCo. In this case, the payment network performs de-tokenization.

How is a token provisioned to the SE?

Now that we know that a Token is stored in the SE, the next step is to find out how it gets provisioned there in the first place.?There are many ways in which this could have been implemented and we will not know for sure until Apple announces its implementation. But, here is an educated guess I would go with…

When a customer adds a credit card to their wallet, the PAN?details are submitted to ApplePay servers. ApplePay sends the information over to the corresponding Issuer bank asking for a Token in return. The Issuer bank calls a Token Service Provider (TSP) and requests for a token. As far as I know, the payment network themselves play the role of TSP at present.

The TSP?vaults the PAN, maps it to a token and returns the token and a token-key. This token-key will later be used to generate a dynamic cryptogram at the SE. The Issuer receives a token and token-key, and adds a cvv-key to the mix. The cvv-key will be later used to generate a dynamic security code at the SE. The Issuer returns the token, token-key and cvv-key back to ApplePay. ApplePay, acting as its own Trusted Service Manager (TSM) provisions the token, token-key,?cvv-key and maybe other data into the Secure Element. It is the Token that Apple calls as “Device Account Number” in its press release.

What happens when a?payment transaction is initiated?

When a customer taps or waves their iPhone in front of a point of sale terminal, a payment transaction is initiated. ApplePay uses EMVCo’s Contactless suite of specifications to communicate with the contactless reader terminal. When it is time for the Secure Element to send information to the terminal, it does two things. First, it generates a dynamic cryptogram using a combination of?the token, token-key, transaction amount, transaction counter etc. Second, it generates a dynamic CVV value using the cvv-key. Finally, it passes the token, the dynamic cryptogram, the dynamic CVV and other payment and chip data elements to the terminal using the EMV specification.

Let’s stop for a moment here and review what just happened and compare that to Apple’s press release?as quoted below.

“Each transaction is authorized with a one-time unique number using your Device Account Number and instead of using the security code from the back of your card, Apple Pay creates a dynamic security code to securely validate each transaction.”- From the press release

From the quote above, the Device Account Number represents the Token, the One-time Unique Number represents the dynamic cryptogram and the Dynamic Security Code represents the dynamic CVV.

What happens during a payment transaction?

The contactless terminal receives the token, dynamic cryptogram, dynamic CVV and other data elements according to the contactless EMV specification (or contactless MSD for backwards compatibility) and?sends?them over to the Acquirer. The Acquirer doesn’t know or care if the incoming PAN is a token PAN or the real PAN. They just identifiy the payment network based on the BIN and send it over the corresponding payment network.

The payment network identifies that it is a tokenized PAN and not a real PAN based on BIN?tables. Consequently, they send a request out to the TSP?to de-tokenize passing in the Token?and the dynamic cryptogram. The TSP, among other things, validates the cryptogram using the token-key that it shared earlier during the provisioning process. If the cryptogram is valid, the TSP de-tokenizes and returns the real PAN back to the payment network. The payment network attaches the real PAN to the authorization request and sends it over to the Issuer for authorization.

The Issuer validates the dynamic CVV based on the cvv-key it shared earlier during the provisioning process. Then it?authorizes the transaction depending on the customer’s account status. The authorization status?flows back from the Issuer to the Payment network, back to the Acquirer and back to the Merchant where your receipt gets printed.

In conclusion, we saw how ApplePay?does provisioning and how a payment transaction is processed.?For some of us this is good enough information to?understand the security strategy used by ApplePay. But some others may have more questions.?What happens when the?Card is lost??What?happens when the phone is lost??What happens when the merchant is compromised? How does ApplePay handle these challenges? These are all very good questions, but this post has?already become too big. So, I will address those follow-up questions in my next post. Stay tuned!

Reprinted from my own article here

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Ganeshji Marwaha

I spend my days as the Director of Technology for Mobility practice and help my clients design enterprise and consumer mobile strategies. Mobile Payments, Digital Wallet and Tokenization technologies are my areas of specialization

  • Frank

    Nice article

  • Good description of the process. I would agree with all the steps, but how do you know for sure that Apple Pay uses EMVCo tokenization and EMC contactless? If Apple have released this information, can you point to any references?

  • Thanks Slava. AFAIK, Apple does not explicitly mention that it does use EMV tokenization and/or contactless specs yet!

    I took a look at their in-app payment PassKit documentation and noticed that it uses EMV data elements. It was reasonable to think that the same is used for Tap n Pay as well. In the same document, you may notice that it is also supporting 3D secure online payments. Based on that and the fact that many NFC terminals in US today are not EMV compliant, I would think that Apple supports Contactless MSD as well for backward compatibility.

    From a tokenization standpoint, this interview from NFC World talks about how Visa token service works with Apple. Check the 3rd paragraph from last.

  • hartct

    Nice article Ganeshji. To some of the other discussion here regarding EMVCo specs, I think the thing to look at is the POS terminals that can be used with Apple Pay… Once you’re using a network’s (i.e Visa’s payWave or MasterCard’s PayPass) contactless specification at the terminal, the network will dictate how the tokenization process must work. For example, the EMVCo specification is fairly abstract, but each network has it’s own specific implementation for cryptogram creation. Ultimately, Apple Pay is leveraging the network to provide the rails for processing these transactions, and the networks *should* be using the EMVCo spec to guide their implementation.

  • Thanks hartct. That was well explained. Interesting times ahead for mobile, payments and security professionals.