Evan Schuman's StorefrontBacktalk

Apple’s status as the Great Fruit Hope for alternative payments took a hit this week, after it failed to stop a Russian hacker who broke the iPhone’s security for many in-app purchases. It’s roughly the equivalent of customers somehow tweaking their payment cards, and then swiping them at an in-store PIN pad, which tells the POS the transaction has gone through—except the card is never charged.

Apple’s billion-dollar third-party payments business takes a larger than Visa cut, sets less flexible than Visa operating rules, and then offers less help than Visa in securing transactions. And this is the company that’s supposed to rescue retail from Visa’s interchange rates?

The in-app purchase security hole was exploited by a Russian hacker named Alexey Borodin, who went public with his attack on July 11. The exploit is unusual in that the customer isn’t the one victimized. In fact, the iPhone user has to actively cooperate with the man-in-the-middle attack by using fraudulent security certificates and even a specially rigged DNS server that misdirects transactions away from Apple to Borodin’s own server.

Then when a customer makes an in-app purchase, the transaction is sent to Borodin’s server, which generates fake receipts that tell the app to deliver whatever has been purchased. (Apple doesn’t allow in-app purchases of physical goods or services outside the app, so purchases are typically upgrades, game currency or items used inside a game or other app.)

The fraud doesn’t work with all in-app purchases—to avoid it, app developers can set up their own servers (at their own expense) to confirm receipts. But even that’s not foolproof.

And considering that Apple set up the easy-to-exploit process and rakes in 30 percent of the proceeds from each valid in-app transaction, developers might expect a little more help in securing it—especially because estimates of how much in-app transactions now bring in are well above $1 billion per year.

For retail chains hoping Apple might offer a real alternative for in-store payments, this should be something between disheartening and terrifying. Apple already does a huge business in third-party transactions—far more than Google Wallet and PayPal in-store combined. But it’s so insecure that customers and a lone fraudster can gang up on in-app retailers to spoof transactions with impunity.

Even more disappointing (or frightening) is the fact that Apple has been unable to shut down the fraud.