Apple Payments To Enhance Apple Eco-System

  • Apple Pay was launched on Monday along with iOS 8.1.
  • The service will continue to scale as the installed base of users, and the number of financial partners increase.
  • Apple Pay may contribute $500 million - $1 billion revenue in Apple’s 2015 fiscal year.
  • Apple’s payment network will impact the product/service ecosystem favorably, and will face limited competition.
Apple Payments To Enhance Apple Eco-System

In its October Conference, Apple (NASDAQ:AAPL) mentioned that it had increased the number of banking partners, and the number of retailers for its NFC payment service. With significant gains in this area, Apple seems well positioned in comparison to PayPal, and Google Wallet. Admittedly, the success of the service is highly contingent upon the number of people who upgrade to iOS 8.1, which was rolled out on Monday. The new update is expected to patch some bugs, and give users the ability to use Apple Pay assuming they own an iPhone 6 and 6 Plus.

Tech Crunch reports that the service worked without any hiccups:

Holding my thumb to Touch ID and my phone to the payment terminal, it took about a second and a half to register at Walgreens and the same amount of time at McDonald’s. Don’t expect it to change the entire experience however: you still have to sign for the amount shown at the drug store and get a receipt to show to the cashier when picking up your order at a fast food joint.

The good news is that the roll out happened quickly at major chain stores, and that in the vast majority of places that I shop at (basically big box chains like Walgreens, Safeway, Wholefoods, McDonald’s, Taco Bell) I’ll be able to purchase products via a digital wallet. Retailers were quick to capitalize as it introduces a more convenient way in which consumers can buy products, and the sooner NFC is made available, the more likely they’ll retain their higher value customers that happen to own iPhone devices.

However further uptake in specialty credit cards, smaller merchants, and an increase in the number of iPhone 6 owners will be needed to make the service much more ubiquitous. Also, smaller banks, mainly credit unions would need to become partners with Apple’s new payment ecosystem in order to support a larger array of debit and credit cards. Despite all these shortcomings, Apple’s payment service will likely achieve wider adoption rates than many of the attempted mobile payment solutions in the past.

Here’s my prior Apple Pay revenue estimate:

This specific service is expected to generate $.15 per $100 in transactions. In an earlier estimate I expected Apple to earn something similar to what Visa and MasterCard earn from debit and credit card transactions. It turns out that I was right about this; therefore I’m going to reiterate my $2.1 billion annual sales estimate for Apple payments, and when working with a 45% net profit margin, I estimate that annual net income will be $959 million at the end of fiscal year 2016.

I anticipate that by the end of FY 2015, transaction revenue will reach $500 million to $1 billion due to the ramp-up in transaction volume that will occur through fiscal year 2015. The online transaction volume may surprise to the upside as the check-out process has been simplified to a single button (similar to Amazon’s quick check out process). The simplicity of Apple Pay may also drive the rate at which consumers buy applications, or purchase in-game bonuses or features. Therefore, the impact across the ecosystem, along with the creation of a new one leads to significant synergies, and a stickier ecosystem.

Mobile Commerce on iPhone Data

Data from Global Web Index indicates that 37% of iPhone users have purchased a product online on an iPhone. I believe that this figure will improve from prior years due to Apple Pay. Also, a high number of Apple users are worried about how personal data will be used, and since Apple mentioned that it will protect user data, it’s likely that Apple is well positioned to drive transaction volume on its new service.

Apple has a relatively strong moat around its new service. Unlike other OEMs, Apple can create its own software, and integrate it better with the operating system. The company has plenty of pull as its installed base tends to be highly affluent, and assuming Apple builds its payment network quickly, creating a competing network can be extremely difficult. Therefore, assuming the network effect unfolds, Apple Pay will be difficult to replicate from scratch. However competing platforms like PayPal may be able to piggy back off of the NFC developments in the space, and carry over its user base of 150 million users to deploy an offline payment service across competing mobile platforms (Android and Windows). Apple Pay will compete with PayPal on competing handsets, but it’s unlikely that Apple users will opt to use PayPal, or that PayPal will be allowed access to Apple’s network. Our Apple stock analysis assigns it a buy rating.

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