Can Apple Pay Succeed In China After Teaming Up With The 'Visa Of China'?

  • Apple has forged a partnership with UnionPay, the Visa of China, to bring Apple Pay to China in 2016.
  • Apple Pay has been underwhelming on its U.S. home turf during its first year after launch.
  • Will the mobile payment service perform better in the Chinese market dominated by the likes of Alibaba and Tencent?

After facing a particularly tough crowd on its US. home turf, Apple's (NASDAQ:AAPL) mobile payment service, Apple Pay, has managed to clear a major hurdle and is set to launch in China in early 2016. Apple has announced that it has forged a partnership with China’s UnionPay, aka the Visa of China, to bring the service to millions of Chinese consumers. UnionPay holds a monopoly on debit and credit transaction processing in the country, and also owns all the country’s NFC terminals. Getting UnionPay to partner with it was considered a major headwind for Apple. UnionPay has ongoing payment processing arrangement with Alibaba's (NYSE:BABA) Alipay, Tencent’s WeChat, and recently Samsung. Apple Pay will utilize Unionpay’s QuickPass as part of security for the system. Apple still has a couple more hurdles to clear, including performing relevant tests and certification required by Chinese regulators, before it can finally roll out Apple Pay in the Middle Kingdom. But these are much smaller and the company remains confident that a launch can happen in the early part of 2016.

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The question on the minds of many Apple stockholders is whether Apple can crack the Chinese market after performing abysmally in its domestic market.

Popularity of mobile payments in China

By partnering with UnionPay, Apple will have a good chance to gain access to a huge pool of potential users--UnionPay’s 260 million customers. Apple is a highly popular smartphone brand in China, with a market share of around 12%, good for #3 market share behind Xiaomi and Huawei in 1st and 2nd, respectively. Apple’s sales in China grew at a blistering 99% during the last quarter, by far its fastest growing market. China is now Apple’s second largest market. The powerful brand recognition should give Apple Pay an easier time getting accepted by the Chinese consumers.

But perhaps the strongest tailwind that will work in Apple’s favor is the popularity of mobile payments in China, which contrasts sharply with the situation locally. A study done by Trustev about one year after the launch of Apple Pay in the U.S. found that only 21% of people who are eligible to use the service had even bothered trying it out at least once. Apple Pay has been underwhelming during its first year in the U.S., and the general consensus is that it will take much longer than earlier anticipated for mobile payments to one day match the popularity of traditional payment services.

Many reasons have been advanced to explain Apple’s lackluster performance in the U.S. But what it all boils down to really is the fact that mobile payments in the US just are not as popular as in other parts of the world, especially the developing economies. Debit, credit, and cash payment systems in the US are all highly developed and for the most part work pretty well. The same survey by Trustev found that 82% of respondents said that paying using credit cards worked very well for them and thus have little incentive to try out mobile payments.

Aggregate global NFC payments, of which Apple Pay is perhaps the biggest member, are estimated to be worth roughly $12.6 billion in the entire 2015. That compares very poorly with a digital wallet such as Paypal Holdings (NASDAQ:PYPL) which handled payments volume amounting to almost $70 billion last quarter alone.

But the situation in China could not be more different. Alipay, China’s most popular mobile payments service with a 78% market share, boasts 300 million users, almost double the estimated number of 160 million-plus people with a smartphone in the US. Part of the success of mobile payments in the country can be chalked up to the innovativeness of mobile payments leaders such as Alibaba and Tencent, which have found clever ways to embed mobile payments into every day consumer services.

Apple Pay won’t have much ground-breaking work to do in China since the service is already very popular there. Still, competing against other Chinese players will not be a walk in the park. Alipay is hugely dominant in the country, and it won’t be easy to prise its users away. Luckily for Apple, there is still a huge untapped market in the country since its estimated that the number of people with smartphones in the country is close to 600 million.

Overall, Apple stands a decent chance of cracking the Chinese market due to the sheer popularity of mobile payments in China compared to the US. A success in China could add to the growing number of reason as to Why Apple stock is a buy.

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