- Apple doesn’t mention its mobile payment service at the WWDC.
- There are several technological and business hurdles that need to be overcome in order for Apple to release a mobile payment network.
- Assuming Apple successfully addresses the shortcomings I have mentioned in this article, the company should be able to generate in excess of $1.4 billion in revenue from mobile payment processing.
Apple (NASDAQ:AAPL) made no mention of its mobile payment service at the WWDC. However, it’s highly likely that Apple will soon integrate a mobile payment service via two separate options. One is through a merchant network similar to Visa and MasterCard. The other option is to develop an additional financial service over pre-existing financial services (basically what PayPal does).
Will Apple’s payment service look similar to Visa or PayPal?
Assuming Apple replicates Visa or MasterCard; Apple will have to develop a system for transacting between a merchant, issuer, and acquirer. Sound confusing? Don’t worry; the process isn’t that complicated.
According to Visa:
A Visa transaction is a carefully orchestrated process. When a Visa account holder uses a Visa card to buy a pair of shoes, it’s actually the acquirer — the merchant’s bank — that reimburses the merchant for the shoes. Then, the issuer — the account holder’s bank — reimburses the acquirer, usually within 24 to 48 hours. Lastly, the issuer collects from the account holder by withdrawing funds from the account holder’s bank account if a debit account is used, or through billing if a credit account is used.
For Apple to develop a mobile payment service similar to Visa, and MasterCard. Apple may have to partner with banks, and merchants to allow for a complex string of financial transaction to occur. This system of transactions is how Visa earns its revenue. Visa earns a small fee on every transaction that goes through its network. In Visa’s 2013 fiscal year, the company generated $12 billion in revenue. Plus the company had a 44.1% net profit margin on that revenue, making it one of the most lucrative business opportunities for Apple to engage in.
Visa operates the larges payment network
"We manage a network of partners that derive value by accessing VisaNet. Globally, we have 14,600 financial institution clients — issuers and acquirers that manage relationships they have with more than 2.1 billion accountholders and more than 36 million merchant acceptance locations. Our products can be used at a physical point of sale, over the telephone, on the Internet, or using a mobile device."
Source: Visa Annual Report 2013
This begs the question, will Apple attempt to replicate Visa’s payment network, or will it become an added component of Visa’s pre-existing payment network? Rumors indicate that Apple is in preliminary talks with retailers, and is in the research and development stage. I don’t think Apple is anywhere near close to Visa’s scale, as Apple would need to have arrangements with 14,600 financial institutions, and 36 million merchants.
The other option is to link Apple’s mobile payments with a consumer credit or debit card (pretty similar to PayPal). Apple would then charge additional fees on top of the fees merchants pay to banks and Visa. In this case scenario, Apple becomes another middleman eating up retailers profit margins.
Furthermore, merchants would have to implement a mobile payment system, on top of the card based payment system that already exists. Assuming Apple successfully launches a mobile payment network; merchants will quickly implement a payment system assuming it’s compatible with current point-of-sale retail systems. Point-of-sale retail systems tend to run on either Linux or Windows Server. The various software and hardware will require Apple to develop a device that’s compatible with both older and newer operating systems. This can be complicated, but assuming Apple is up for the task, integration with legacy operating systems, and hardware should be feasible.
Short-term data security concerns
On the data security spectrum, Apple will have to design a full-proof system. This is perhaps the most difficult component. Recently, PayPal had to notify its customers that eBay had a major data breach. The breach resulted in a loss of user name, contact information, and encrypted password data. Why is it a big deal? eBay owns PayPal, and if eBay cannot secure data, using the latest and greatest in data security technologies what could stop A-list hackers from eventually breaching Apple’s up-and-coming mobile payment system?
Furthermore, data security issues aren’t just isolated to PayPal/eBay. In the past year, Mt. Gox the world’s biggest bitcoin exchange based out of Japan was forced into bankruptcy after losing half a billion worth in bitcoins to hackers.
Intrinsic value to Apple investors
To figure out the potential revenue from creating a mobile payment service, I will assume Apple can convert its 260 million installed base into mobile payment customers. I will then calculate the average revenue that Visa generates from each cardholder, and assume that the average revenue per cardholder when multiplied by Apple’s installed base is the potential revenue that can be generated.
Visa generated $11.778 billion in revenue in fiscal year 2013, I divide that figure by the number of cardholders. Based on that calculation Visa generates $5.53 per customer. Similarly, by multiplying Apple’s installed base of 260 million mobile users by $5.53 I can estimate that Apple will generate $1.437 billion in revenue from mobile payments. In a duopoly or oligopoly structure, pricing stabilizes at an equilibrium point in which competitors can maximize profits. Therefore, Apple will charge similar prices on transactions that go through its network.
I believe Apple can charge merchants higher fees for added technological advantages that can come from mobile based payment technologies. After all, the iPhone is equipped with a thumbprint sensor. This can prevent un-warranted charges from occurring, as it’s extremely difficult to steal thumbprint data from users. Furthermore, with GPS technology, Apple can identify suspicious spending activity. For example, if an iPhone is located in the United States, and a suspicious purchase was made at a Wal-Mart in Mexico City, the charge can be quickly reversed with real-time GPS data.
Therefore, Apple has built in advantages that it can leverage when it comes to payment technologies. These advantages can translate into cost savings for the banks and merchants.
Apple’s payment processing business has yet to get off the ground. However, the company is in the preliminary stage of developing a mobile payment processing product.
Assuming, Apple can successfully create its own payment processing network, based purely on its current installed base for iPhone, the company can expect to earn $1.4 billion in revenue. However, successfully creating a payment processing network will involve extensive business developments with various banks, and retailers.
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