Much of Apple (AAPL) CEO Tim Cook’s tenure has involved asking shareholders to be patient. There have been no spectacular new product releases since he took over from Steve Jobs, just a series of iterative improvements: thinner iMacs, smaller iPads, faster MacBooks and gold iPhones. All good, but nothing that would constitute a new line of business for the company to goose its revenues.
While most eyes have been on the long-awaited iWatch and the (so-far) mythical Apple television, Cook and company have been quietly assembling the pieces to what could become one of AAPL’s biggest businesses: mobile payments.
Cook has been dropping hints that Apple might just be getting ready to pull the trigger.
During the company’s January earnings call, he expressed an interest in the area and linked it to the Touch ID fingerprint scanner on the iPhone 5s. In April, he pointed out the massive number of credit card numbers Apple already has associated with user accounts thanks to its iTunes store.
Cook was quoted by CNBC’s Bill Hardekopf: “We now have almost 800 million iTunes accounts, most of these with credit cards. This is a staggering number.”
This was accompanied by news from Jason Del Rey at Re/Code that Apple has interviewed senior executives associated with the payment industry.
Wired’s Marcus Wohlsen puts all the pieces together and comes up with the conclusion that we could well see a “Pay with Apple” button next to the PayPal option for online purchases, along with the ability to pay for products at the cash register using Apple mobile payments technology.
The Components of Mobile Payments
For mobile payments to work, you need several key components. The first is the technology. Companies like Samsung (SSNLF) include NFC capability in their smartphones to enable the “tap and pay” transaction capability that Google (GOOG) has baked into its Android operating system.
Apple, however, has been snubbing NFC, instead promoting its Bluetooth-based iBeacon technology. Released last year as part of iOS 7, iBeacon is being widely tested by retail giants like Walmart (WMT) for pushing special offers to customer smartphones and tracking shoppers. And it does have mobile payments applications.
Apple is also rumored to be considering NFC in the forthcoming iPhone 6, a development that could let it take advantage of existing NFC terminals already deployed at many retailers. Using either Bluetooth (iBeacon) or NFC, Apple could extend its transaction technology to recent Android and Windows smartphones, so it needn’t be an iPhone exclusive.
Apple has also tackled security — one of the biggest issues with online and mobile payments — by incorporating the Touch ID fingerprint scanner in the iPhone 5s.
The second major component can be the toughest to pull off: convincing consumers to sign up for your service and hand over their credit card number. This is where AAPL has a huge advantage thanks to years spent selling music and other digital media through its iTunes store. Apple already has 800 million iTunes accounts, most with credit cards associated. Again, these customers aren’t exclusively iPhone users, so the list of users isn’t limited to devices being used.
To put that in perspective, PayPal (the current most popular online payment service) has 143 million accounts. Amazon (AMZN) claimed more than 215 million when it announced its own “Login and Pay With Amazon” service last October.
Apple has the consumer buy-in taken care of, and has been assembling the required transaction technology.
Mobile Payments is a Crowded Market
Besides tech entries like Amazon, PayPal, Square and Google Wallet, credit card companies are pushing their own mobile payment systems. There are also consortiums like ISIS — which counts mobile carriers like AT&T (T) among its members and claims more than 200,000 mobile payment terminals deployed nationally.
There are dozens of competing standards for mobile and online payments, but none have had the traction to become a dominant standard. In part, this is because consumers and retailers having been waiting to see what Apple — the company that sells more smartphones in the U.S. than anyone else — will do.
What Success in Mobile Payments Could Mean for AAPL
Most of Apple’s current product lines are mature. Sure, it sells more iPhones than ever each quarter, but the days of explosive growth seem to be in the past. Meanwhile iPad sales actually declined last quarter and the iTunes store is beginning to feel the pressure of a consumer shift toward streaming music instead of buying it.
Margins may be thin for online and mobile payments (Square takes just 2.75% of a transaction and must split this fee with credit card companies), but the size of the prize is staggering. Business Insider’s Tony Danova mentions that in-store mobile payments quadrupled in 2013, and the value of retail transactions using mobile devices is forecast to hit $1.5 trillion by 2017. That doesn’t even include online transactions.
If Apple netted just 1% of that $1.5 trillion, that’s $15 billion — much of which would be profit. Considering AAPL cleared a little more than $10 billion in profit last quarter for all product lines combined, mobile payments could become one of Apple’s most valuable businesses.
Apple moves slowly — at least until it has all the pieces in place to shake up an industry and has the relationships in place to make it work — so mobile payments may not be coming this year. But with biometric security systems being deployed on its mobile devices, retailers testing its iBeacons, experience with its own EasyPay in-store mobile purchase system and a perceived technology leadership position, AAPL seems likely to make a play for locking up mobile payments soon.
If it waits too long, a competitor like Google or Amazon will catch up on its credit card lead and erase that key advantage.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.