Apple’s Mobile Payments: Who Wins, Who Loses?

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Apple (AAPL) is expected to make waves this month with the launching of the iPhone 6 — and a version of the phone comparable in screen size to Samsung’s (SSNLF) popular Galaxy line running Google’s (GOOG) Android operating system. Given the similarity of app selection and performance between high-end iPhone and Android models, screen size has long been a major differentiator for Samsung; it will be interesting to see how the company responds in its next release.

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But Samsung and Google aren’t the only companies looking at stepped-up competition from Apple when the iPhone 6 is launched.  Apple has reportedly inked a deal with Visa (V), MasterCard (MA) and American Express (AXP) that will potentially make the iPhone far more viable as a method for mobile payments. That’s bad news for EBay’s (EBAY) PayPal and for newer upstarts like Square, both of which had started to make inroads of late.

How will the new mobile payments work for Apple? You would essentially store your credit card details in your iPhone, allowing you to leave the plastic cards at home. Your phone would communicate with the merchant’s cash register via a near-field communication (“NFC”) chip, and you would use your fingerprint to verify your identity.

Apple’s new mobile payments system is really nothing new. Already, various credit card issuers use NFC chips that allow you to “tap” your card rather than swipe it. And Google has had a similar NFC-based mobile payments product for years, though merchants have been slow to adopt it due to the cost of upgrading their systems and limited demand from consumers.

Let’s dig a little deeper into the details to see who stands to gain or lose the most.

Credit Card Issuers

mobile payments, apple iphone 6One seemingly obvious beneficiary would be the credit card companies, though we need to see more details about the deal to draw any real conclusions. Already, middle- and upper-income Americans use their credit and debit cards for substantially all of their day-to-day spending, and anyone who would be using Apple’s mobile payments system is already using a credit card. It’s hard to imagine legions of cash-only Americans suddenly making the jump to electronic payments because their iPhone offers a snazzy new app.

Nationwide, 66% of all point-of-sale transactions are made with plastic. Small businesses have historically been less likely to accept plastic due to high costs and the need for expensive and cumbersome card readers. But with Square and PayPal here and their competitors now able to turn any smartphone or tablet into a payment terminal, it’s not uncommon to pay your babysitter or the neighborhood ice cream man with a credit card.

Furthermore, we can assume that Apple will take some share of the swipe fees. We have no information on what sort of fees would apply to merchants, but unless the fees are higher on the mobile wallet — which would discourage retailers from accepting it — it’s hard to see Visa, MasterCard or Amex really benefitting from this. The only real positive I see would be the security benefits. Apple’s fingerprint technology would make it harder for an unsophisticated thief to steal your card and go on a shopping spree.

Merchants and Consumers

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For consumers, the benefits will be negligible at first. It will be years before mobile payments become accepted broadly enough for you to leave your plastic at home. So even if you plan to use your mobile wallet everywhere you can, you’re still going to have to lug around a physical card. Longer term, if it catches on, you might enjoy as slightly thinner wallet and have less risk of having your card stolen. But for the foreseeable future the benefits are marginal at best.

As for merchants, unless the fees are drastically lower — and we’ve seen no indication that this will be the case — there is very little upside to expect from Apple’s mobile payments. Upgrading systems will be an immediate expense with very little obvious benefit.  It’s hard to see a would-be customer going to one of your competitors because they allow payment with an iPhone whereas you require a plastic card.

But five to 10 years from now, the story could be different. I rarely have cash in my wallet, and as a result I often avoid restaurants and parking garages that do not accept credit cards. We could eventually have a similar situation with mobile wallets, but that’s still quite a few years away.

Mobile Payments Competitors

mobile payments, applie iphone 6I would saw that the parties with the most to lose would be newer non-bank payment systems, such as Paypal or Square.  Some retailers — including giants like Home Depot (HD) — allow you to pay with PayPal. Likewise, Square scored a major coup two years ago when it partnered with Starbucks (SBUX), though that deal ran out of steam quickly.

A successful mobile wallet that used existing credit and debit accounts would make it harder for an upstart like Paypal or Square to emerge as a new standard. Even in the absence of a successful mobile wallet scheme, I wouldn’t be surprised to see Square out of business and PayPal relegated to a niche market within five years.

What about Google or Amazon (AMZN), both of which offer rival mobile wallet platforms?

Counterintuitively, Apple might actually help them by pushing broader acceptance. iPhone users can be a demanding lot, and if their enthusiasm for mobile payments spurs merchants to accept them, this would potentially help all other NFC-based mobile wallet providers.

And finally, what about AAPL stock? Looking very long-term, a successful mobile payments app could mean a fantastic new revenue stream. But for now, it will be sales of the iPhone 6 that matter most to investors in AAPL stock; the mobile wallet will be little more than a sideshow for the foreseeable future.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/mobile-payments-apple-iphone/.

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