Apple Inc. (NASDAQ:AAPL) and its recently-released Apple Pay feature are experiencing significant problems with fraud in the early days of the service. Apple hopes to generate a significant new revenue stream from mobile payments, so at first glance, one might expect the AAPL stock price to suffer as a result.
Not gonna happen.
The early issues with Apple Pay fraud, though admittedly significant, won’t do a thing to the long-term success of the service — or the AAPL stock price.
Sky-High Fraudulent Apple Pay Transactions
Let me be clear: The fraud levels AAPL is seeing through Apple Pay, as they stand today, are unacceptably high.
In an article highlighting the issue earlier this week, the Wall Street Journal cited a mobile payments consultant with knowledge of the early numbers, Cherian Abraham. Abraham said that it wasn’t unusual for the issuing banks to see a fraud rate of 6% on Apple Pay transactions. That’s 60 times the 0.1% of plastic swipe transactions that are fraudulent.
The majority of these fraudulent Apple Pay transactions are using credit card numbers obtained through the large-scale Home Depot Inc (NYSE:HD) and Target Corporation (NYSE:TGT) security breaches seen in recent years, according to the WSJ. On top of that, AAPL is itself the largest merchant involved in the fiasco, as 80% of the unauthorized purchases were actually made at Apple stores.
So, how exactly is all this irrelevant to AAPL stock?
AAPL First-Mover Advantage Is Too Strong to Stop
AAPL, which takes a cut of the transaction fees issuing banks charge merchants, could see Apple Pay die if its financial partners stop teaming with the company due to high rates of fraud. With massive banks like Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC) and many more on board, sales volume could crumble overnight if the big players pull out.
That’s not going to happen. Instead, banks are swiftly instituting stricter measures for verifying the identity of card users, with some banks even requiring people to call in and answer security questions before allowing a card to be integrated with Apple Pay.
Needless to say, these measures alone should cause AAPL to see that 6% number fall dramatically.
However, if Apple Pay fraud only falls modestly, the banks will still stick around. That’s because they realize the massive potential of the mobile payments market, which is projected to quadruple in size to $90 billion by 2017.
As of late January, AAPL said that Apple Pay was responsible for two out of every three dollars spent via contactless payment systems.
The longer consumers have to get used to Apple Pay, the harder it will be to usurp. It’s highly unlikely that Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and its Google Wallet service will be able to promise lower rates of fraud than AAPL anyway, since the ease with which you can add credit cards to your mobile wallet is largely controlled by the banks.
Apple Pay has hit a speed bump, it’s true. But, there’s still plenty of highway ahead.
As of this writing, John Divine was long shares of AAPL, GOOG and GOOGL. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
