No matter what changes Apple Inc. (AAPL) makes to Apple Pay, the service is never going to make a difference on Apple’s top or bottom line.
It gets just 15 cents per $100 spent on Apple Pay. That’s the deal AAPL made with MasterCard Inc (MA) and Visa Inc (V). As a result, there are not enough billions of transaction dollars that could make Apple Pay even remotely relevant as a service that moves AAPL stock.
What’s Unfortunate Is That it Could
Apple Pay has been criticized by some, but by normal standards it has been a success. Apple has millions of merchants accepting Apple Pay and the support of just about every relevant bank in the U.S., along with strong adoption internationally.
Furthermore, Apple recently upgraded Apple Pay so consumers can use it for in-app purchases and other purchases on its operating system. That could be a huge win for transaction volume.
Still, Apple gets just 15 cents per $100 dollars while MasterCard and Visa collect fees that are believed to be around 3% of total transactions. That’s a big disconnect, and as I explained in previous articles, AAPL already has the structure and ecosystem to compete directly with Visa and MasterCard, but to be a real success it will need help.
Thankfully, American Express Company (AXP) is both iconic and cheap at 11x forward earnings.
With a market capitalization of $60 billion, AXP may look too rich for AAPL, but keep in mind that Apple essentially prints billions of dollars in new cash by the quarter, and has over $200 billion in assets right now.
Why AXP Stock?
What makes AXP so great for AAPL is what separates it from the likes of MasterCard and Visa. American Express is very much a club that attracts the wealthy. It does not bottom feed off low-income consumers or students like MasterCard or Visa.
Consumers pay annual fees for usage, but do not pay the high interest rates of other credit cards. If Apple were to acquire AXP stock and thereby enter the payment processing space, it would be wise to leave American Express’s business as is. It is a business model that works where AXP can charge merchants higher fees than either MasterCard or Visa because its customers spend more.
Therefore, Apple would absorb American Express’s $30 billion business with operating margins of nearly 24%, but it would add itself as an “iconic global consumer brand.” Keep in mind that AXP has exclusive partnerships with the likes of The Coca-Cola Co (KO), Walt Disney Co (DIS) and Nike Inc (NKE) where much of American Express’s revenue is created.
By adding Apple to the mix, American Express could replace the loss of Costco Wholesale Corporation (COST), whose members accounted for 9% of AMX’s billed business. So while the upside in becoming an exclusive partner of AXP through an acquisition is clearly a potential growth driver, and reason for acquisition, the big catalyst remains AXP’s premium transaction fees from Apple Pay.
How AXP and Apple Pay work together
Apple does not disclose transaction details for Apple Pay. We don’t know how much money it is earning from Apple Pay or how many billions of dollars in transactions are processed on the service.
What we do know is that transaction volume grew five-fold year-over-year during its last quarter and that Apple’s App Store and iOS is the worldwide leader in mobile transactions. Furthermore, we know that Statista anticipates more than $1 trillion in annual transactions through mobile devices by 2019.
Therefore, let’s say that 50% of the transactions are on iOS — $500 billion in transaction volume by 2019. That can be $750 million for AAPL if it keeps Apple Pay as is. Or, it could be $10 billion to $20 billion in revenue if Apple acquires AXP and makes Apple Pay an actual transactor of payments where it collects 2% to 4% in fees.
When you consider that AXP’s existing business would remain, it makes too much sense for Apple to ignore, not to pursue American Express. Thus, AAPL must become its own payment processor of mobile transactions.
With iPhone sales falling, Apple needs to find the next big thing. Turns out, Apple Pay could be that next big thing. Apple just needs to maximize the revenue stream, and it can do so easily by acquiring American Express.
If this does happen, watch for AAPL stock to soar.
As of this writing, Brian Nichols owned shares of AAPL stock.