Apple's 'iWallet' payments seen as unlikely to earn much money, but will lock in users to iPhone eco
In looking at the potential options for Apple in launching a mobile payment platform, one analyst believes the company is most likely to start small and safe with a "proxy" approach -- a strategy that wouldn't make Apple much money, but would help lock users into the company's iPhone ecosystem.
Rod Hall and his team, along with the Computer Services experts at investment firm J.P. Morgan, looked into how Apple might debut its so-called "iWallet" service. They came away with the conclusion that the company is most likely to offer a credit card proxy system that would allow people to carry virtual versions of select credit cards on their mobile devices.
If Apple does use this approach, Hall expects the company would collect a small transaction fee, maybe around a penny per use. He also does not expect that Apple will include debit cards initially, due to more stringent regulation of such cards, and due to the fact that debit cards are directly tied to bank account funds.
In this scenario, even if all 444 million iPhone users were to utilize "iWallet" for 100 percent of their credit card transactions, Hall estimates that the penny-per-use sum would lift the company's earnings by just 0.5 percent, or 4 cents.
In that respect, Apple's anticipated mobile payment system is not expected by Hall to have a significant effect on the company's bottom line. In a note to investors on Friday, a copy of which was provided to AppleInsider, he indicated he believes Apple's rumored payment system is more about locking users in to the iPhone and larger iOS ecosystem, making it harder to leave for competing platforms like Google's Android.
The so-called "proxy" approach wouldn't be Apple's only option for a mobile payment system. Hall noted that Apple could also become a merchant of record, which would require it directly interact with merchants --?an approach that seems to the analyst like it would be too complex for Apple to want to attempt.
Finally, he said Apple could become a full-fledged credit card issuer, which offers the most attractive economics. In Hall's estimates, this approach could add about 11 percent to his 2015 earnings per share forecast, but he also views this as the least likely method for Apple to take.
In this method, Apple could either become a bank, or find a bank partner to co-brand with. Both methods would open the company up to regulation.
Apple would either be required to extend credit to users, or offer a reloadable pre-paid debit card account, and Hall believes the latter makes the most sense. But he's not convinced that consumers would willingly pre-fund an Apple account to make credit card purchases, and he doesn't think Apple would ever want to take on credit card risk.
"Neither seems particularly likely to us," he said.
This week, it was said that Apple negotiated lower transaction fees with five credit card issuing banks as part of the company's behind-the-scenes efforts to debut a new mobile payment system. The service is expected to be tied to a new near-field communications chip and secure enclave located inside not only the upcoming "iPhone 6," but also the company's anticipated wearable "iWatch."
Apple is said to have obtained a "card present" status, resulting in lower fees. The credit card issuers are said to have agreed to this in exchange for Apple assuming some of the risk by requiring Touch ID fingerprint authentication for each purchase.
In addition to issuers, recent reports claim Apple has signed deals with American Express, Visa and MasterCard for the payments, bringing the world's top credit card companies onboard for an apparently imminent launch.
Rod Hall and his team, along with the Computer Services experts at investment firm J.P. Morgan, looked into how Apple might debut its so-called "iWallet" service. They came away with the conclusion that the company is most likely to offer a credit card proxy system that would allow people to carry virtual versions of select credit cards on their mobile devices.
If Apple does use this approach, Hall expects the company would collect a small transaction fee, maybe around a penny per use. He also does not expect that Apple will include debit cards initially, due to more stringent regulation of such cards, and due to the fact that debit cards are directly tied to bank account funds.
In this scenario, even if all 444 million iPhone users were to utilize "iWallet" for 100 percent of their credit card transactions, Hall estimates that the penny-per-use sum would lift the company's earnings by just 0.5 percent, or 4 cents.
In that respect, Apple's anticipated mobile payment system is not expected by Hall to have a significant effect on the company's bottom line. In a note to investors on Friday, a copy of which was provided to AppleInsider, he indicated he believes Apple's rumored payment system is more about locking users in to the iPhone and larger iOS ecosystem, making it harder to leave for competing platforms like Google's Android.
The so-called "proxy" approach wouldn't be Apple's only option for a mobile payment system. Hall noted that Apple could also become a merchant of record, which would require it directly interact with merchants --?an approach that seems to the analyst like it would be too complex for Apple to want to attempt.
Finally, he said Apple could become a full-fledged credit card issuer, which offers the most attractive economics. In Hall's estimates, this approach could add about 11 percent to his 2015 earnings per share forecast, but he also views this as the least likely method for Apple to take.
In this method, Apple could either become a bank, or find a bank partner to co-brand with. Both methods would open the company up to regulation.
Apple would either be required to extend credit to users, or offer a reloadable pre-paid debit card account, and Hall believes the latter makes the most sense. But he's not convinced that consumers would willingly pre-fund an Apple account to make credit card purchases, and he doesn't think Apple would ever want to take on credit card risk.
"Neither seems particularly likely to us," he said.
This week, it was said that Apple negotiated lower transaction fees with five credit card issuing banks as part of the company's behind-the-scenes efforts to debut a new mobile payment system. The service is expected to be tied to a new near-field communications chip and secure enclave located inside not only the upcoming "iPhone 6," but also the company's anticipated wearable "iWatch."
Apple is said to have obtained a "card present" status, resulting in lower fees. The credit card issuers are said to have agreed to this in exchange for Apple assuming some of the risk by requiring Touch ID fingerprint authentication for each purchase.
In addition to issuers, recent reports claim Apple has signed deals with American Express, Visa and MasterCard for the payments, bringing the world's top credit card companies onboard for an apparently imminent launch.
Comments
This clown has no idea what Apple will do with payments in the future. If Paypal can net billions of dollars a year with only 100 million accounts imagine how much Apple can with 800 million accounts.
PayPay is estimated to have $3B in net revenue for 2014 and $1.8B in Gross profit.
Apple can easily multiply that by 6x that amount once the payment system is mature.
We are talking $18B in revenue and $8B in profit. That's more profit than what the iPad produces.
Exactly!
The profit margin on each transaction fees would be phenomenal! Just look at Google's AdWord revenue from $0.01 per click and Google generated 50 Billion in advertising revenue in 2013.
/s
I agree with your whole post, but I'd like to focus in on this part, because Apple doesn't do anything small and build it up... unless he meant start with only one country like the USA or one continent, and then add more countries etc as they roll out their new deal...
When Apple sets out to disrupt an industry, they do it in style and then move fast enough to keep everyone else from catching their breath or getting their balance. In addition, Apple has enough cash (in the USA and abroad) they could be a bank, but I suspect they will use their liquid cash to back a major bank and let the banking people do what they know and Apple will stick to what they know best.
I think the president of Samsung will have his number one son digging a bigger hole out behind the offices to bury their not-too-smart phones in... Between this program and the IBM partnership, enterprise will be want to do business with Apple in the broadest possible way.
Doesn't this completely remove all borrower risk? And also, doesn't this making giving money form one individual to another very easy?
If true, Apple could offer the account owner a slice of the pie - 1 to 2% off all purchases wherever the 'card' is presented.
What's your view of this prefunding only possibility? Does my view of the matter have legs?
I work on the ATM and VISA systems for a Canadian bank and let me tell you Apple will collect way more than 1 cent per transactions. Let me give you some examples:
Credit card fees: There is no fee on the card owner side but there is a % of the purchased amount on the merchant side. The merchant side fees can get pretty high.
ATM transactions: In canada, bank will charged pretty high fees unless you take a plan. It can get really expensive if you dont go to you're bank ATM because the ATM owner will overcharged a fee for himself on top of the withdraw amount. For example, on the consumer side, I could get overcharged $3 on top of paying an extra $1 to my bank if I dont have a plan. On the bank side, the bank only needs to pay $1.5 to the interac network. For example, if a bank overcharge $3 on a transaction made by another bank customer, it will get the interac fee on top of it ($1.5) for a total of $4.5 for a single transaction...
Apple normally play hardball on negociations, they will get a lot more than 1 cent per transactions... A more likely scenario for credit card transactions, Apple will get a % of the fee, not a flat rate.
In order to do these digital payments you will need an iOS device with NFC.
if you already have an iPhone then all you need is the iWatch.
If you don't have an iPhone, then you need to buy the iPhone 6 with NFC.
IWatch will not work with Android, it is all about selling more iOS devices.
Apple's goal is to keep adding to the iOS value proposition to justify the higher price.
Many Android users will switch to the iPhone so they can also use the iWatch for payments, health tracking and security.
Apple's competitors have NFC payment systems but they have not caught on because they only understand how to add features.
They don't understand how to create end to end seamless experiences that delight consumers.
My friend was recently telling me how he can't wait to switch back to an iPhone after switching to an HTC one.
He said it was a good device but there were constant little annoyances that made him miss his iPhone.
Too much work. Normal people don't want to have to keep moving money around to make sure that the next transaction will go through.
Apple likes simple, "it just works".
How is this proxy payment concept (if there's truth behind it) "lock in"? Do your purchased items get taken from you if you leave iOS? Do your credit cards stop working?
Do they call EVERY good feature of every product a "lock in" because you lose the feature if you don't use the product?
Sounds like someone wants a way to spin happy customers into something negative. What's wrong with just calling users who get value from Apple features a "cult"? That's a fine tradition!
One might note that PayPal gets a significant percentage of each transaction, thus they make a lot more money than someone who's simply acting as an intermediary.
Secondly, while I agree that various signs point to Apple getting into mobile payments, it's also possible that the "inked" "card present" deals with AMEX and Visa could simply pertain to lower transaction fees for iTunes and AppStore purchases. Nothing more, nothing less.
This clown has no idea what Apple will do with payments in the future. If Paypal can net billions of dollars a year with only 100 million accounts imagine how much Apple can with 800 million accounts.
I wonder how much money paypal would make without ebay sales?
The US is going to have to change how all transactions are handled. Unless Apple is also coming out with replacement credit and debit card technology, Apple's impact will be minimal.
This clown has no idea what Apple will do with payments in the future. If Paypal can net billions of dollars a year with only 100 million accounts imagine how much Apple can with 800 million accounts.
PayPay is estimated to have $3B in net revenue for 2014 and $1.8B in Gross profit.
Apple can easily multiply that by 6x that amount once the payment system is mature.
We are talking $18B in revenue and $8B in profit. That's more profit than what the iPad produces.
Visa/Amex/Mastercard/Discover have total revenues of $60B a year
They have total profits of almost $20B a year
You dont think Apple can take a huge chunk of that?
Not for the first 10 years. Apple is repeating history. Think 'music.' Think 'break even.'
Those profits assume you can plug/replace trillions of transactions... most of those transactions are not done by people who have smartphones or retailers who can handle a digitally secured transaction (simple example... any mid level restaurant where you hand your card to the wait staff and they take it to the 'Point of Sale', and arguably, the least secure of transaction types... you just gave away all the secrets that protect your account to a semi-stranger). It will take some time.
but, yes, that's the long game... but the short game is exactly the crux of strategy
Lock them in with the experience... get their cards into the secure enclave, never to be released. Just like your music library.
The objective isn't to make money... the objective is to make them never want to leave, or the barrier of leaving is higher than any benefit of leaving.
Then the money will take care of itself.
This is disintermediation on the order of Apple owning the smartphone customer... once you own them, and exploit the internet, not competing with these players... you're displacing them.
It will take some time... to get to VAM's profits... remember, their entrance price (card) is free for most people, and around $100 a year for high value users (hotel/airline branded cards with mileage/points). Apple is depending on people spending some $400-$1000 a year for the privilege of carrying their 'card'. Apple is only carried today by 20-40% of the smartphone users. Assume they are 5-20% of the total credit/debit card carrying public. And like music labels, there will be some pushback by VAM and the payment card processors as Apple upsurps their space.
Apple doesn't need all that profit from the transactions... what they do need is confidence that every 2-4 years, you spend $800 on their mobile computing equipment. Making $100 a year on your transactions (1% of $10,000 in annual purchase [<50 dollars a day]... times say 500M users= 50B), is valuable, but not critical gravy.
So in the end, this is like iTunes Music. I'll crack a small smile if they say, 'we're just trying to run a break even business to make sure our customers have the best experience using our devices.'
This clown has no idea what Apple will do with payments in the future. If Paypal can net billions of dollars a year with only 100 million accounts imagine how much Apple can with 800 million accounts.
PayPay is estimated to have $3B in net revenue for 2014 and $1.8B in Gross profit.
Apple can easily multiply that by 6x that amount once the payment system is mature.
We are talking $18B in revenue and $8B in profit. That's more profit than what the iPad produces.
Visa/Amex/Mastercard/Discover have total revenues of $60B a year
They have total profits of almost $20B a year
You dont think Apple can take a huge chunk of that?
Keep in mind the time Paypal has been in business and the spread they have. Apple won't have that when this launches.
Rather like how Google Maps was crap when it started like 10 years ago, Paypal was barely making any money when it started. It wasn't until various web sites, including Apple, jumped on board the 'pay with Paypal' system and eBay bought Paypal that they really started to rake in the cash.
That is the same thing that is likely to happen here. Apple starts small with credit card only via one or more of the biggies. Everyone sees that it's no ore risky than using a plastic card (from customer and merchant point of view) and companies like Gap etc want to add their cards, banks are willing to allow debit transactions, online sites want to hook up for auto fill and validate with touch id etc. Even bill pay services might get it on it. And here comes enough money to sustain it at the least. But more important is that folks will want the hardware. On the fence upgraders will be lured to get rid of that iPhone 4 or 4S or that iPad 2 and so on. And that is where Apple makes the real profit
Apple already has 900,000,000 creditcard accounts.
Imagine if Apple releases a digital Credit card with Apple rewards. The sign up would be off the charts. Get 1% of your purchases to use on iTunes or Apple retail? Awesome.
Now that would be really killer. Actually they kind of did do that at one point. Barcley Bank which handles their inhouse financing had a choice of a no interest introductory offer or a rewards card. I rather wish I had known that when it was live cause I would have applied and just route everything through it for max tunes points.
This is why the stock was down 4% earlier this week. Wall Street clowns pumped up the stock to record highs and then dump it saying nothing Apple does can be meaningful to the top/bottom line. I wouldn't trust any of these clowns to know what Apple might/is do(ing). They think small, Apple doesn't.
Actually the stock was down because of the vast number of negatively slanted articles that have been coming out over the past couple of weeks, especially after the invite. It's standard form. Hype the stock all summer to raise the stock. The invite goes out and the talk of delays and issues goes up to drive the stock down. Big houses score on the dump, then can get more shares cheap when everyone is excited about what is announced and then even more so when the lines are huge, preorders are gangbusters and so on.