September began on a busy note for Apple Inc. (AAPL) which launched four new products to gain steam even as its peers, Samsung and Motorola, came up new smartphones and smartwatches last week.
Apple unveiled two new smartphones, iPhone 6 and 6+, along with two new products – Apple iWatch and Apple Pay. Notably, the company has forayed into the new-age digital payments through the Apple Pay mobile wallet, available from next month.
This next generation mobile payment technology will now help Apple users make payments through Apple’s Touch ID application at any wireless pay terminal. The Touch ID functions on finger print sensors or a one-time password for each transaction along with device-only account number and the near-field communication (NFC) chip. These features encase superior security and privacy for customers as it does not involve sharing of credit card details for any mode of payment. A similar highly secured version is also available for web-based transactions.
Apple intends to give a complete user-experience through this viable payment solution, thus increasing reliance on its mobile devices and making them a more integral part of its already large, loyal customer base. It also aims to gain competitive edge over Google Inc.’s (GOOG) Google Wallet and other mobile wallets in the market through its high-end secured processes.
Widespread Launch
In its initial phase, Apple has launched its mobile wallet extensively to cater to over 220,000 merchants only in the U.S. alone by partnering with the global card processing giants – Visa Inc. (V), MasterCard Inc. (MA) and American Express Co. (AXP) and use their superior payment technology. These together cover 83% of all global credit cards.
Concurrently, Visa has introduced a Visa Token Service for the latest Apple products, which will operate on a digital numeric identification generated online for secured mobile payments. With this digital account number service, consumers will no longer require the 16-digit card number for online payments.
Additionally, Visa assimilated its CyberSource and Authorize.Net platforms with Apple Pay for safe payment processing solutions, thereby monetizing well on this innovative technology. Initially, this function will be available for Apple Pay and will be made accessible to all Visa clients in the U.S. from fourth-quarter 2014 and to global clients from 2015 onwards.
Meanwhile, MasterCard and American Express’ digital platforms are well-positioned to integrate with Apple Pay, aiding optimum market retention for both the card companies.
Apple has also allied with six largest global banks that issue cards, namely Bank of America (BAC), Citigroup Inc. (C), JP Morgan Chase & Co. (JPM) among others. Moreover, the company already has over 800 million iTune users who would be the initial accountholders of Apple Pay.
However, Discover Financial Services (DFS) was out of list as it had already allied with eBay Inc.’s (EBAY) PayPal last year,to offer mobile payment processing service that reads card information with smartphones.
Competitive Edge or Challenges Ahead?
Apple Pay ensures that the one-touch transaction through this channel will only be privy to the customer, the merchant and the bank involved. The degree of security and privacy may help raise confidence among smartphone users in the U.S., about 66% of whom are still reluctant to make mobile payments linked through a debit or credit card, according to CreditCards.com. NFC has also been of little help in boosting mobile payments so far.
However, this conversion could also be a challenge for Apple in the near term, although a majority of consumers are expected to shift to mobile payments by 2020, according to a study undertaken by Pew Research Internet Project in 2012. Even eMarketer estimated that payments through mobile devices in the U.S. increased about 114.5% year over year in 2013, while smartphone users shot up 57%.
Apple Pay also scores a bonus point against Google Wallet, PayPal and others, which does not guarantee such high-profile security as the latter ones store customer data. The purpose of data accumulation also lies in the focus and operational strategy of both the companies. While advertising drives Google’s revenues and may make use of the customer information to predict their future purchases, Apple is only concerned with escalating consumer’s inclination towards its mobile devices by enhancing customer-experience.
While Apple aspires to stay ahead of competition even without any back-up customer information, this could be risky given that the company will not even keep records of transaction data for future verification. Even on grounds of national security, Apple Pay transaction will fail to consider the shopper’s identity given the absence of name, credit card number or security code. Moreover, Apple Pay is functional only on Apple hardware, while others are readily accessible through Android-based smartphones.
Furthermore, the new mobile wallet will weigh on customers’ bills in a measure similar to its peers. While shares of Apple scaled an all-time high of $103.74 on Tuesday, the subsequent consideration of these challenges led the stock to close at $97.99, down 0.4% from previous session. Shares of Visa, MasterCard and American Express were also down 0.7%, 0.2% and 1.2%, respectively.
Scope of Growth for Card Processors
Apple Pay will likely be a strong long-term growth catalyst for Visa, MasterCard and American Express, as it adds to the secured and user-friendly contactless payments service (m-commerce) that these credit card giants are focusing on since the past few years. This is crucial given the fact that the cyber hackers are expected to have stolen more than 60 million credit card numbers, informed by The Home Depot Inc. (HD) earlier this week.
Going forward, this secured operational model and investment in technology upgrade is expected to boost investors’ confidence in these card giants as well. Despite the aforementioned challenges, mobile wallets are steadily moving beyond niche solutions given the increased dependence and usage of smartphones as well as constantly improving technology and security. Over time, such endeavors could prove to make mobile wallets an integrated one-stop solution, thereby driving transaction volumes and revenues for these credit card processors.
We believe that once consumers are assured enough about the overall mobile payments ecosystem, which is a matter of time, the card giants will be able to gain scale and capture a significant market share in the digital payments’ space. The gradual understanding will also help the stocks soar to great heights.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment