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Will Apple Pay Become the New Standard in Mobile Payments?

Zacks Research Staff

Yesterday on September 9th, Apple Inc. (AAPL) officially unveiled their iPhone 6, iPhone 6 Plus, Apple smartwatch, and a payment system called Apple Pay that will allow consumers in stores and online to use their phone like a credit or debit card.  Banks including JPMorgan Chase & Co. (JPM), Bank of America Corp (BAC), and Citigroup Inc. (C) agreed to integrate their cards into the system.  

Under deals reached with banks individually, Apple and other related tech companies will have a share of more than $40 billion that banks generate annually from so-called swipe fees.  Processors and card companies expect to benefit as consumers should be spending more with the convenience and portability of using their phones and other digital devices.

Mobile Payment Movement

Mobile payment technology has become prominent in the past years with different technology companies trying to figure out the most efficient use for consumers. From companies such as Tim Hortons (THI) launching In-App Mobile Payments to Google (GOOG) Glass letting you nod to pay with Bitcoins, companies are striving to not be left behind in the mobile payment wave.  The most prominent companies that will be able to capitalize on mobile payments will be firms such as Amazon, eBay, a variety of banks, phone companies and much more.

For example, Amazon recently directed an undercut strategy at Square Inc. and PayPal by announcing their “Amazon Local Register”.  Amazon is offering a flat charge of 1.75 % per payment until the start of 2016, a full percent lower than the 2.75 and 2.7 percent asked by the other two.  From a small business perspective, this could save a big chunk in terms of overall costs, though there is still heavy competition from the likes of Square (2.75% fees) and eBay (2.7%).  

Apple Entering the Race

Apple is looking to enter this “race” by additionally partnering with other cards such as Wells Fargo (WFC), Capital One Financial Corp (COF).  Merchants such as Macy’s (M), McDonald’s Corp (MCD), Walt Disney Co. (DIS), Starbucks Corp (SBUX), and Target (TGT) will accept the contactless payments from Apple Pay.  The new payments system will be available in the U.S. in October. Visa (V), MasterCard (MA) and AmEx gained last week amid news of their partnerships with Apple. 

Apple Pay could potentially funnel more spending to the networks and card-issuing banks as transactions shift from cash and plastic cards to mobile phones and other digital devices.  Merchants and stores could also see a boost if the payment system generates more revenue.

Apple Pay will use fingerprint scanners to verify users and NFC (near-field communication), a radio-based technology that exchanges data between devices that are held or swiped within a few inches of each other.
With cards “we’re totally reliant on the exposed numbers and the outdated and vulnerable magnetic stripe,” Apple CEO Tim Cook said Tuesday. “It’s so easy to lose your card, or have it compromised, it’s no wonder that people have dreamed of replacing these for years.”
Investors also have to keep in mind that Apple has about a 42% market share of smartphone subscribers while Android has about 51% while Microsoft, Blackberry, and others own the rest.  
Challenges with Security
Recent hacker attacks of Target and Home Depot, among other retailers, have exposed the data of millions of consumers. And even Apple has had problems with the security of its iCloud storage system; celebrities whose individual accounts were hacked recently saw their private photos spread across the Internet.
Either way, Apple Chief Executive Officer Tim Cook seems undeterred by these issues as he said today, “It’s so easy to lose your card, or have it compromised, it’s no wonder that people have dreamed of replacing these for years.”
One of the biggest questions with mobile payments is that of security.  Consumers are still not fully trustworthy of payments coming from their phone that is somehow linked to their card and bank account. On top of that, there will be additional security by using a dynamic security code, replacing the static data on the magnetic strip of a typical card.
The one-time codes eliminate the need for merchants to receive sensitive customer account information. That makes the system less susceptible to fraud and hacker attacks. Visa, MasterCard and AmEx previously introduced industry standards for implementing the technology.
Bottom Line
The Mobile Payment system is a very exciting and lucrative method and companies are intensively competing in to win over consumers.  While this new method may win over consumers, this approach is a two way street where merchants also have to participate.   We will have to wait and see if merchants and retailers decide to adopt mobile payments by overturning brick and mortar sales and retailers pushing mobile payments in stores. 
The dollar value of the mobile payment sector for Apple is not clear today, but mobile wallet providers could make it more attractive for merchants and customers in the future. Apple is hoping to be a main driver in this “sector” in a state where consumers are still searching how to even use the payment method. We currently have Apple as a Zacks Rank #3 (hold), but investors should definitely keep an eye out for this stock as the holidays are right around the corner, and Apple could be in focus soon once more.
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