Is Apple Pay the answer to mobile payments?

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On September 9, 2014, Apple announced Apple Pay along with the iPhone 6 and Apple Watch. Apple Pay is first available in the US, with international launch expected later. The announcement sparked a frenzy of discussions, in both private boardrooms and public forums, on what Apple Pay means for the industry.

Apple Pay has a good chance to be successful, but it’s not going to happen overnight. In the US, the keys to its success lies with the merchants, and Apple still needs to develop a much stronger merchant proposition, particularly for in-store payments. Internationally, Apple may find it harder to negotiate with the issuers and will have to contend with the dominance of Android.

Main differences between NFC payments and Apple Pay
Main differences between NFC payments and Apple Pay

“Apple Pay raises the bar for mobile payments in terms of consumer experience and security,” says Zilvinas Bareisis, a senior analyst with Celent’s Banking practice. “However, given limited consumer reach and expected reluctance from the US merchants to switch on contactless acceptance in their stores, Apple Pay’s success is not guaranteed. Time will tell if Apple can ignite mobile payments and succeed where so many others failed, but this development is certainly impossible to ignore.”

Apple Pay is also likely to prove a money spinner, generating revenues of $2.5 billion in 2017 in the US alone, predicts investor activist, Carl Icahn.

After years of speculation, Apple finally made its play for the payments market last month, unveiling a compelling mix of NFC technology, tokenisation and biometrics designed to make paying at the till with a phone simple, quick and secure.

In an open letter to Apple CEO Tim Cook, Icahn, who owns 53 million shares in the company, says he expects the new payments feature to have “limited financial impact” in 2015 because retailers need to catch up and roll out NFC infrastructure.

However, things will then pick up quickly as Apple takes a significant slice of the US market’s pie. Says the letter: “We estimate that, based upon Apple Pay’s rumoured fee of 15 bps of all spend on credit and debit cards (US card spend was $4.2 trillion in 2012) and merchant deployment of NFC reaching 80%+ in 2017, Apple in the U.S. could generate revenues (also equivalent to gross margins, as the variable costs are de minimis) of $2.5 billion in FY 2017 if it reaches 30% market share of all spend on US credit and debit cards.”

While Icahn’s figures for NFC rollout and Apple’s share of card spend appear wildly optimistic – the 30% market share quote is particularly overly-ambitious – he is even more bullish for the firm’s longer term prospects because it dominates the premium market, meaning that its customers spend more than their peers, leaving it “unusually well positioned to succeed with Apple Pay where others could not”.

More generally, Icahn – who recently got his wish when eBay agreed to spin off PayPal – is urging Apple to use some of its $133 billion cash pile to buy back more shares. The investor is pledging to keep hold of his own shares, saying that the company is dramatically undervalued and should be trading at $203, around double its current position.

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