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Should Bank of America Be Terrified of Apple?

Having Apple (NASDAQ: AAPL  ) as a competitor is scary.

Recent rumors suggest Apple is likely to move into the world of payments. This potential move should scare some companies, but Bank of America  (NYSE: BAC  ) shouldn't bat an eye.

Source: FLickr / Jun Seita.

The move into mobile
CEO Tim Cook recently noted Apple has now 800 million registered iTunes users, almost all of whom have stored credit cards.

Cook went on to say, "the mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID... I don't have anything specific to announce today,'s a big opportunity on the platform."

Despite Apple's enormous user base, if you think Apple is prepping to take down Bank of America and the other major banks, you're wrong.

The reality
Apple has been rumored to dive into the payments industry, not the banking industry. While it's easy to think those two are synonymous with one another -- after all we make payments with the cards issued by banks -- it's vital to understand the differences.

Although the swipe of a card is simple and easy, the payments industry encompasses a variety of moving parts, pieces, firms and industries. A quick glance at a chart from Visa in its latest annual report shows just how complex it is:

Source: Company Investor Relations.

Bank of America has a joint venture with First Data called Bank of America Merchant Services, which is an acquirer -- a unit that has relationships with merchants and stores to ensure the payments they receive are processed -- but this is a remarkably small part of its business.

Why Bank of America isn't worried
The merchant services business at Bank of America processed $625 billion worth of transactions last year. However "merchant services," can only be found four times in its annual report.

This is still a bank, and the majority of its revenue is still generated from loans and securities. Last year, net interest income stood at $43 billion.

It also earns money from its investment banking operations and other operations which charge fees, known as noninterest income, and it had $47 billion worth of that last year.

All of this is to say, while Bank of America is involved in payments, it is by no means a principal source of its income.

Who should be scared
While it may not be a threat to Bank of America, Apple's possible entrance into the payment landscape should terrify PayPal, a unit of eBay.

PayPal has had impressive growth. It has 148 million registered users -- a 35% increase since 2012 -- and its total payment volume recently sat at $52 billion. 

148 million users is nothing to sneeze at, but it pales in comparison to Apple's 800 million users. Apple could build its own PayPal-like platform and easily plug its users into it via its numerous platforms and hardware devices.  

If Apple was able to create a better user experience (something it is has continuously done in the past) customer loyalty to PayPal could fade. Apple also has the financial strength with its nearly $160 billion in cash to invest in its platform and not be pressured to turn a quick profit from any new business segments.

How it all ties together
While Apple is poised to expand into the payments industry, and could be a threat to PayPal, it isn't moving into the banking industry and challenging the big banks.

Bank of America and the other major banks are surely keeping an eye on what Apple is doing, but for the time being, it isn't something that threatens their business, even though many likely wish it would.

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Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2014, at 1:34 PM, G44ca wrote:

    IMO, if Apple is serious about this space it will buy Monitise (MONIF).

  • Report this Comment On May 18, 2014, at 2:31 PM, taojoness wrote:

    Of corse they should be scared if you understand the banking system . By law a bank can float up to 10X its cash reserves .It is the only american business that does not use its own inventory to make money .do you think there is a reason the bank asks for 10% down on a mortgage? tour deposit gives it the power to write the rest of the mortgage right there no fanny or fed involved unless the bank screws up then it has to pay part of its compound interest to the fed if it ends up at the discount window .Yes Virginia the fed destroys more money than it lends out and not by burning dollar bills its just an entry in quickbooks .

    If Apple gets into the payment business it will reduce the float that these banks rely on as reserves . even when an exec gets a multi million bonus as soon as he cashes the check its back in the reserve . my dollar is worth a dollar because i work for it their dollar is worth 10 because they say so . I hope apple spanks them good. changing laws on bank leverage is the only way the middle class will ever get out of wage slavery. make these guys put their own skin in the game to make loans or invest . let them grow by accumulating profits not "interest"

  • Report this Comment On May 18, 2014, at 2:56 PM, fauxscot wrote:

    I have had a Paypal account for more than a decade. A BOA Visa for as long. A iTunes account since the early days.

    I use the Visa constantly. Everyone uses credit cards.

    I use the Visa to buy things from Apple. Those 800 million card holders all use cards, obviously.

    Paypal sits there untouched, sometimes years between transactions. In my world, it's already an also-ran, and is used to make donations or the occasional eBay purchase.

    Not sure they should worry, but PayPal is where myspace is in my world. Kinda nowhere.

  • Report this Comment On May 18, 2014, at 7:59 PM, Cintos wrote:

    Perhaps Apple should buy VISA.

  • Report this Comment On May 19, 2014, at 12:58 PM, taojoness wrote:

    fauxscot if you had actually gone to paypal you would find a new feature called bill me later that gives you 6 months interest free on purchases .My pay pall account languished for years but this new feature has let me buy a new soft top for my jeep and tickets to dinner with a meet and greet with the fabulous Procol Harum followed by a concert in west bury ny in july

    i am the richer for it (interest free )

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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