The Dow Jones Industrial Average (DJINDICES:^DJI) was down 26 points in early afternoon trading Tuesday, even after a strong economic report on factory output beat expectations. This beat followed the confusing, but ultimately positive, Institute for Supply Management manufacturing report yesterday.
Worldwide Developers Conference
This week the investing world is focusing a close eye on Apple (NASDAQ:AAPL), as the company's annual Worldwide Developers Conference gets into full swing.
Yesterday the company announced a major overhaul to its operating system software. The new version, coined Yosemite, rehauls the system's coding language, a move that has been widely applauded by the developer community.
Still, this update is an incremental change at a company where the greatest successes have been leapfrog innovations. That history has many investors asking, what could be the next big innovation at Apple?
The answer is digital payments
Recently I wrote a report on the current and future landscape of digital payments. The one-sentence summary is that the existing infrastructure is not changing anytime soon, but the way consumers interact with merchants could be radically altered by new entrants into the industry.
Companies like Apple, for example.
Let's start from the top.
The predominant method today for paying for goods or services is either with cash or with a plastic card such as a credit card. The card is swiped, setting in motion a complex digital process between the merchant's bank and the consumer's bank over a payment network.
Visa (NYSE:V) and MasterCard (NYSE:MA) are the two lead horses in the payment network business. Their networks support trillions of dollars of transactions every single year.
But here's the thing about payment networks -- they don't necessarily care where the transaction originates or where it ends. They operate like toll collectors, earning a small profit on every transaction. From a long-term strategic perspective, it is in the best interests of these companies to expand the access points to their networks. More traffic means more tolls.
In that way, mobile payments are a huge opportunity for these companies.
The technology is still very early stage today
Many of you have probably seen a MasterPass or similar terminal at a gas station or grocery store. If your phone is equipped with near-field communications, or NFC, hardware, you could use your phone today to make your payment at those terminals.
The problem is that most phones don't yet have NFC technology, and that is limiting adoption of the technology.
No iPhone has the hardware yet, but Samsung does include the hardware on certain phone models. Earlier this year, Visa forged a strategic partnership with Samsung to include Visa's payWave mobile payment software on the home screen of newly shipped phones.
Moving from early stage to mainstream
Now consider where Samsung's phones are positioned in the marketplace. The vast majority of their share is down market in less-expensive phones. The Galaxy and Note product lines compete directly with the iPhone, but in general they remain in second or third position.
If Apple were to roll out a new iPhone that included NFC technology and a software package from either Visa or MasterCard, then overnight mobile payments would move up market and into the hands of millions of iPhone users around the world.
The technology that was just days ago on the fringe would suddenly be a core feature of the most popular high-end smartphone on the world. Millions would test it out (because why not!?), and many of those would continue using the technology.
Even more critically, Apple's iTunes has hundreds of millions of users, many of whom already trust Apple to store their credit card information. The transition from iTunes to Apple's mobile payments software would be seamless. No reentry of your 16-digit card number, expiration date, security code, etc.
It's a win-win-win situation
For consumers, the move to smartphone-driven mobile payments would be an evolution to a simpler, more streamlined, and easier way to transact.
For Visa and MasterCard, this technology would open up thousands or millions of new access points for their networks to capture commerce. More transactions on their networks means more profits, and that's a good thing for the companies and their investors.
And for Apple, this technology would be another step to strengthen and expand the closed ecosystem that supports iPhone users, developers, and partners. It would build on iTunes, provide a new feature set for the iPhone, and further ingrain Apple into public use
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Apple, MasterCard, and Visa. The Motley Fool owns shares of Apple, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
