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2 Ways Apple Inc. Can Play Mobile Payments -- and Win

Touch ID sensor. Source: Apple.

This week, Apple (NASDAQ: AAPL  ) took the bold and somewhat expected step of opening up its Touch ID feature to third-party developers. Opening up Touch ID has been a long time coming, as when it first made its debut, its usage was limited to iTunes purchases and device unlocking -- barely scratching the surface of its true potential.

The most obvious implication of adding third-party support is giving Apple inroads to the burgeoning field of mobile payments. Mobile payments have certainly been on Tim Cook's mind lately. Here he is as recently as January:

The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID. But we're not limiting ourselves just to that. So I don't have anything specific to announce today, but you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it's a big opportunity on the platform.

This is just the beginning. Here are two different ways Apple can play mobile payments.

1. Facilitate third-party payment vendors
Apple's 30% cut on apps and books under the agency model is common knowledge. However, that only applies on the sales of content, including in-app purchases. For apps that are just extensions of other services, such as payments, there is no cut.

Consider Square, the popular mobile payments service that is being adopted by small- and medium-sized merchants en masse. Square charges 2.75% per swiped transaction, and Apple gets none of it. eBay's (NASDAQ: EBAY  ) PayPal similarly charges a comparable 2.7% for its competing PayPal Here service. Again, Apple's cut is zilch.

By allowing third-party entities to use Touch ID, all while keeping the actual fingerprint data encrypted locally, Apple can facilitate these types of services and the net result is an incredibly simple experience for users to pay for things. PayPal, specifically, has been looking forward to this day for over a year and has been anticipating Apple's killing the password.

PayPal Here. Source: PayPal.

PayPal is a member of the Fast IDentity Online, or FIDO, alliance, which has set out to transition authentication away from alphanumeric passwords in favor of something more secure. Google joined the FIDO alliance last April and Microsoft got onboard just six months ago. In fact, PayPal became the first company to enable fingerprint authentication for payments with Samsung's Galaxy S5 earlier this year. With that in mind, it should be obvious that PayPal will embrace Touch ID once iOS 8 launches this fall.

PayPal continues to adopt new technologies for payment authentication, and mobile results are soaring as a result. In the first quarter, PayPal's mobile commerce volume jumped 70% to $11 billion, and the company added 6.5 million new customers from mobile alone.

Even if Apple isn't getting a piece of the action, the goal for the Mac maker is to further strengthen iOS and expand the platform's overall capabilities. Third-party payment vendors like PayPal are going to love Touch ID.

2. Launch a first-party payment service
Apple now has nearly 800 million iTunes accounts, most of which have credit cards on file., the largest e-commerce company on the planet, has "just" 237 million active customers with credit cards on file. Apple has over three times as many registered users, which is a clear opportunity for a first-party payment service.

Using Touch ID for iTunes purchases. Source: Apple.

Over the years, iTunes has continued to swell to encompass a very broad range of products and services beyond music. iTunes is no longer a comprehensive moniker, but the main reason Apple hasn't changed it is because it has become such a powerful brand. For that reason, Apple could launch something along the lines of "iTunes Pay" and tap into your iTunes account for payments. Add in iBeacon's retail potential, and all of a sudden you have a massive payments platform with real-world applications.

Apple would have to reduce its fees for these types of transactions closer to the industry norm of around 3%, but again the goal here isn't about turning mobile payments into a direct profit center. It's about giving consumers more and more reasons to buy iPhones.

Having cake and eating it too
The real beauty of these strategies is that they're not mutually exclusive. Apple can do both to maximize its chances of success. Touch ID is about to proliferate throughout the lineup, dramatically expanding its usage. Apple is already doing one of these strategies, but will it do both?

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  • Report this Comment On June 07, 2014, at 11:49 PM, twolf2919 wrote:

    Your first option makes some sense - but, as you point out yourself, it won't make any money for Apple - it'll simply facilitate other players getting a bigger foothold in the mobile payment market. Since those players are multi-platform, it won't even give iOS much of an advantage.

    The second strategy is one that is bandied about a lot by analysts and bloggers. Each time, I ask the question "how will Apple make money" from those 800 million credit cards, since it is the credit card companies that make the money off the transaction and I doubt customers will pay Apple for the dubious privilege of pulling their phone out of their pocket rather than a plastic card. No analyst has ever explained this.

    As far as your comparison of Apple's 800 million credit cards to Amazon's "mere" 300 million - that's just rubbish. Amazon probably sells hundreds of thousands of goods and services - and makes its money by either selling these goods directly (just like a store) or charging sellers a fee to list on amazon. What does Apple have? You claim that iTunes has grown up to offer a wide range of products and services - common! How many goods and services are we talking here? A dozen? Two dozen? Silly comparison.

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Evan Niu

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at a major discount broker. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.

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