It was recently reported that American Express (AXP 0.07%) has agreed to work with Apple (AAPL 1.27%) in the development of a long-awaited mobile payments system for the iPhone.
Source: Wikipedia.
It's pretty easy to see why Apple would want this. The company already has nearly 800 million customer credit or debit card numbers on file from its iTunes and App Store, and there is definitely money to be made in fee revenue. The system will also reportedly be integrated into the highly anticipated "iWatch," which would enable consumers to pay for things with a swipe of the wrist.
However, there is one good question that comes to mind that hasn't been addressed in any of the reports: What's in it for Amex? Since this only gives customers another way to use their existing credit cards, is there really a lot of opportunity for Amex to make money with this partnership?
The short answer is, yes, there are a couple big reasons this deal could mean big money for American Express.
It eliminates Amex's major obstacles to mobile payments
In order to be successful in mobile payments, two very important things are needed. First, there must be a sufficient customer base interested in using the platform. Second, there must be a substantial infrastructure in place to make payments mainstream. American Express' partnership with Apple solves both of those problems.
As far as the first point is concerned, those aforementioned 800 million Apple customers make up about the biggest customer base anyone could hope to reach.
In this respect, partnering with Apple is something of a defensive move on American Express' part: It won't necessarily make money here, but could prevent rivals Visa and MasterCard from being the only options on Apple's platform. And both of them have reportedly agreed to a mobile payments partnership with Apple as well.
In terms of infrastructure, the cost to American Express will be minimal. On the consumer side, the hardware is already in place (the iPhones), or will be once the iPhone 6 is released. All that's missing is the software platform, which Apple is developing in conjunction with Amex and the other major payment processors.
On the merchant side, the infrastructure will need to consist of upgrades to point-of-sale terminals to allow compatibility with near field communication, or NFC, technology. The prospect of reaching Apple's massive customer base could be just the motivation merchants need to upgrade.
How it will increase charge volume for Amex
The real opportunity for increasing American Express' charge volume will depend on whether the system supports peer-to-peer payment options.
While people might choose to use their phones to pay at retailers instead of their physical credit cards, this alone isn't likely to have a large effect on charge volume. However, if iPhone users can send money to other users, similar to PayPal, simply by punching a few buttons on their phones, it could easily be a catalyst for an uptick in charges.
According to the most recent data, there are about 152 million active PayPal accounts, which combined for $180 billion in transactions last year. Of this amount, $125 billion was processed by PayPal's merchant services business, which suggests roughly $55 billion in volume was peer-to-peer transactions.
Imagine how much peer-to-peer transaction volume we could see from Apple's 800 million users. And bear in mind, this is transaction volume that the credit card companies aren't seeing too much of now. Many PayPal users have their accounts linked to a checking or savings account, thereby bypassing the credit card companies entirely, and people who don't use PayPal are unlikely to use a credit or debit card to send money to another person.
Think about it -- right now if you owe your friend $100, you will probably write a check or go to the ATM and withdraw the necessary cash. However, if you could simply click a button on your iPhone and send that money remotely to their Apple mobile payments account, thereby saving someone a drive to the bank and maybe even earning some credit card rewards points, it could be an attractive alternative.
It's tough to put a number on it
It's difficult to put any numbers on the potential for increased charges or fee revenue for American Express, since the magnitude of success will depend on several variables. Will the system support peer-to-peer? How many merchants will get on board?
And how seamless and user-friendly will the system be? This is the primary variable. The problem with most mobile wallets (so far) has been that they aren't terribly convenient. Merchants for the most part don't support NFC technology, and the software itself requires setting up an account, entering credit card information, and more. If Apple does it right and integrates its mobile payments system directly into software the company's customers already know and love, the possibilities are huge.
Regardless of the immediate impact, it's easy to understand why American Express' partnership with Apple could be a winner for both companies. It'll be interesting to find out more details at Apple's product event on Sept. 9.
