It's becoming increasingly clear that Apple's (NASDAQ:AAPL) new mobile payment service is a success. A new report on mobile payments from ITG Investment Research, as reported by MarketWatch, adds to the growing evidence that Apple Pay has huge potential. Based on this new report, Apple Pay is not only gaining meaningful traction, but it's also showing a high level of initial customer engagement.
Apple Pay is gaining traction
Apple's new mobile payment service has only been around for a few months. It was officially launched Oct. 20. But Apple Pay is already shaping up to be a contender as one of the top methods for digital payments.
From Oct. 20 through the end of November, Apple Pay accounted for 1.7% of mobile payments, according to ITG. Google's Google Wallet, which has been around for three years, has a 4% share of the market, ITG says. eBay's PayPal, and mobile payment and register start-up Square, unsurprisingly capture the largest portions of the market, with 78% and 18% of November mobile payment transactions, respectively.
While 1.7% share for Apple Pay in less than two months is respectable, the most notable data from ITG's report was Apple Pay's surprisingly high level of engagement. ITG notes that new Apple Pay users, on average, recorded 1.4 transactions per week. Comparatively, just 20% of new PayPal users averaged more than one transaction per week. Apple Pay users are also more engaged than Google Wallet users, ITG says.
These data and trends uncovered by ITG indicate that Apple Pay "could pose a major threat" to PayPal, MarketWatch quoted ITG analyst Steve Weinstein as saying.
Early Apple Pay traction is quite impressive in light of the limited market that can actually use the technology. The list of products compatible with Apple Pay for mobile payments is not only short, but also only made up of products no more than 3 months old. Eligible products include the iPhone 6 and 6 Plus, iPad Air 2, and iPad mini 3.
Apple's new mobile payment service works by combining near-field communications technology, a digital wallet that stores encrypted credit card information, and Touch ID -- or skin contact in the case of the tech giant's upcoming Apple Watch.
Time to get bullish on Apple Pay?
With the optimistic early trajectory for Apple Pay, it's worth considering whether there are potential implications for Apple's financial results. One Barclay's analyst even cited Apple Pay as one reason, among others, for a recent boost to his 12-month price target for Apple stock from $120 to $140, explaining that he expects the service to play a role in helping Apple improve its already hefty profit margin of 38%. Apple stock closed Friday just under $112.
While Apple hasn't disclosed how much it charges credit card companies and banks for transactions that use Apple Pay, Bloomberg reports that Apple will indeed charge a fee to the card issuers on each transaction. With banks and credit card companies generating $40 billion annually from transaction fees, Apple Pay could eventually net Apple hundreds of millions of dollars per year if the service continues to increase in popularity with consumers, and the fees Apple charges are big enough.
Of course such an assumption can only be made with numerous speculative extrapolations. Further, even several hundred million dollars is small in relation to Apple's fiscal 2014 net income of $39.5 billion.
Looking at the known information about Apple Pay, there are simply too many uncertainties surrounding the service at this point to know how the service could impact Apple's financials. Despite Barclay's optimism about the service, investors may have to wait to see how the next year plays out, and whether Apple chooses to disclose related financial information before the service's role in Apple's results can be assessed.
The biggest takeaway today, with Apple Pay seemingly gaining traction, is that the service should help strengthen the "stickiness" that keeps customers in the Apple ecosystem of products. It also could potentially bring upside to earnings.