Apple Pay is pretty cool. Head to the grocery counter, click your iPhone 6 to Apple Pay, and voila, automagically your milk and eggs are paid for. Even better, you soon can forgo even reaching into your pocket -- just use your Apple Pay-connected Apple Watch.
Apple being Apple, banks are flocking to sign up for the technology, and consumers and media have anointed this the "next big thing."
But before we get sucked into the typical Apple (NASDAQ:AAPL) fan-demonium, I think we need to ask a serious and contrarian question: Does Apple Pay matter to investors in mobile payment and financial stocks?
Mobile Payments 101
I'll offer what I think are two much better options for your portfolio, but let's first consider how the digital payments system works and why Apple Pay isn't the game changer Apple CEO Tim Cook would lead you to believe.
Modern mobile payment technology is not that dissimilar from transactions in the past. Money is transferred from your bank to a recipient for goods provided or services rendered. In between your bank account and the merchant's is a system of networks that verify and manage the transaction.
These companies, called payment processors, handle trillions upon trillions of transactions each year. They could be thought of as toll collectors on a highway -- they manage the digital payments freeway for banks and other providers, and in exchange they take a small percentage of each transaction. The more transactions on their freeways the better; it doesn't matter from where they come or where they go. More traffic equals more tolls.
Apple Pay uses these existing networks to connect the iPhone or Apple Watch to the digital payments universe. In other words, Apple Pay seeks to make it easier to merge onto the digital payments highway. It doesn't build any new roads of its own.
Apple gets paid a small fee from the banks, not the payment processors, for each transaction completed using Apple Pay.
Is anyone using Apple Pay?
Fundamental to Apple Pay's influence in the market is its adoption -- or lack thereof. Apple doesn't break out Apple Pay's specific revenue numbers in its financial reporting, but we can get an idea from other industry sources.
And as it stands today, the numbers don't look all that great.
One recent survey by InfoScout and PYMNTS.com found that 85% of respondents with an iPhone 6 and connected Apple Pay bank had not even tried the service. Nine percent had tried the service but didn't use it regularly. Only 5% actually used Apple Pay with any regularity.
The main problem, it seems, is muscle memory. The reality is that only a sliver of Americans use mobile payments in general; for the rest of us, it's easy to forget that payment via iPhone is even an option. Thirty-one percent of those surveyed who didn't use Apple Pay regularly cited forgetfulness as the main reason.
With continued marketing and coverage in the media, the number of regular users will almost certainly increase as the masses remember that a click can accomplish the same thing as a swipe. That's important, because Apple seems to be doing well among those who do use mobile payments.
According to another report, Apple Pay represented 40% of all U.S. contactless payment volume as of March of this year. That's a strong market share among early adopters who are using their phones to make purchases. As more users make the switch from plastic, it is a strong indication that Apple Pay will be their digital wallet of choice.
Forget Apple Pay. Buy this instead.
So here's the situation so far:
- Apple Pay is a new technology that encourages consumers to use their phone instead of their plastic to pay for groceries and other purchases.
- Apple Pay transactions still traverse the digital payments universe on the existing payment highways.
- Banks, not payment processors, lose a smidge of revenue to Apple in any transaction completed via Apple Pay.
- Apple Pay isn't quite mainstream yet, but it has brought serious attention to the technology and likely hastened the transition from plastic to mobile.
At this point it should be pretty obvious that one specific group of companies stands to benefit tremendously -- more so than anyone else in the digital payments system.
Why do these companies make the most sense? First, Apple Pay doesn't seem to have moved the needle in terms of mobile payment volume. It's going to be a while yet before Apple starts collecting billions of dollars in fees from the service.
Visa and MasterCard, though, already handle trillions of transactions from the billions of people still using plastic cards.
If this payment revolution eventually comes to fruition, Visa and MasterCard are as likely as Apple to cash in handsomely. E-commerce, physical-store sales, mobile transactions, and every other type of digital payment rings the register at these payment processors. If Apple Pay encourages consumers to buy their morning coffee with their phone instead of cash that's a win for the payment processor just as much as for Apple.
Today, Apple Pay isn't a huge deal. In a few years, though, it might be. It all depends on consumers' steady and increasing adoption of mobile payments over plastic or cash. If you want to cash in on digital payments and a possible mobile payment revolution, my advice is to start with the pure players instead of Apple or a bank. Check out MasterCard and Visa, two companies at the heart of the digital payments universe.