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Apple Pay Has Hit a Wall -- and That's OK

By Evan Niu, CFA - Feb 22, 2016 at 12:30PM

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Apple Pay seems to be losing traction in the market, but that won't hurt the iEverything maker.

Image source: Apple.

It's now been about a year and a half since Apple (AAPL 2.45%) launched its mobile payment service, Apple Pay. The Mac maker has focused on pushing merchants to help grow the infrastructure of NFC-enabled payment terminals, while simultaneously partnering with financial institutions and card networks around the world. Apple Pay just launched in China last week.

Too bad Apple Pay seems to be hitting a wall.

Adoption and usage are both heading lower
Earlier this month, market researcher First Annapolis released the results of a survey (n = 580) regarding Apple Pay adoption. The survey showed that awareness of Apple Pay remains high, with 73% of respondents being familiar with the mobile payment service. Of the iPhone 6 owner subset, 20% had used the service at least once, technically making them adopters. Of the adopters, roughly 15% said that they use it regularly (more than once per month).

The bad news is that most of those relevant adoption and usage statistics are down from a year ago. The numbers are heading the wrong way.

Apple Pay only helps
While Apple Pay is an important part of Apple's broader services ecosystem, it's by no means a critical piece of the puzzle. Of course, the company would like to boost adoption, and it's done an incredible job at putting together a seamless payment experience that's highly secure. But at the end of the day, Apple Pay is still only marginally better than the current model of swiping a card -- which has always been the high hurdle for any mobile payment service.

The only extent to which Apple Pay truly matters is if it helps or hurts iPhone sales. It's safe to say that it cannot hurt sales, since there is no negative impact of including Apple Pay. There is only potential upside, and Apple Pay does deliver value to those who use it.

Apple Music is more promising than Apple Pay
Compare Apple Pay to another important Apple service, Apple Music. Apple Music is directly monetized through consumers that subscribe for the service for $10 (individual plan) to $15 (family plan) per month. It's been reported that Apple earns 0.15% on all Apple Pay transactions, which helps to sustain the service and give it favorable economics compared to rival mobile payment services.

In order for Apple to earn just $10 per month at that take rate, a user has to process $6,666.67 through Apple Pay in a given month. Given current limitations in infrastructure support and availability, that's a pretty high bar to meaningfully compare to Apple Music.

It goes without saying that Apple Pay and Apple Music are not mutually exclusive, nor do they compete. They clearly complement each other within the ecosystem, but the point is that Apple Music is much more likely to be financially significant than Apple Pay.

Overall, Apple's services segment is now a $21 billion business. The more the merrier.

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