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Apple Pay: An "On-Ramp" to Visa Inc.'s Network

By John Maxfield and Gaby Lapera - Mar 5, 2016 at 9:20AM

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While it’s tempting to think that Apple Pay will disrupt the payments industry, companies like Visa and MasterCard are embracing it instead.

Apple (AAPL -3.97%) is trying to wedge itself into the payments space. But far from fighting its entry, companies like Visa (V -0.29%)MasterCard (MA 0.39%), and American Express (AXP -2.07%) are welcoming it with open arms.

In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and John Maxfield discuss why this is. Among other things, they note that Apple Pay, far from being a competitor of payments companies, is actually more akin to an on-ramp to their existing payments infrastructure.

A transcript follows the video.

This podcast was recorded on Feb. 29, 2016. 

Gaby Lapera: Like I said, it's very hard for small companies to break into this space, which is why, it's interesting that the people that you are seeing who might be disrupting the space are Apple and Walmart of all people.

John Maxfield: Yeah. So, you have Apple Pay, which is a payment system that operates over the iPhone, then you have Walmart's -- when we were looking at it, it looked like it's also in a very early stage, like its beta phase. But CurrentC, these are two very different things. So, here's the interesting things about Apple Pay. So, when you think about Apple Pay, you think, this clearly must be really disruptive, right? But, what Apple Pay is, fundamentally, and this is kind of how Visa explains it, is, it's just an on ramp onto the existing infrastructure. So, typically, when you go to the store, you just use your credit card, you swipe it or put it in one of those horrible chip readers that they're still trying to figure out how to make them take less than 2 minutes to process the information--

Lapera: (laughs) 

Maxfield: --and that's how you would access their network. Now, with Apple Pay, the way it works, you just put your Visa or your MasterCard or your American Express or your Discover or whatever it is onto Apple Pay, and it just uses near field communications to do the same thing if you would be doing if you swiped your card. So, it's just another way to access the existing infrastructure.

Lapera: Yeah, which is really interesting, because, how disruptive is Apple Pay ultimately? Maybe we get rid of our physical credit cards, and that's it. Right?

Maxfield: Right. And the other thing to keep in mind is -- one way to get a sense of how disruptive Apple Pay in particular is, is to look at what Visa, MasterCard, and these companies think about it. And when you look at Visa and MasterCard and AmEx, they're all on board with Apple Pay.

Lapera: Oh yeah, they love it, because it just means more payments for them, which is ultimately what they want.

Maxfield: Yeah, that's exactly right. So, to them, they're seeing it as a benefit. But here's the thing, and we were talking about this before the show, the question is, in the short term, it seems like a great way for Visa, MasterCard, and American Express to boost up their payments volume, to make payments easier, to reduce the percentages of payments that are still being done over cash and shift that over to their networks. So, it seems like a great way to do that in the short run. 

But here's the question -- over the long run, let's say that Apple Pay really takes off, and let's say everybody adopts this with iPhones, and more people buy iPhones because they want to have access to it, and all these different things. At that point, if you have a large share of all purchases going over Apple's network, that puts Apple in a really strong competitive position vis-a-vis MasterCard, Visa, and American Express. And you just have to wonder, if Apple is able to position itself like that, if it would eventually start to charge more for using that on ramp, if you will, to the existing payments network...

Lapera: Yeah, it's definitely really interesting.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$143.31 (-3.97%) $-5.93
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$340.19 (0.39%) $1.33
Visa Inc. Stock Quote
Visa Inc.
V
$203.40 (-0.29%) $0.60
American Express Company Stock Quote
American Express Company
AXP
$158.50 (-2.07%) $-3.35

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