Apple Inc (NASDAQ:AAPL) is expected to make waves this month with the launching of the iPhone 6—and a version of the phone comparable in screen size to Samsung Electronics PK (OTC:SSNLF) popular Galaxy line running Google Inc (NASDAQ:GOOGL) Android operating system. Given the similarity of app selection and performance between high-end iPhone and Android models, screen size has long been a major differentiator; it will be interesting to see how Samsung responds in its next release.
But Samsung and Google are not the companies looking at stepped-up competition from Apple when the iPhone 6 is launched. Apple has reportedly inked a deal with Visa Inc (NYSE:V), Mastercard Incorporated (NYSE:MA) and American Express Company (NYSE:AXP) that will potentially make the iPhone far more viable as a mobile wallet. That’s bad news for eBay Inc (NASDAQ:EBAY) PayPal and for newer upstarts like Square, both of which had started to make inroads of late.
How will the new wallet work? You would essentially store your credit card details in your iPhone, allowing you to leave the plastic cards at home. Your phone would communicate with the merchant’s cash register via a near-field communication (“NFC”) chip, and you would use your fingerprint to verify your identity.
Apple’s new mobile wallet is really nothing new. Already, various credit card issuers use NFC chips that allow you to “tap” your card rather than swipe it. And Google has had a similar NFC-based mobile wallet product for years, though merchants have been slow to adopt it due to the cost of upgrading their systems and limited demand from consumers.
Let’s dig a little deeper into the details to see who stands to gain or lose the most.
Credit Card Issuers
One seemingly obvious beneficiary would be the credit card companies, though we need to see more details about the deal to draw any real conclusions. Already, middle and upper-income Americans use their credit and debit cards for substantially all of their day-to-day spending, and anyone using Apple’s mobile wallet is already using a credit card. It’s hard to imagine legions of cash-only Americans suddenly making the jump to electronic payments because their iPhone offers a snazzy new app.
Nationwide 66% of all point-of-sale transactions are made with plastic. Small businesses have historically been less likely to accept plastic due to high costs and the need for expensive and cumbersome card readers. But with Square and PayPal Here and their competitors now able to turn any smartphone or tablet into a payment terminal, it’s now not uncommon to pay your babysitter or the neighborhood ice cream man with a credit card.
Furthermore, we can assume that Apple will take some share of the swipe fees. We have no information on what sort of fees would apply to merchants, but unless the fees are higher on the mobile wallet—which would discourage retailers from accepting it—it’s hard to see Visa, MasterCard or Amex really benefitting from this. The only real positive I see would be the security benefits. Apple’s fingerprint technology would make it harder for an unsophisticated thief to steal your card and go on a shopping spree.
Merchants and Consumers
For consumers, the benefits will be negligible at first. It will be years before mobile wallets become accepted broadly enough for you to leave your plastic at home. So even if you plan to use your mobile wallet everywhere you can, you’re still going to have to lug around a physical card. Longer term—if it catches on—you might enjoy as slightly thinner wallet and have less risk of having your card stolen. But for the foreseeable future the benefits are marginal at best.
As for merchants, unless the fees are drastically lower—and we’ve seen no indication that this will be the case—there is very little upside. Upgrading payment systems will be an immediate expense with very little obvious benefit. It’s hard to see a would-be customer going to one of your competitors because they allow payment with an iPhone whereas you require a plastic card.
5-10 years from now, the story could be different. I rarely have cash in my wallet, and as a result I often avoid restaurants and parking garages that do not accept credit cards. We could eventually have a similar situation with mobile wallets, but that might be a decade from now.
Mobile Payments Competitors
I would saw that the parties with the most to lose would be newer non-bank payment systems, such as Paypal or Square. Some retailers — including giants like Home Depot Inc (NYSE:HD) — allow you to pay with PayPal. Likewise, Square scored a major coup two years ago when it partnered with Starbucks Corporation (NASDAQ:SBUX), though that deal ran out of steam once the new wore off.
A successful mobile wallet that used existing credit and debit accounts would make it harder for an upstart like Paypal or Square to emerge as a new standard. Even in the absence of a successful mobile wallet scheme, I wouldn’t be surprised to see Square out of business and PayPal relegated to a niche market within five years.
What about Google or Amazon.com Inc (NASDAQ:AMZN), both of which offer rival mobile wallet platforms?
Counterintuitively, Apple might actually help them by pushing broader acceptance. iPhone users can be a demanding lot, and if their enthusiasm for mobile wallets spurs merchants to accept them, this would potentially help all other NFC-based mobile wallet providers.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management.