pple: Mobile Payments Will Require Partnerships And NFC
Sep. 3, 2014 1:51 PM ET | 12 comments | About: Apple Inc. (AAPL), Includes: MA, TBBK, V
Disclosure: The author is long MA, V. (More...)
Summary
Apple is widely expected to release an iPhone 6 featuring NFC and a payments service.
Apple has likely learned lessons from Google's failed payment effort and is striking up ecosystem partnerships.
Incremental payments revenues are likely to be limited near term, but could be more significant longer term.
The Apple (NASDAQ:AAPL) rumor mill has been in high gear recently with speculation that Apple will include Near Field Communication (NFC) within the iPhone 6 when it debuts later this month. The introduction of NFC within iPhone 6 will have fairly profound implications for retail point of sale payments.
The case for mobile commerce
Mobile commerce is still fairly small today, but the shift is expected to accelerate steadily, and mobile commerce should contribute close to $110B in U.S. retail sales by 2017. What is of interest to all participants in the space is that mobile proximity payments will eventually account for an increasing share of retail commerce activity and a progressive amount of a user's time.
Playing a major role in mobile commerce carries with it the ability to influence the merchant ecosystem and act as a conduit to a rich vein of offers and loyalty programs which enable the commerce experience. For Apple, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and others, the ability to participate in this stream of activity appears to be proving too much of a temptation to resist.
Apple's shifting stance on NFC
The case for the inclusion of NFC within the iPhone has always been a fairly speculative one as far as Apple is concerned. However Apple has never appeared to be in a rush to support the technology. NFC has been perpetually plagued by the ongoing chicken and egg problem. The lack of consumers with an NFC handset and the required cost of upgrade for point of sale terminals meant that most merchants didn't see a reason to deploy NFC. The net result of this was that the few consumers who actually had a NFC capable device had even fewer places to use it, reducing the utility of NFC.
Apple has historically not viewed NFC as necessarily solving a retail commerce problem, nor solving a specific consumer need. While this may be true, Apple no doubt must view the ability to solve mobile proximity payments as something that would enable a magical experience for the consumer, and an activity which Apple should be well equipped to take on. Apple now has the perfect vehicle to play in mobile commerce via Apple Passbook, which allows merchants to manage their loyalty offerings and coupons within the Passbook environment for Apple users.
The question remains however, given Apple has allowed a QR code framework to be utilized for the display of credentials stored within Passbook, why would it go out of its way to enable and support NFC, a technology that has been withering on the vine for the last few years? I think the answer to this question comes down to a realization from Apple that in order to be successful with its own payment service, the company will need to forge one or more partnerships with major players in the mobile ecosystem and deploy a standards-based approach.
Forging Ecosystem Partnerships
Apple would have observed several lessons from Google's failure in attempting to launch Google wallet. Chief among the reasons for Google's failure was that Google assumed that it could simply buy its way into mobile payments, an endeavor which cost the company over $300M, with little to show for its efforts.
The reality is that mobile payments are a very complex ecosystem. Implementation of a payments solution requires collaboration with payment networks, network operators, merchants and terminal manufacturers to get a solution implemented. Google tried to go it alone with few partnerships, and it didn't succeed as a result. Apple no doubt realizes it requires at least one or more partnerships of significance to make mobile payments work.
The players that have the most to gain from the successful expansion of mobile commerce will be the payment networks, particularly if such a push expands the overall usage of network branded cards. For Apple, being able to support payment credentials across the major payment networks is critical to being able to get any type of scalable payment service launched. Failure to do so will mean any payment service will be too fragmented.
Support of the payment networks also would allow Apple to leverage an existing merchant ecosystem with existing infrastructure, reducing the extent of the effort required by Apple to make headway with a mobile payments effort. Thus a partnership between Apple and the payment networks would make logical sense for both.
If Apple does secure partnerships with the payment networks in support of a payments service, it will be no surprise if Apple supports NFC. Exactly why is this?
What has become clear now is that Visa (NYSE:V) and MasterCard (NYSE:MA) have come down unambiguously in favor of NFC (Near Field Communications) by requiring merchant compliance with EMV. Visa and MasterCard have set requirements which mandate that merchants who do not support EMV-based transactions by the end of 2015 will bear the cost of any fraudulent activity that happens as a result. This should drive merchants to deploy Point of Sale terminals that support EMV by the end of 2015.
This is very significant from a mobile payments perspective, because NFC technology embedded within mobile phones operates on the same technical specifications as EMV. What this means is that NFC handsets can support mobile payments that occur using EMV infrastructure. So with Apple believed to be seeking out partnerships with the major payment networks in the deployment of a payments service, it makes sense that Apple will support the technology interface that the payment networks themselves have effectively mandated for mobile proximity payments.
What will the nature of the partnerships with the payment networks look like? I expect that Apple will embed a secure element that will support and store payment tokens issued by Visa and MasterCard. Practically, what this will mean is that any Visa or MasterCard payment credential should be supportable on the iPhone 6. For Visa and MasterCard, Apple's adoption of NFC and drive to push mobile payments should really help kick start the NFC ecosystem, triggering a wave of merchant upgrades of NFC terminals and culminating in greater mobile payments volumes, all of which will drive interchange revenues higher for the payment networks.
Conclusions and Implications on Apple stock
The introduction of NFC and a mobile payments service by Apple is likely to be just another value-added feature on the iPhone 6 and I don't expect it to drive significant momentum toward the iPhone in the near term. This is particularly the case given NFC reader penetration is still relatively low<20%, with consumer usage likely to be limited at least for the next year. Apple's support of NFC will eventually trigger a wave of merchant reader upgrades which will increase the acceptance of NFC.
Over time, as users find additional ubiquity in the availability of merchants accepting NFC, I expect that this could provide greater utility and spur interest among smartphone users to upgrade to an NFC capable handset that will allow proximity-based payments.
The bigger long-term implication for Apple and the payment networks may well be how seriously Apple wants to play in the payments space by disrupting interchange revenues that the payment networks derive from merchants. Apple moving to provide a low-cost source of interchange (via an ACH payment rail for example) to incentivize a greater volume of merchants to support Apple payments in store is not a move that should be ruled out longer term. Apple could be using the payment networks to initially achieve critical mass for its payments initiative and then could look to cut them out through the use of a closed loop Apple payment instrument, such as an Apple gift card.
I suspect that taking a more fundamental role in payments infrastructure is not where Apple's interest lies and that Apple has no wish to find itself knee deep in the payments business, unless it does so via partnership with a payments utility provider such as Bancorp (NASDAQ:TBBK) for instance. In this scenario, where Apple doesn't take a larger role in payments, incremental Apple revenues from payments will be limited.
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