The new Apple Inc. (NASDAQ:AAPL) Watch has dominated headlines in the last few days, but the announcement of mobile payment system Apple Pay could be even more important if Apple can build a large enough merchant base to compete in what is turning into a crowded market. BMO Capital Markets analyst Paul Condra sees Apple Pay as a top tier mobile payment service, but warns that its biggest competitor hasn’t yet made it to market.
“We believe a tiering of the mobile payments landscape appears to be underway, with the top tier represented by the bank-aligned Apple Pay on the one hand, and the merchant-aligned CurrentC on the other,” he writes.
Apple Pay has a built in customer base
For a mobile payment system to take off, it has to build a large enough base of customers that merchants are interested, and a large enough base of merchants that customers don’t move on to a more convenient service. Apple Inc. (NASDAQ:AAPL) has an enormous advantage in launching its new service because it comes bundled with the iPhone 6.
Condra estimates that the US customer base will be around 66 million by the end of 2016, and since iPhone users will connect payment information to their phones anyways the adoption rate should be quite high. If 50% of iPhone users become active Apple Inc. (NASDAQ:AAPL) Pay users as well, that would be the equivalent of 8% of all Visa/MasterCard users in the US after just two years.
CurrentC has the lead in signing up merchants
So Apple Inc. (NASDAQ:AAPL) only faces half the challenge that another company might, but it will still face serious competition from Merchant Exchange, also known as CurrentC, a mobile payments system that has been in development for the last few years. Even though Apple Pay will beat CurrentC to market, CurrentC currently has more accepting merchants and has a more appealing product if the two customer bases are roughly the same size. He also suspects that the 220,000 ‘stores’ accepting Apple Pay are really locations, not distinct companies (eg McDonalds makes up about 14,000 of them).
Even if neither requires exclusivity, merchants may have to choose one over the other to keep costs down and Condra points to CurrentC’s ACH and closed-loop payment systems designed to reduce transaction costs as well integrated customer loyalty, coupon, and rewards features as competitive advantages. He still puts Apple Inc. (NASDAQ:AAPL) Pay and CurrentC in a class of their own (he rates as Google Wallet, SoftCard, and LevelUp as second tier), but writes that he is “somewhat baffled by Apple’s relatively vanilla initial offering.”