Apple Inc. NASDAQ:AAPL unveiled its payment service on Tuesday, and early reaction from some suggested that it could pose a threat to other companies that were already in the payment space. However, BMO Capital analysts think there is no threat because of how much it relies on the current “electronic payments value chain.”
Will Apple Pay create mass wireless payment adoption?
In a report dated Sept. 9, 2014, analyst Paul Condra said Apple Pay is essentially in line with what he had been expecting from the company. He believes that so far of all the digital wallet offerings, it has “the best shot” at convincing consumers in mass to adopt a mobile payments system at the point of sale.
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However, he doesn’t believe it poses much of a threat in the near- to mid-term to current payment services providers. Specifically, he mentioned Global Payments Inc (NYSE:GPN), Heartland Payment Systems, Inc. (NYSE:HPY), and Vantiv Inc (NYSE:VNTV).
Shares of Global and Heartland edged lower in regular trading on Wednesday, while Vantiv closed essentially flat from its opening price.
How Apple Pay works
In order to process payments at the point of service, Apple Pay accesses card accounts that are stored in iTunes accounts and then authenticates the payment using the iPhone’s Touch ID fingerprint scanner. The service does offer a fairly higher security level because it doesn’t store card information on the iPhone, Apple Watch or even Apple’s servers.
Instead, it tokenizes the information so that if thieves do steal someone’s Apple device, they will not be able to retrieve the owner’s payment data. Apple said it won’t track users’ purchases, which Condra said is surprising.
The service is compatible with Mastercard Inc (NYSE:MA)’s, Visa Inc (NYSE:V)’s and American Express Company (NYSE:AXP)’s cards. More than 220,000 merchants around the U.S. are able to take “contactless payments,” which Condra thinks means that they can accept payments through near field communication. All said and done, 220,000 isn’t really an impressive number, so Apple’s going to have to find a way to grow that number, and fast.
Questions for Apple
The analyst expects Apple to release more information, but for now, he has a number of questions. For example, he wants to know if the service will work with barcode or QR code payments. In addition, he questions how Apple will be able to increase the installed base of merchants that accept payments through near field communication.
More specifically, he wonders if Apple is offering incentives to those who take Apple Pay. He also wants to know if Apple is offering any value-added services or information to merchants that take the service. After all, 220,000 isn’t really an impressive number, so Apple’s going to have to find a way to grow that number, and fast.
Condra also wants to know if merchants will need any special hardware to take Apple Pay payments and whether there are any differences in the economics for merchants that decide to take payments through the service. In addition, he wonders if there is an option for person to person payments and just how “comprehensive” the tokenization service is.
And finally, he wants to know if Apple plans to integrate its payment service with iBeacons.
Why Apple is no threat to other payment services providers
The analyst believes that with the information Apple made available initially, the real value isn’t in the technology because it’s “by no means revolutionary.” Instead, he thinks it lies in the hundreds of millions of iTunes users who could for the first time scale up the number of users of mobile payments.
Of course he adds that the service is only available on the newer iPhones. Also the system looks to be totally reliant on current electronics payments providers. As a result, he thinks it poses little threat to current providers of payment services.