Upwardly Mobile: The Mobile Payments Landscape, PayPal And Apple

by: Geetanjali Gamel

The latest buzz surrounding the Wall Street Journal's recent report of Apple Inc.'s (NASDAQ:AAPL) plans to take on mobile payments as the next frontier in its remarkable journey has raised questions and opinions galore about the future of the mobile payments world and existing competitors like eBay's (NASDAQ:EBAY) PayPal.

The Mobile Option: Mobile payments can be defined to include purchases of merchandise and services, bill payments, donations and money transfers between persons. Different types of payment platforms and mobile wallets can be used by customers and merchants to conduct business on mobile websites as well as in stores. These payment systems can work through various technology; media apps downloaded on smartphones for easy checkout and payment options, blue tooth enabled devices at stores, near field communication or NFC to name a few. NFC is a technology that enables smartphones and other equipment to communicate with each other through touching or tapping to enable transactions.

Apple's Opportunity: Given that Apple Inc. reported last year that it had 575 million registered iTunes users and had sold approximately a total of 375 million iPhones and 155 million iPads; it already has a large potential customer base in place for a mobile payments system. It also has synergistic capabilities in place like Touch ID, its fingerprint identity sensor, which can be leveraged for authentication and fraud prevention. Also its iBeacon Bluetooth technology can possibly be used for in store transactions. Recently the company applied for a patent covering payments using signals between phones and wireless devices. And while mobile payments may be in its "infancy" in Apple CEO Tim Cook's words, reports by e commerce companies and market researchers generally have a positive outlook on adoption rates and market share growth for mobile commerce. Although the company has not yet confirmed any reports relating to its mobile payments strategy it would not be uncharacteristic for the company to tackle a technology in its early stages, build it into a quality product or service, and make it the new normal. But there are existing players in this market like PayPal, Square, Stripe, Google (NASDAQ:GOOG) Wallet and Isis to name a few, who have a head start.

PayPal's Head Start: PayPal is one of the leaders in the mobile payments space. In its Q4 2013 earnings call eBay Inc. declared that commerce over mobile had grown 88% in a year, exceeding expectations. Mobile payment volumes over the PayPal platform increased from $600 million in 2010 to $27 billion in 2013. For the quarter, PayPal mobile payment volumes reached $8.8 billion. A majority of PayPal's mobile payments came from eBay; one example of the benefit of synergies from keeping these businesses together. The company expects enabled commerce volume through mobile to grow 65% on average annually for the next three years. PayPal gives users the ability to easily complete transactions online through mobile devices by using its checkout options. In store transaction methods like using a customer's phone number and pin with participating vendors may be easier to implement than NFC enabled platforms.

PayPal has 137 million active registered accounts, but its active mobile user base is approximately 17 million. Its mobile payments service is available in over 80 markets and supports 26 currencies. Through its mobile apps it enables customers to transfer money and upload checks. For merchants there is functionality to accept mobile payments, process checks using a phone camera, or swipe a credit card using a card reader on their mobile device.

Market for Mobile: Forrester Research published research predicting that the spending growth over mobile payments for American consumers would be 48% on a compounded annual growth rate basis between 2012 and 2017, increasing from $12.8 billion to $90 billion in a span of five years.

A report by Gartner predicted that global mobile payments transaction values and volumes will grow at an average rate of 35% annually between 2012 and 2017 with over 450 million users and a $721 billion dollar market by 2017. It identified the performance of NFC as disappointing, which is not entirely surprising since it requires the installation and use of new devices and systems that may make it relatively hard to adopt. While the report showed that shopping over mobile was weaker due to unsatisfactory customer experience overall, it had an optimistic outlook for money transfers worldwide.

This was echoed in another study by the Board of Governors of the Federal Reserve System in early 2012 which revealed that most mobile payment users (47%) used it for online bill payments in comparison to only 36% that used it for online shopping. While 66% of users made use of credit or debit card numbers entered into mobile phones, only about 22% used a medium like Google Wallet, iTunes or PayPal. This indicates that there is still a long way to go, or alternatively a large untapped market, for the likes of Apple or PayPal to expand their influence.

Limitations: One of the biggest apprehensions for consumers regarding mobile payments is transaction and information security, so a stellar reputation in this area can be useful in getting conversions. The Board of Governors study also indicated that many users did not adopt mobile payments since they did not view it as better than the alternatives.

I think for a company to be a successful in this area, security will need to be accompanied by simplicity. A great example is Starbucks (NASDAQ:SBUX) which allows its customers to use its mobile app to buy merchandise in its stores, earn and use rewards and also give gifts by transferring money from within the app. In its F1Q 2014 earnings call the company discussed how it has been benefiting from the move to mobile by leveraging its proprietary mobile payment technology. Approximately 10 million customers used its mobile app and nearly 5 million mobile transactions were recorded in stores each week. In fact it's mobile and cards payments added up to 30% of its total payments in the United States. The company plans to stay on top of this trend by using personalized service and geo-targeting on mobile platforms, along with expanding its mobile payments services to China to take advantage of the large potential market there.

Fight to the Finish: It is still mostly speculation whether Apple will move forward with a mobile payments strategy in the near future and what form it will take. But with its existing iPhone and iPad user base, proven track record of innovation and grasp on enhancing customer experience, it can be a formidable competitor. PayPal has experience in the mobile payments business and is using eBay effectively to grow; but needs greater growth outside of the business it gets from eBay. While mobile commerce is still a relatively small part of e commerce in general, it is growing at a much faster pace and a strong mobile payments infrastructure will be needed to support it. It is hard to say how the landscape will look in the future. But if people continue to use technology to change the way they shop and do business, then despite tough competition, this may not be a zero sum game.

Disclosure: I am long AAPL, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a self-taught individual investor and this article expresses my views based on my own research. I am not being influenced or paid by any organization to write this article.