The Future Of Mobile Payments: Part II

| About: Apple Inc. (AAPL)
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If you haven't read part 1, please go ahead.

The Battle OF NFC Vs. BLE

The vision for mobile payments can't be separated from the vision of swiping your phone at a POS terminal and paying for practically everything as you go. This will make your wallet and the need to carry so many cards, as well as cash, almost obsolete. Making those proximity payments possible requires a piece of hardware to be embedded in your phone. Most such solutions today tend toward Near Field Communications (NFC). But there is another option, Bluetooth Low Energy (BLE). To explain the difference, I attached this interesting infographic:

BLE vs. NFC [infographic]
Compliments of Retail Customer Experience

While Apple (NASDAQ:AAPL) refused to include an NFC chip in its designs for the past few design cycles, in mid-2013, Apple introduced iBeacons. That was an indication that Apple plans to participate in the payment market as well as enable retailers to offer coupons and deals on-site. A few months later, a company named inMarket, which makes small BLE transmitters, began an impressive rollout of iBeacons BLE transmitters, at 200 Safeway and Giant Eagle locations in Seattle, San Francisco and Cleveland.

It May Be The Killer App

As was the case with Africa and M-PESA, to convert a country to digital mobile payments, a few factors need to align. In the M-PESA case, the lack of financial infrastructure caused an accelerated adoption of the digital mobile payment platform. In the Western World, where financial services are abundant, the different platforms (Google Wallet, Isis, PayPal, PayPass) are having a hard time gaining traction. This is, in my opinion, an infrastructure problem. Consumers don't bother to ditch their physical wallet because there are just not enough locations where they can pay with their chosen wallet. Google Wallet is accepted at some places, while Isis is accepted at others and PayPal is accepted at still other places. To get the consumer to switch to a mobile wallet, he needs to know that he will be able to use it anywhere he goes, at the least at the same places where he normally uses his credit card. However, this is like the chicken and the egg problem, shops are waiting for consumers to adopt digital wallets, and vice versa. So what could be the killer app in the Western World? What can take the same role as remittance in Africa? I believe that the answer is going to be the on-site coupon eco-system.

The iBeacon Vision

The iBeacon vision is Apple's vision for the retail industry. In this vision, you walk around in a grocery shop and when you pass the dairy section, your phone reminds you to grab some milk (if you included it on your phone grocery list). When you go by a restaurant, you'll be sent a push notification offering you a 20% discount on the entire menu-you get the point. I expect the recent Safeway/inMarket rollout to be just the beginning. There is a tremendous incentive for retailers: it can attract more customers from the street/mall and it can enhance the shopping experience for its customers as well. Of course, there is also the case use of analyzing the data of consumer behavior inside retail stores, which could then be used to turn the physical store layout design into a science. Let's think of this vision in two parts.

The Consumer Side

According to ABI Research, by 2018, there will be 10 billion Bluetooth enabled devices. Practically 90% of Bluetooth enabled smartphones are expected to support BLE. As for the software side, all of the major mobile operating systems already support BLE: iOS, Android, BlackBerry and Windows Phone. Consumers don't need to purchase a specific model, no matter his choice, he'll probably end up with a BLE enabled phone in his pocket.

The Retailer Side

The retailer is incentivized to deploy BLE beacons in his shops for the various uses I detailed above. The market for beacons is rapidly evolving with companies such as inMarket, Estimote and even Qualcomm (NASDAQ:QCOM) are stepping up. Qualcomm is actually offering these beacons at a price of $5-$10 each. An average Macy's store is 179,000 square feet. One beacon can cover up to 230 feet, according to Estimote. If the retailer wants further granularity, he may want a different beacon for each 20 feet. That means that a beacon covers a circle in the area of about 315 square feet. Therefore, an average Macy's shop will need around 550 beacons. At an average of $7.5 (Qualcomm prices), this will add up to only $4125 per store. Macy's owns 840 stores, so it will cost the entire chain just $3.45M to deploy beacons in all of their stores. Taking the added customers and the use of big data analytics to further optimize the stores, it looks like a very reasonable investment for a retailer. Therefore, I expect retailers to start deploying beacons at high adoption rates, and in doing so, they will lay the infrastructure to a mobile payment platform.

Apple: The Sleeping Giant Just Woke Up

In the last conference call, everybody in the world heard Tim Cook's words:

Tim Cook - CEO

"Let me sort of avoid the last part of your question, but in general, we're seeing that people love being able to buy content, whether it's music or movies or books, from their iPhone, using Touch ID. It's incredibly simple and easy and elegant, and it's clear that there's a lot of opportunity there.

The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID. But we're not limiting ourselves just to that. So I don't have anything specific to announce today, but you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it's a big opportunity on the platform."

Source: Apple last earnings call.

On January 16th, an Apple patent was revealed. The patent is titled, "Method To Send Payment Data Through Various Air Interfaces Without Compromising Data."

This makes perfect sense for Apple, let's consider the facts.

  1. Apple has a huge registered user base. Apple has more than 575 million iTunes accounts. They are already credit card linked. That puts Apple straight on top of the competition, and skips the phase that the other mobile wallet solutions failed-getting a meaningful user base.
  2. TouchId Provides Security. The new TouchId feature provides the much needed security a mobile wallet should have. The number one concern of consumers is security. Apple already stores your credit card details with iTunes. Your fingerprint is much more difficult to steal than a PIN, or your phone.
  3. The Market Opportunity Is Big, Even For Apple. Let's go back to the Visa case study. To remind you, Visa has 2.2B credit cards around the world. Those credit cards generated 58.5B transactions per year. That means 26.5 transactions per card. Although this number sounds very low, we have to understand that the 2.2B figure includes many barely used cards. If we take the same approach with the barely used iTunes accounts, let's say each iTunes account will generate 26.5 transactions a year, on average. That means that if Apple could get 1% on their transactions (remember Visa has to share its fees with its partner banks, Apple could cut them off and link the wallet directly to bank/credit accounts), the math brings us to astonishing numbers. If those 575M users would abandon their credit cards, and completely use the Apple payment system, $1.1T (yes, that's a T) will flow through the Apple system a year. One percent of that is $11B a year. When taking into account the iTunes account number growth, that business could rival the size of Visa. These revenues are very high margin, Visa net margin is 42%. Assuming the same for Apple, that comes up to $4.62B in net income for Apple/year. Looking at 2013 net income, this could increase Apple's net income 12.5%. This is a tremendous opportunity for Apple.
  4. Using BLE, Apple Will Tap Into An Existing Infrastructure. If my projections are correct, we will witness a high adoption of beacons in the retail industry worldwide. If that's the case, Apple could design a system in which the beacon senses your phone, in your pocket, and then, after you shop for whatever you want, the store can automatically send your phone a bill, and all you'll have to do is pull it from your pocket and swipe your finger on the home button.

Other players could join the ever evolving BLE infrastructure. Android, BlackBerry and Windows Phone operating systems are all BLE compatible. Google Wallet, Isis and PayPal, could all offer their own BLE based payment service, but they'll have trouble reaching the number of users that Apple currently has. That said, there is plenty of room for an Android based payment that uses the same BLE infrastructure. A more logical move would be an attempt to partner with Apple, like PayPal is rumored to be trying to do.

This mobile payment environment will drive mobile handset manufacturers to adopt the always-on-context-awareness mode. That means that your phone is always processing data from your sensors. That way, when you step into a shop, your phone can act in a certain way if it's still in your pocket and in another way if it's in your hand. One company that could benefit from this move is QuickLogic (NASDAQ:QUIK); they invented a tiny chip that will enable smartphones to be true context aware, with ultra-low power consumption. Check my article on QuickLogic to learn more.


There is no assurance that Apple will actually go on to build a mobile payment system, but if they do, they could easily build a business that will rival Visa. Even with Apple's current size, this has substantial potential to grow revenues and net income, if Apple actually goes in that direction. However, if they don't, I think it will take many more years for the mobile payment vision to become a reality. In my view, Apple is just what the mobile payment market needs to jump start.

Disclosure: I am long QUIK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.