Will Apple Kill Visa And MasterCard?

Includes: AAPL, MA, V
by: AtonRa Partners


Apple and credit card issuers are partners for the upcoming launch of Apple Pay.

But Apple is likely to try to bypass them in the future to fully take advantage of the mobile payment opportunity as it needs to find new growth drivers.

Importantly, the mobile payment business could open new opportunities and notably spark huge advertising revenues in the long run.

Apple Pay a boon primarily for credit card issuers in the short term

The number of cashless transactions in the global economy is likely to boom pretty soon as Apple (NASDAQ:AAPL) is expected to launch in just a few days its Apple Pay service that enables iPhone 6 users to make in-store payments with the tap of a finger and as this digital payment initiative sparks rival offerings.

As it has a history of making new technologies and features easy to use, Apple will probably "educate" smartphone owners about mobile payments and spark the take-off of this new payment method. Furthermore, the rise of the Apple Pay service should be rapid as owners of Apple devices are accustomed to making online purchases with their iPhone/iPad. According to research firm Adyen, the share of online payment transactions taking place on a smartphone or tablet grew to 19.5% in December 2013 from 12.6% in December 2012. And close to 73% of these mobile transactions took place on an iOS device (vs. 27% on Android devices).

Credit card issuers such as Visa (NYSE:V) and MasterCard (NYSE:MA), which have partnered with Apple, will undoubtedly benefit from the accelerated move towards a cashless economy as they will collect fees on an increasing number of digital transactions.

But surprisingly, Apple will not get material revenues from Apple Pay in FY15 and FY16 (probably in the hundreds of millions) as it will garner pretty low fees according to various sources (15bps, compared to PayPal's take rate of 350bps in Q2). For now, it looks like Apple only sees its payment feature as a way to strengthen its ecosystem and to boost sales of iPhones and watches.

In all, the soon-to-be launched Apple Pay will probably be more a boon for credit card issuers than for Apple in the short term.

Apple a wolf in sheep's clothing

Credit card issuers and Apple are partners... for now. But the situation could dramatically change in coming years. As eBay's (NASDAQ:EBAY) CEO commented recently: "Everyone is a frenemy in the payments world."

Our view is that Apple could try to grab a larger chunk of the fee pie in the medium term, once its Apple Pay service runs smoothly and becomes ubiquitous (i.e. most merchants accept it). Indeed, Apple has an incredible opportunity to monetize the mobile commerce business and we struggle to see why it would not seize this opportunity.

Ultimately, Apple could go further and try to bypass credit card issuers. For those who think that this is a crazy idea, just think of PayPal, which already offers its users the opportunity to link their bank account. On its website, PayPal explains that "When you link your bank account, it automatically becomes the way you pay when your PayPal account balance isn't enough to cover a transaction." Obviously, this is much more profitable for PayPal to remove Visa or another credit card company from the process as it does not have to share the transaction fees with them.

In order to follow PayPal's path, Apple will have to design a full-scale payment processing service including warranties, settlement and clearing functions, partnerships with a large number of banks. This will take a few years and that's probably the reason why Apple Pay only offers the opportunity to link credit cards initially. But in the long run, Apple has everything it needs to replicate the PayPal model and to bypass Visa and peers: 800m iTunes accounts (vs. 152m PayPal users), loyal and high-income customers, technology know-how and a strong brand.

Apparently, Visa is well aware of the risk as in a recent Bloomberg interview, Visa CEO stated:

"We have to think and act much more like a technology company than we have before. The payments world is changing. There are new entrants, new opportunities for people to get into our business and other opportunities for us to grow our business in ways that didn't exist before."

Interestingly, retailers could welcome and even foster competition in the payment processing business. In March, Wal-Mart (NYSE:WMT) sued Visa for $5 billion for allegedly conspiring with banks to fix transaction fees. But admittedly, some of them will try to push their own payment solutions.


As Apple is now a $600bn market cap company, it's getting tougher for it to find significant growth drivers. Against this backdrop, we are pretty convinced that Apple will not miss the mobile payment opportunity.

The combined valuation of Visa, MasterCard, American Express (NYSE:AMX) and Discover Financial (NYSE:DFS) is around $300bn, and $350bn when including PayPal. If we assume that Apple grabs a 10-15% share of their business in the future, the impact on Apple's valuation would stand around $45bn or $7 per share, at least (we suspect that Apple Pay could be more profitable).

That's not a huge upside but, importantly, this business could open new opportunities to the company and notably fuel significant advertising revenues. For now, Tim Cook claims that collecting data (and selling ads based on it) is not Apple's business but his stance could evolve over the years. Interestingly, Tim Cook forgets to mention iAd that targets advertising on apps running on Apple devices, using users' iTunes purchase history and home addresses.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.