There Is Much More Room For Apple Pay

About: Apple Inc. (AAPL), Includes: FB
by: The European View

Recently, Facebook unveiled a consortium to create an open-source digital currency called Libra. It is noticeable that Apple does not belong to this consortium.

With Apple Pay, Apple offers its own mobile payment solution. The acceptance is already very high on user and seller side.

In order to evaluate to what extent Apple Pay brings success to investors, I will analyze hard and soft factors with the help of statistics.

Considering the extreme growth potential and the high margin, Apple is extremely undervalued.


Recently, Facebook (FB) unveiled a consortium to create an open-source digital currency called Libra, set to launch in the first half of next year, which would allow consumers to send money around the world easily and for free. Libra won't be run by Facebook but by a nonprofit association (the independent "Libra Association") and backed by relatively stable government money. Facebook is only a part of the Libra Association. Founding members are by industry:

(Source: Founding members)

First of all, it is noticeable that Apple (NASDAQ:AAPL) does not belong to this consortium. It's not uncommon. Apple often goes its own way and tries to offer its own solutions. One example is the elimination of the CD drive and the iPhone's own headphone jacks. Of course, this has to do with the fact that Apple sees new sources of income (air pods) or other advantages (better, thinner design).

But, sometimes, Apple also joins other consortia or companies. For example, in 2018, Apple joined a consortium to develop better industry standard video compression. Another example is Apple's entry into the Wireless Power Consortium in 2017, which is committed to the open development of the wireless Qi charging standard. This is partly due to pure necessity. While Qi was expected to be only an interim solution until the launch of Apple AirPower, Apple had to admit that AirPower will not achieve the company's high standards and was therefore cancelled. Accordingly, Apple must now continue to work with Qi.

But when it comes to mobile payment, Apple now has good reasons to go its own way with its Apple Pay service.

The technology

With Apple Pay, Apple offers in-store mobile proximity payments, enabled though near-field-communications (NFC). During the transmission, neither the credit card number nor any other sensitive data is transmitted. Instead, a Primary Account Number (PAN) with a tokenized Device Account Number (DAN - Apple’s term for a payment token) is stored for each deposited card. Particularly, the seller never receives the customer's actual credit card details, but only the device account number and the bank's confirmation that it is linked to a valid card.

Apple Pay supports credit and debit cards from the three major payment networks American Express (NYSE:AXP), Mastercard (NYSE:MA), and Visa (NYSE:V).

Can investors benefit?

In order to evaluate to what extent Apple brings success to investors with Apple Pay, I will analyze hard and soft factors in the following. Hard factors are established facts which stand for themselves. Soft factors are those circumstances that have indirect significance.

Hard factor 1: The market in which Apple operates

Witch Apple Pay, Apple operates in a strongly growing market. In 2020, research estimates that near-field communications or other contactless technology will be accessed by 67.2 million U.S. users, up from 55 million users in 2018.


Industry experts project mobile proximity payments to be amongst the most successful future mobile payment methods. Popular application areas are paying for transport and transit, as well as retail goods and services. In 2021, near-field communications or other contactless technologies are projected to generate close to 190 billion U.S. dollars in transaction value:

(Source: U.S. proximity mobile payment transaction value 2021)

This growth is being driven by rising demand. During a survey in December 2017, 22 percent of respondents stated that they were planning to increase the frequency of app-based card payments somewhat more. Only 5 percent of respondents stated that they were planning to decrease the frequency.

(Source: U.S. purchase intention via card and app)

Hard factor 2: The position of Apple Pay in this market on the user side

According to recent estimates, the global year-end user base of Apple Pay amounted to 383 million users worldwide, up from 127 in the previous year.

(Source: Number of Apple Pay users worldwide 2018)

The number of users has thus almost tripled. This is, of course, accompanied by the fact that Apple Pay has been introduced in more and more countries:

(Source: Global availability of Apple Pay)

Furthermore, it is estimated that 43% of global iPhone users have enabled Apple Pay. This is up from 36% in 2018 and 20% in 2017. This means that almost every second iPhone user now makes mobile payments with his iPhone. This is already a large number, but also shows that Apple still has growth potential here. In this respect, the glass is half full twice.

Hard factor 3: The position of Apple Pay in this market on the sales side

Acceptance by iPhone users would be worth little if Apple Pay is hardly accepted on the sales side. But that doesn't seem to be the case. As of December 2018, 50 percent of responding North American retailers were already accepting customer payments via Apple Pay, with 32 percent planning on accepting the payment method within the next 2 years. This means that Apple Pay is already the most common digital payment method that North American retailers accept or plan to accept. It is even more accepted than Visa, Mastercard, or PayPal (NASDAQ:PYPL):

(Source: Retail: accepted digital payment methods 2018)

Apple Pay also has more users than Google Pay and Samsung Pay (OTC:SSNLF). This also underlines the dominant position Apple has been able to achieve:

(Source: | without the Starbucks App)

Soft factor 1: High margin

In the first quarter of Apple's 2019 fiscal year, the company’s overall gross margin was 38 percent. Nevertheless, the services unit had a 62.8 percent gross margin. In the year-ago quarter, the services gross margin was 58.3 percent. So, Apple is much more profitable with the service than with the sale of hardware.

Soft factor 2: Security

Security is a big problem for many users. A statistic from 2017 provides information on barriers to digital wallet adoption according to consumers in the United States as of November 2017. During the survey period, it was found that 39 percent of non-mobile wallet using respondents were hesitant to use digital wallets due to security concerns:

(Source: U.S. digital wallet adoption barriers)

This is due to the misconception that people confuse mobile payment with cryptocurrencies. And indeed, it is to be expected that cryptocurrency-related criminal activity will likely continue to evolve and accelerate. In 2018, more than $950 million was stolen, representing 3.6 times more than in 2017. But Apple can address this unjustified fear with its Apple Card. Apple has implemented many security mechanisms there. The Apple Card is designed to make sure that the user is the only one who can use it. All the advanced security technologies of Apple Pay - Face ID, Touch ID, unique transaction codes - are built in the card. And, the physical card has no numbers. Not on the front. Not on the back. Hence, it’s hard to steal a credit card number when you can’t see it.

It's not unlikely that Apple will be able to address many doubters with it. There is a huge early demand for Apple Card among iPhone users. According to Business Insider, only 15 percent of iPhone users said they weren’t at all interested:

(Source: Business Insider/cultofmac)

Soft factor 3: Network effects

Apple can work with economic network effects here. The more users use Apple Pay, the greater the incentive for sellers to accept Apple Pay. The more sellers accept Apple Pay, the greater the incentive for users to use Apple Pay themselves because they can then pay anywhere.

(Source: Indirect Network Effects)

Investors' Takeaway

Apple Pay remarkably links the hardware with the software by extending the iPhone application to another everyday event - paying. As far as Apple is struggling with problems regarding smartphone sales and the China dispute, I see a risk here, of course. But Apple will be able to handle it. The cycles are now just longer until a new iPhone is bought. But this also means that Apple has longer time to bind hardware customers to the software services. This makes it more likely that customers will buy a new iPhone later. And, that's why Apple is investing aggressively in the service business and launched Apple Pay. The service segment is now 20 percent of Apple's total revenue: (Source: Statista)

Apple has a forward P/E ratio of around 17. Considering the extreme growth potential (not even half of Apple users use Apple Pay), the high margin (62.8 percent), the broad acceptance of Apple Pay, and the expected transaction value, Apple is extremely undervalued. Therefore, Apple is still a buy.

I look forward to discussing the potential of Apple Pay with you in more depth in the commentary section.

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Disclosure: I am/we are long AAPL. 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.