Apple Pay’s Success Draws in Regulators

Apple Pay’s Success Draws in Regulators

It was only a matter of time. Apple (AAPL) customers are tapping their watches and phones to pay for products in record numbers.

Apple Pay, the near-field communication contactless payment system, may be responsible for 5% of global card transactions, according to a new research report.

Since sales of iPhones peaked in 2015, the Cupertino, Calif.-based company has been desperately looking for a way to grow overall sales. There has been an extremely successful foray into wearables: Its AirPod line of wireless headphones is classic Apple; create a problem then solve it with an expensive, high-margin device that customers never knew they couldn’t live without.

Related post: Apple After the iPhone

AirPods solved the problem Apple created in 2016 when designers “courageously” killed the headphone jack. Now analysts predict the ubiquitous white earbuds will sell 90 million units in 2020.

Apple Pay could be even bigger.

Contactless payment systems allow consumers to tap to pay with NFC enabled devices. Since 2016, iPhones have had NFC enabled chips for payment. Recently, Apple added the chips to its popular smartwatches.

Now product managers are using the company’s scale and marketing muscle to get more people into the habit of tapping to pay.

To get an idea of what’s at stake, Quartz notes that Visa (V) and Mastercard (MA) process digital payments of about $14 trillion annually. And a Juniper Research report suggests that contactless payments might reach $1.5 trillion by 2024, up from only $178 billion in 2020.

Now, consider that Apple is the lone NFC gatekeeper on all its devices. That’s unique. Android devices, for example, provide NFC access through software application programming interfaces. Samsung adds Samsung Pay to its Galaxy line of Android smartphones, but users are free to use Google Pay, Amazon Pay or the digital wallet of any provider they choose.

By gatekeeping access to the hardware needed for payments, Apple is in position to collect all the rewards.

Harshita Rawat, an analyst at Bernstein, believes that business already accounts for 5% of all transactions. In a note to clients, he predicted Apple may be looking to disrupt the entire digital payments ecosystem.

Unfortunately, that’s a risk in the current business strategy. While Apple may only have 15% market share of the global smartphone market, it has 100% control of iPhones. And the monopoly game on contactless payments isn’t playing out in their favor.

European Union regulators began asking ecommerce companies in 2019 if they had been approached by Apple to make exclusive deals for Apple Pay. And in November, German legislators passed a law to force Apple to open up access to NFC on iPhones. Since Germany is Europe’s largest economy, that could shift the market severely.

The writing is on the wall. Regulators are coming, and none of this is baked into Apple’s current share price.

Related post: Microsoft, Apple Platforms Prove Too Big for Underdog Competition

I often write that big tech investors should not fear regulators. Usually, the companies are built with the expectation government scrutiny is imminent.

But I’m doubtful that is true for Apple. More importantly, losing control of access to some iPhone sensors could be extremely detrimental to its business model.


Apple shares are up 11% in 2020, and 92% over the last 12 months. The stock trades at 22.6x forward earnings and 4.9x sales.

While neither of these metrics seem extreme, investors need to be careful. The company sees second-quarter revenue of $4.34 billion, plus or minus $200 million, above the previous guidance.

Best wishes,

Jon D. Markman

Leave a Reply

Your email address will not be published. Required fields are marked *