Could Apple’s Fintech move hurt Block and PayPal?

Could Apple's Fintech move hurt Block and PayPal?

Apple (NASDAQ:AAPL) recently introduced “Tap to Pay on iPhone”, a new feature that allows merchants to accept NFC payments on their iPhones without using additional hardware or payment terminals.

Merchants can accept Apple Pay, contactless credit and debit cards and other digital wallet payments with the service, which will roll out to iPhone XS and newer devices in the US later this year. Could this movement cause problems for To block (NYSE:SQ) and PayPal Credits (NASDAQ: PYPL)?

Image source: Apple.

What is Apple’s game plan?

Apple Pay has been adopted by more than 90% of US retailers since its launch in 2014. Unlike Block’s Square, PayPal and other digital payment services, Apple Pay does not charge its merchants any fees. Instead, it simply allows using a stored credit or debit card on iPhones, iPads, Macs, and Macs with Touch ID, Face ID, and NFC security features.

Apple also launched Pay Cash, a peer-to-peer payment service, in 2017. This service, which competes with Block’s Cash App and PayPal’s Venmo, is also free.

For Apple, digital payments represent a way to lock in users instead of generating significant revenue. It’s just one more brick in its prisoner ecosystem, which also includes its App Store, Apple Music, Apple TV+, Apple Arcade, Apple Fitness+, and other subscription-based services.

The rigidity of this ecosystem widens Apple’s moat against Alphabetit’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Android. Google’s comparable solution, Google Pay, is also a free service for merchants.

Therefore, Tap to Pay on iPhone represents a natural extension of this strategy. Google Pay also offers peer-to-peer and in-store payments, but its merchants still need to install third-party NFC payment terminals.

What Tap to Pay means for Block and PayPal

To understand how Apple’s latest move could affect Block and PayPal, we must first realize that their business models are very different.

For merchants, Apple Pay and Google Pay are just simplified credit and debit card transactions. Merchants don’t pay any fees to Apple and Google, but they still have to pay a “card present” swipe fee at physical stores, which can cost 1.3% to 3.5% depending on the network. maps.

Block’s Square and PayPal bear these swipe fees and instead charge a flat transaction-based fee to merchants. These fees, which are reduced by the scale of Square and PayPal’s own payment networks, can be a cheaper option than card swipe fees for some businesses. Square and PayPal also sell additional products – such as payroll tools, analytics services and loans – to offset these costs and increase their revenue per merchant.

Apple’s latest decision does not directly disrupt these business models. In fact, Block’s Square Seller and Cash App services already work with Apple Pay, while PayPal integrates Apple Pay into its Braintree back-end payment platform. Apple already plans to integrate Tap to Pay with other third-party iOS payment apps – starting with Stripe – so that Block and PayPal can also add the new option to their own payment ecosystems in the near future.

Apple’s Tap to Pay on iPhone could eliminate the need for Square’s dongles and payment terminals, but this lossy hardware generated less than 1% of its revenue in the first nine months of 2021. PayPal sells terminals point-of-sale (POS) through its subsidiary Zettle, but it also does not generate significant revenue from these products.

Apple is not (yet) a threat to Block and PayPal

Apple’s new Tap to Pay feature may initially seem like a threat to Block and PayPal, but it will actually only impact their tiny hardware segments.

Block and PayPal’s core businesses shouldn’t be affected, as Apple Pay targets a completely different market. Nor will it likely turn Apple Pay Cash into a major threat to Block’s Cash App or PayPal’s Venmo, which together serve at least 150 million active customers.

Additionally, Apple won’t expand the Apple Pay ecosystem with value-added data collection services like Block and PayPal because its privacy-focused platform can’t actually identify the buyer or product. bought.

Therefore, investors should simply think of Apple Pay and Google Pay as secure, smartphone-based physical card extensions. Meanwhile, Block and PayPal are intermediaries leveraging their scale to offer more favorable payment processing rates while selling additional value-added services.

These two markets overlap in some areas like payment terminals, but Apple and Google’s fintech initiatives to create an ecosystem are unlikely to render digital payment platforms like Block and PayPal obsolete anytime soon.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.