At Apple’s iPhone 6 event back in 2014, CEO Tim Cook took to the stage to promote a new and exciting product. Flamboyant as you might expect from any other Apple event, he went on to mock the way we do things now, with the promise that Apple could give us a way to do it better.
Specifically, Cook was talking about conventional payment processes such as cash and credit and debit cards. He labeled these methods “outdated and vulnerable,” pointing to our reliance on bulky plastic, exposed numbers, and insecure security codes.
The solution he brought to the table? None other than Apple Pay — the ability to make payments wirelessly directly through your mobile phone.
Mobile Payments: Destined to Fail?
At its initial launch, there was rampant speculation surrounding the question of whether or not Apple Pay was the next big thing. “Could this be the next catalyst for Apple stock?” some headlines read. “Would the very concept of a wallet disappear?” asked others.
Apparently not yet.
Fast-forward two years, and Apple Pay is about as popular as it is an added convenience to consumers (it’s not much of either). In light of the initial excitement surrounding Tim Cook’s introduction of Apple Pay, no one is yet ditching their wallet in exchange for mobile payments — after all, it’s just as easy to take a card out of your wallet and swipe it as it is to take out your phone and open an app.
According to a recent survey by Accenture, 52% of North Americans are “extremely aware” of mobile payments, but only 18% use them on a regular basis. Jointly, Yahoo Finance has reported that only one in every 50 iPhone 6 owners uses Apple Pay on a regular basis. In short, the technology is available and consumers are aware, but they just don’t seem to care enough to use it.
For Apple, the mobile payment market has been a non-factor. Piper Jaffray’s low-end estimate forecasts that the fees Apple skims off every transaction will generate a mere $310 million in revenue for Apple in 2016. On the high end, Nomura’s analysts estimate it could account for $1.6 billion in revenue by 2017 — but even that’s a virtual rounding error for what was recently a trillion-dollar company.
Still, it would be impossible to deny that mobile payments are at least gaining some traction, and it’s almost certainly true that what’s a drop in the bucket for Apple could be an absolute windfall for companies a fraction of its size. The truth is no one is buying a $600 iPhone for the benefit of Apple Pay — but they might be willing to dish out the cash for more convenient devices (more on that below) at a much lower price.
Mobile Payment Growth
According to eMarketer, U.S. mobile proximity payments are poised to grow substantially over the next few years. The firm reports that mobile payment users totaled 23.2 million in 2015. By 2016, that number is expected to go up to 37.5 million. By 2017, 50.2 million. By 2018, 58.8 million. And by 2019, 69.8 million — a near tripling in a four-year time span.
As millennials begin to age and subsequently gain more buying power, mobile payments will become increasingly commonplace. According to Edelman Digital, 41% of millennials reported having made purchases with their smartphones over the last year, and 56% of millennials have already adopted alternative payment services such as Venmo or PayPal.
Clearly, there is a future market for mobile payments, regardless of what’s been a relatively sluggish adoption of highly touted services like Apple Pay.
Part of the reason for this sluggish adoption has a lot to do with convenience. Sure, Apple Pay is becoming increasingly accessible through major retailers across the U.S. (and internationally as well), but is there really much of an incentive for you to take out your phone instead of your wallet? I personally don’t see it.
The reality is that replacing one or two credit cards is not going to replace the need for a wallet. You still need your driver’s license, metro card, security access, health insurance, or whatever else you may carry in there. Until all these documents become digitalized on a unified platform, the wallet will continue to serve its purpose — and accomplishing that would be a truly remarkable feat.
Ultimately, the only reason to adopt mobile payments as a consumer is because it requires less effort. Taking your phone out is of equal convenience to taking out your wallet, so there is no major incentive to do so. But what if the mobile payment were attached to you at the wrist?
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The Flick of a Wrist
Remember that stat I shared above, the one that found only one in 50 iPhone 6 users regularly uses Apple Pay? Well, here are a few interesting numbers regarding wrist-hugging Apple Watch.
According to market research, ~20% of Watch owners try out Apple Pay for the first time on their Watch, with 80% of Watch users overall using the service. Jointly, mobile payments are made frequently, with 78% of Watch/Pay users reporting using the service on at least a weekly basis.
Obviously this is a drastic difference. The math works out to about 63% of Watch users using Apple Pay regularly, versus 2% of iPhone 6 users. Sure, there’s something to be said about Watch owners being a different demographic in and of themselves, but it’s safe to assume much of the difference in adoption has to do with physical convenience as well.
Of course, it’s still an inconvenient truth for Apple that no one is buying its Watch for its payment capabilities. Not only does the Watch retail on Apple’s website for between $649 and $1,099, but you’re required to purchase a $649 iPhone to even make it work. For the majority of consumers, upwards of $1,300 isn’t the right price for a convenient way to pay for things.
The reality is if Apple really wants to generate money from Pay, it needs consumers to actually use it. Its Watch owners might be natural adopters, but it doesn’t have many of these customers relative to the size of its business. If you want to find investment opportunities in mobile pay, you’ll have to look somewhere else…
Fitbit, Inc. (NYSE: FIT): The Best Bet for Mobile Pay
In contrast to Apple, Fitbit’s business rests almost entirely on wearable devices that live on consumer’s wrists. Its products are also priced so that they are accessible to consumers — as little as $100 for an entry-level wristband.
This is part of the reason why Fitbit’s Blaze has replaced Apple’s smartwatch as the top-selling smartwatch on Amazon’s Best Seller List, and why Fitbit has come close to doubling Apple’s smartwatch sales in recent quarters.
By getting its watches into the hands of more consumers, Fitbit is building a user base where it could benefit immensely from mobile pay. If Apple is expected to skim $1.6 billion in payments by 2017, just imagine what Fitbit could do with double the users and a payment system of its own. And while in the case of Apple, $1.6 billion might be chump change, that’s more than half the entire market cap of $FIT.
This is why Fitbit’s acquisition of mobile payment startup Coin earlier this week is such big news for the prior firm (though the market has largely ignored the development). With a commanding 30% market share, the company is better positioned than any other tech firm to profit from payment integration.
While Fitbit has noted the payment technology will not be part of its product lineup this year, it’s safe to assume its future devices will soon double as both fitness trackers and mobile payments.
Coupled with Fitbit’s precipitous 53% decline in share price over the last year, the company is looking like a good stock to consider on the dip.
Until next time,
Jason Stutman
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