Apple’s Next Version of the Wallet App Could Be Killer. Why PayPal and Other Fintechs Should Worry.

Apple (ticker: AAPL) doesn’t aspire to be a bank, but it’s pushing deeper into financial services, aiming to generate extra income while keeping its one billion-plus iPhone users hooked on the Apple ecosystem. The company is expanding into payments with its Apple Pay service. It has built a credit-card business with

Goldman Sachs Group

(GS), its partner for the savings accounts, and it’s muscling into buy now, pay later, facing off against companies like

Affirm

(AFRM),

Block

(SQ), and

PayPal Holdings

(PYPL).

None of this is likely to move the needle financially for Apple, which is estimated to book $391 billion in revenue and $96 billion of net income this year. But services, including cloud, music, and video, are becoming a major revenue driver, accounting for 20% of total sales. Apple takes 30% of app sales and a cut of games, music, and video revenue. Building out its payment services adds another source of revenue and another reason for consumers to stick with their iPhones through the next upgrade cycle.

Longer term, if Apple succeeds in building a full-scale digital wallet, it could also be another killer app embedded in the company’s two billion installed devices, keeping consumers buying more hardware, software, and other services through the sheer convenience of having it all in one place.

None of this bodes well for PayPal, Block, and other rivals in financial technology, known as fintech. “A lot of companies in the fintech space are frenemies, but every player views Apple as a threat,” one analyst told Barron’s, requesting anonymity due to investments in the arena.

Apple declined to comment for this article.

The company has spent nearly a decade pushing into fintech. It launched Apple Pay, its contactless mobile payment service, in 2014, and gradually added features, including peer-to-peer payments in 2016 and a Goldman-branded credit card in 2019. Only 10% of iPhones had activated Apple Pay in 2016. But pandemic-era online shopping pushed adoption to 55% in 2020 and about 78% today, according to data from Deepwater Asset Management.

“Apple’s ‘familiarity factor’ has been long coming,” says Lisa Ellis, senior fintech analyst at MoffettNathanson. Her channel checks show that in the past 18 months, use of Apple Pay has accelerated, including a “notable shift” in the past six months.

Apple expanded its digital wallet this year in two key areas. In March, it launched Apple Pay Later, a BNPL service that put it in direct competition with Affirm, Afterpay (owned by Block), PayPal, and Klarna. BNPL has become a popular form of credit in the past few years as it marries the convenience of a credit card with the structure of layaway. Rather than put a purchase on a credit card, shoppers generally split the payment into four equal installments over a two-month period with 0% interest.

The savings accounts, run by Goldman, give people a high-yield reason to stash cash in Apple Wallet, a home base for payments and credit cards, including its own branded card. Rewards earned on its card automatically go into the savings account, which can hold up to $250,000.

Investors appear to view Apple’s fintech aspirations as one more reason to sour on payment stocks. Shares of PayPal, Block, and Affirm are each off more than 75% from 2021 highs. Investors are assigning lower multiples to earnings and growth. PayPal trades at 11.6 times estimated 12-month earnings, a third of its five-year average of 33 times, according to FactSet. Block goes for 28 times, down from an average of 98. Affirm isn’t profitable but trades at 2.4 times sales, down from an average of 17 times.

Some analysts see bargains in payment stocks, noting that Apple doesn’t compete in some core areas. PayPal, for instance, appears to have a hit with its Braintree business, a processing “stack” for merchants that allows them to accept credit cards, PayPal, and PayPal credit through an integrated platform. PayPal also has some incumbency advantages, including a wider acceptance rate among large online retailers than Apple Pay, according to Evercore ISI analyst Amit Daryanani.

Block’s suite of Square apps for merchants can manage things like sales, invoices, payroll, and subscriptions; the company is also building its Cash app into a full-scale digital wallet. Under co-founder Jack Dorsey, Block is also a

Bitcoin
proponent, building out crypto and blockchain services, something that Apple doesn’t offer.

Affirm looks more vulnerable, not just because of pressure from Apple. BNPL is now a commodity offered by large banks and fintechs; you can pay off individual items on your

JPMorgan Chase

or

American Express

credit card with BNPL. Affirm says it now has 16 million active users, up from 12.7 million a year ago, and is growing its consumer and merchant base. But analysts see mounting pressure and are souring on the stock, cutting estimates, price targets, and ratings.

Affirm declined to comment but pointed to its statement following the release of Apple Pay Later, in which it said Affirm is “well-positioned to win.”

Apple isn’t yet a fintech giant. Far more people still use Venmo and PayPal for payments or Square for merchant services. Its BNPL service and savings accounts are in their infancy.

But Apple is playing a long game with vast financial firepower at its disposal, including $56 billion in cash and cash equivalents on its balance sheet. It also has a big advantage in controlling both the hardware and software through its iOS-based devices—something no other payment company does. Android devices running Google’s operating system are building similar payment services, but none are as fully integrated as Apple.

The pressure will force payment companies to do more “blocking and tackling to ward off the threat of Apple,” the fintech analyst with investments in the space told Barron’s. That could be costly. In fiscal 2022, Apple spent $26 billion on research and development whereas PayPal spent $1.7 billion on R&D. Apple could dramatically outspend PayPal while still leaving plenty of cash for things like virtual-reality headsets, video content, and new features for Apple Watch, iPhones, iPads, and Macs.

Apple has both the top-selling smartphone and a huge pile of cash. That makes it the disrupter-in-chief.

Write to Carleton English at [email protected]