2/14/2020
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`Financial Alchemist: Apple (AAPL): Apple Pay Revenue Estimates and Future Potential
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`Apple (AAPL): Apple Pay
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`Thursday, April 25, 2019
`Apple (AAPL): Apple Pay Revenue Estimates and Future Potential
`Since its launch 4 years ago, Apple Pay has seen strong growth in active users and transaction volume, but revenue has been relatively inconsequential. The
`challenge facing Apple Pay to impact the top line is straight forward: it is widely estimated that Apple only collects 15 cents for every $100 in credit card
`purchase value, thus it would require $1T (trillion) in PV just to generate $1.5B in revenue. Even then, one or two billion barely nudges the needle for
`a company with $260B annual sales. Annual transaction value for credit cards is over $3T in the U.S. and more than $10T globally. Thus, Apple Pay would have to
`capture a significant portion of global transaction volume and/or boost its percentage take in order to become a significant revenue contributor. Debit transaction
`volume is not quite as much as credit volume, but Apple likely collects less than a penny per debit transaction. It is possible the economics are more
`favorable internationally.
`
`APPLE PAY NON-REVENUE BENEFITS:
`While revenue from POS (point-of-sale) transactions would still be modest with widespread Apple Pay usage, Apple stands to benefit in other ways. First, Apple Pay
`can increase platform loyalty and enhance the value of Apple's overall ecosystem. Second, AP gives Apple a foothold in the payment space from which it can
`expand into other verticals. Apple could move into a processing like PayPal, or become an POS (point-of-sale) acquirer like Square. We have already seen Apple
`expand into online payments as well as peer-to-peer payments with Apple Cash. Most recently, Apple partnered with Goldman Sachs to become a credit card issuer.
`
`
`Another benefit is Apple Pay places Apple at the beginning of the chain in the payment process. Being at the start of a process (or the gateway) is immensely
`valuable. Amazon dominates online retail because it's the first place (sometimes only) that a consumer checks for an item he/she needs. Google succeeds because
`anyone looking for something on the internet comes to them first. With the popularity of the iPhone, Google now shares billions to Apple annually because when
`users need to find something on the internet, they pull out their iPhones. To keep Apple from switching search engines or building one, Google pays to be the default
`search option. If Apple Pay becomes the standard in which consumers make purchases, Apple gains leverage over the card networks and issuers, as well as
`merchants.
`
`APPLE PAY REVENUE ESTIMATES:
`Apple Pay has done $387M in total sales (1Q15-2Q19 ), $175M in revenue for FY18, and $242M in the last year. While Apple has not announced Q2 results yet, I
`am basing my estimates from the disclosure at last month's special event that Apple Pay has reached 10B transactions.
`
`Apple Pay revenue is calculated from multiplying Apple's commission of 0.15% (or 15 basis points) by the total value of transactions where Apple Pay is used. We
`calculate total transaction value from multiplying the number of Apple Pay transactions by the average transaction amount.
`
`1) # of Transactions x Average $ Value per Transaction = Total Transaction Value
`2) Total Transaction Value x .0015 (commission) = Apple Pay Revenue
`
`My estimates are based on management comments from earnings conference calls and other disclosures which are shown in the table below. I have the highest
`degree of confidence in the assumption for the Apple Pay commission (U.S. transactions), followed by the estimates for transaction volume. Last, the estimates for
`average transaction amount are guesses.
`
`For a couple of quarters, Apple has given transaction volume figures and for most quarters it has provided year-over-year growth rates. Taking the two together, we
`work backwards to estimate transaction volume for earlier periods.
`
`The industry average credit card purchase is higher than $50, but I believe Apple Pay is less. The only guidance we have for the average Apple Pay transaction
`amount is a comment from 1Q17: "100's of millions of transactions and billions of dollars in purchase value." This implies that transaction volume was 200M or
`greater and that average transaction was $50 or less. This assumes purchase value was $10B or less, otherwise the comment would have been: "over $10B" or
`"10's of billions." I use $25 per transaction for my estimates.
`
`The sum of the number of transactions since launch is slightly more than 10B which is consistent with Apple's recent disclosure of attaining 10B cumulative
`transactions.
`
`For FY19, Apple Pay revenue will reach $330M, and if growth can continue at 100%+ revenue will hit $775M in FY20. These estimates could be too high since I
`am assuming that all transactions are credit card payments. While the number is certainly not 100%, credit cards are the vast majority. I do not adjust for this since it
`is likely offset by the low estimate of average transaction value.
`
`IMPORTANCE TO APPLE MANAGEMENT:
`It is apparent that Apple's ambitions for Apple Pay extend well beyond its revenue potential from contactless payments. If that were not the case, I don't believe
`Apple would talk-up the service as much as it does, nor continue to expend effort and resources on development. Surely, not all of that for a business that perhaps in
`the future only generates modest revenue. Practically on every earnings calls, management boasts about Apple Pay's success despite having little to no effect on
`the quarter's results, as they have occasionally conceded. Obviously, they believe the future holds bigger and brighter things for the service.
`
`Just to highlight how serious Apple is about AP, look at the case of the new Apple Card. This is the credit card Apple is introducing in partnership with Goldman
`Sachs. As the issuer, Apple stands to collect 2%-2.5% (interchange fee) from the merchant. Obviously, the economics are much better as a card issuer. Apple offers
`cash back rewards of 2% on Apple Pay purchases and 1% for purchases where Apple Pay is not accepted and the card is physically swiped (inserted). After
`accounting for the cost of rewards, the economics look less attractive, but still much better than the Apple Pay transactions from 3rd-party card issuers. This is
`especially true for Apple Card transactions that Apple only has to pay 1% if Apple Pay is not used. One would think Apple would prefer Apple Pay not be used since
`those transactions are more lucrative. Since Apple is the card issuer, an Apple Pay transaction does not result in any additional revenue. So why would Apple spend
`1% for the use of Apple Pay when there is no financial benefit? Obviously, Apple's goal is to increase Apple Pay usage and is willing to spend money for it. Naturally,
`the next question becomes "Why would Apple spend money to increase usage when even if Apple Pay becomes ubiquitous, revenues would still be relatively
`small?" I believe that is the crux. Apple sees AP as much larger than just POS transactions because it makes no sense to pay 1% to your card holders to boost a
`business that only collects 0.15%. In short, Apple's vision for Apple Pay longterm is ambitious and is therefore seriously committed to accelerating its adoption.
`
`► 2018 (1)
`► 2012 (1)
`► 2010 (2)
`International usage is much higher than in the U.S. as 80% of transactions occur abroad. The Apple Card addresses this gap. Domestic users don't have
`https://financial-alchemist.blogspot.com/2019/04/apple-aapl-apple-pay-revenue-estimates.html
`
`APPLE PAY GROWTH POTENTIAL:
`Apple Pay revenue will continue to increase as merchant acceptance continues to grow and as the service expands into new markets. If Apple Card succeeds in
`attracting a large user base, Apple Pay usage will accelerate domestically.
`
`1/2
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`Financial Alchemist: Apple (AAPL): Apple Pay Revenue Estimates and Future Potential
`
`much motivation or incentive to use the service, and many are unsure and/or do not ask if the merchant accepts Apple Pay. For their entire lives, people have been
`in the habit for reaching for their wallets when making a purchase, not their phones. This will change for Apple Card users since they are essentially paid 1% of the
`purchase amount to use Apple Pay.
`
`Payment card terminals that accept EMV (chip) are also equipped with NFC to handle contactless payments such as Apple Pay. EMV began rolling out across the
`U.S. a couple years ago and has become the new standard. Not only does this help Apple Pay since it increases merchant acceptance, it should also help lift usage
`on the part of the consumer. In general, the process of inserting and reading a chip card takes considerably more time than swiping. This is a situation where
`contactless payments provide a noticeable advantage to the user. Merchants that have busy checkout lines also benefit from a quicker transaction process.
`
`Apple Pay has potential for online and in-app payments. Since these transactions do not involve physical cards, merchants pay higher fees for "card not
`present" transactions due to the increased risk of fraud. It is possible that the acceptance of Apple Pay reduces such fees since it decreases the risk of fraud. In
`addition, Apple Pay online payments is beneficial to users since it eliminates the need to have to enter credit card information as buyers can simply tap or click the
`Apple Pay button and be done with it. Merchants benefit as it reduces the friction in the checkout process moving the customer from product selection to sale with
`fewer steps increasing the likelihood that more transactions reach completion which also helps merchants capitalize on impulse purchases. Personally, I
`have encountered situations where I went to purchase an item to later discover my wallet was not nearby causing me to abandon the purchase.
`
`The full potential of Apple Pay is not currently clear. Apple firmly believes Apple Pay has vast potential as evidenced by its continued efforts and the introduction of
`Apple Card.
`
`
`Posted by Turley Muller
`
`
`
`Labels: AAPL, Apple Pay, Estimates, Payments
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`IPR2020-00019
`Fintiv EX2020 Page 2
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