Apple and Online Payments: 800 Million Reasons Why That's a Good Idea
Not everyone feels safe handing over their credit card information to just anyone on the Internet. Nor should they.
Lucky for online shoppers, a little business called PayPal made it easy to securely transfer money across the Internet. Since eBay bought the business in 2000, it has expanded its reach across the globe. PayPal now generates nearly as much revenue as eBay's marketplace business, and it's growing faster.
Is there room for another online payments processor? In 2013, eBay handled more than $125 billion in e-commerce outside of its marketplaces. Apple may be the only company able to make some headway.
How to make money processing payments
Apple has more than 800 million credit cards on file through its iTunes store. Comparatively, PayPal has just 148 million active accounts -- some of which have bank account information, but most of which have credit card information. Having bank account information is valuable because it allows eBay to bypass the credit card companies and their fees.
Online Payment Processing Fees for Merchants
1.95% + $0.10
1.89% + $0.10
2.9% + $0.30
As you can see, PayPal typically charges a premium compared to the credit card companies. Moreover, PayPal likely pays lower fees to the credit card companies because it transacts so much business. As a result, PayPal is able to pocket quite a bit of change, and the credit card companies get their take as well. In 2013, eBay's payments business generated more than $6 billion in revenue, with a gross margin around 60%.
But why would merchants pay PayPal (or Apple) more?
PayPal offers a couple benefits to businesses and consumers. The first is convenience. It's very easy for a merchant to add a PayPal button to their website, but it's even easier for a customer to click it. It's significantly easier than typing in his credit card information.
More important, however, PayPal offers a bit more security and peace of mind to consumers. Providing your credit card information to a lot of websites increases the risk of that information getting stolen by hackers.
Theoretically, accepting PayPal should increase sales conversions for smaller online retailers. Thus, it should be an easy decision for online merchants to forgo an extra 1% or so of revenue to increase total sales.
Why Apple could take the market by storm
Apple has more than 300 million iOS devices out in the wild, and consumers are using them more than any other mobile device to shop. That's at least twice the number of active users compared to PayPal.
Apple can take advantage of its control over those 300 million devices to make it easier for its users to make purchases on the mobile web. Its integration of Touch ID in the iPhone 5s may open the door for payments made via fingerprint authentication.
Tim Cook said as much on Apple's first-quarter conference call: "The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID."
It's worth noting that Apple doesn't have to be profitable with its payments solution. Much like iTunes music downloads, which are hardly profitable for Apple, these services attract more users to its brand. If Apple breaks even operationally with payments, it could still attract more users to the iPhone and iPad over the competition. That means it can be very price-competitive with PayPal.
Another thing working in Apple's favor is that merchants using PayPal are directly funding their competition -- eBay. Apple's relatively neutral position in online commerce should make it preferable to PayPal.
A huge, growing market
Global online transactions topped $1.25 trillion in 2013. That number is expected to climb another $1.1 trillion by 2017, according to eMarketer. Mobile commerce is growing even faster.
Apple is well-positioned to take on that market with 800 million credit cards on file, more than 300 million iDevices in use, and strong relationships with other retailers. Although PayPal is well-established, it still accounts for only 14% of the market, including eBay marketplaces. Apple could help make up the difference in a hurry.
Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.
The article Apple and Online Payments: 800 Million Reasons Why That's a Good Idea originally appeared on Fool.com.Adam Levy owns shares of Apple. The Motley Fool recommends Apple and eBay. The Motley Fool owns shares of Apple and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.