In a report published Monday, Jefferies analyst Sundeep Bajikar argued that Apple Inc. (NASDAQ: AAPL)'s Apple Pay service is likely to be one of the most "compelling killer" apps for the Apple Watch.

"We think the convenience of using Apple Pay on Apple Watch with or without a tethered iPhone, while ensuring a higher level of security and privacy as compared to using physical credit cards, is likely to gain traction as a smarter way to pay," Bajikar wrote.

Bajikar said that "Apple Pay 2.0" with browser-based payments and loyalty card support would further increase the "relevance" and "persistence" of Apple Pay. In fact, the analyst noted by the end of 2016, roughly 90 percent of the global iPhone installed base would be Apple Pay compatible.

According to Bajikar, the Apple Watch is also well positioned to become a convenient and secure "repository" of "electronic credentials" including airline boarding passes, membership cards, hotel room key.

Related Link: 22 Fintech Apps Coming To Apple Watch

However, despite the positive opinion of Apple Pay, the analyst stated the service is unlikely to be an "earnings per share needle mover" for Apple. Rather, the convenience of Apple Pay could drive increased adoption of Apple products, including iPhone and Watch.

Finally, Bajikar pointed out that Apple Pay will see increased competition from Samsung Electronics Co Ltd's similar offering, Samsung Pay. The company has already stated it will roll out Samsung Pay in the U.S. (and Korea) in the bottom half of 2015 and is described as "triple secured" through fingerprint authentication and other advanced security features.

Bottom line, since Samsung Pay integrates both near-field touch (NFC) and conventional magstripe-based payment technologies, it could potentially see broader adoption than Apple Pay that is NFC-only compatible.

Shares of Apple are Hold rated with a $135 price target.

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