Apple Pay: Really a PayPal killer?

Apple's launch of Apple Pay, a way to conduct transactions via iPhone 6, iPhone 6 Plus and Apple Watch in the future, is causing a bit of angst for PayPal watchers. After all, Apple's partnerships with high transaction retailers, debit card issuers and credit card networks instantly gave Apple Pay credibility and market coverage.

It was also obvious that PayPal wasn't on the list of partners touted at Tuesday's iPhone 6 and Apple Watch unveiling.

Apple Pay relies on near field communications (NFC), a secure chip on the iPhone 6 to mask credit card numbers and a system that delivers a one-time number to retailers to close transactions. Apple also said it won't track what you've bought or what you paid for it. Toss in TouchID as a verification tool and Apple Pay may have enough secret sauce to be a payment player.

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On the surface, Apple Pay could spell doom for eBay. Analysts fretted that Apple Pay's use of a secure token system may mean that technically PayPal can't be a partner. PayPal operates under a different system.

Meanwhile, Apple Pay could simply be easier to use over time for transactions even though the economics on how Apple gets paid are fuzzy at best.

Janney analyst Shawne Milne said:

"Apple Pay includes several features that were already widely expected and/or leaked including NFC integration (iPhone 6 and Watch), Touch ID authentication at POS, and partnerships with major card networks and banks. Importantly, PayPal was not included in the list of participating payments networks, while it is too early to tell about potential “exclusivity rules”. Given that Apple Pay uses a dynamic security code at checkout and not a consumer’s actual credit card number, we believe this creates a potential technological barrier for PayPal ever being included in Apple Pay, making the wallet potentially exclusive to only credit and debit card transactions."

According to Milne the threat for PayPal doesn't revolve around the brick-and-mortar point-of-sale terminal since expectations are low. Instead, the threat to PayPal is mobile and in-app payments. Apple Pay is likely to be easier for in-app and mobile purchases too. If that's the case, a sizeable chunk of the payments processed by PayPal will be up for grabs.

While there is a good bit of angst over PayPal, eBay's profit engine, taking a hit from Apple Pay, there are multiple reasons to think the incumbent can hold its own. Consider the following:

• Apple Pay is available on the latest iPhones so distribution will depend on the upgrade cycle. There would be more angst over PayPal competition if Apple Pay was available on the entire iPhone installed base.
  
  
• Apple Pay's initial focus is on brick-and-mortar transactions. PayPal is a payment option at many retailers, but its penetration is small.
  
  
• It's unclear whether the masses will really stop using their credit cards at the point of sale. How much easier will Apple Pay be than whipping out a credit card?

Macquarie analyst Ben Schachter said Apple Pay will take time to gain traction and dent PayPal. For now, the PayPal threat is duly noted but the burden of proof is on Apple. Schachter said:

"We are broadly positive on Apple’s new mobile payments service. The broad adoption of Apple devices, coupled with buy-in from a meaningful number of retailers at launch and security advantages relative to traditional credit-card transactions, could help Apple Pay succeed where other mobile payment solutions have not. That said, over the past several years, it has been an uphill battle for providers of mobile payment services to gain traction with consumers and displace the credit card from point-of-sale transactions. Furthermore, the recent headlines related to security breaches in Apple’s iCloud (though these were targeted attacks) could make the path more difficult for Apple."