Apple’s next version of the Wallet app could be the killer. Why PayPal and other Fintechs should worry you.

Apple (ticker: AAPL) doesn’t aspire to be a bank, but it is pushing deeper into financial services, aiming to generate additional revenue 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 savings account partner, and is evolving to buy now, pay later, taking on companies like Affirm ( AFRM ), Block ( SQ ) and PayPal Holdings ( PYPL ).

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

In the longer term, if Apple succeeds in building a full-scale digital wallet, it could also be another killer app built into the company’s two billion installed devices, driving consumers to buy more hardware, software and other services through the sheer convenience of to have everything in one place.

None of this bodes well for PayPal, Block and other rivals in financial technology, known as fintech. “Many companies in the fintech space are friends, but all players see Apple as a threat,” one analyst said Barron’srequests anonymity due to investments in the arena.

Apple declined to comment for this article.

The company has spent almost 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 Apple Pay enabled in 2016. But pandemic-era online shopping pushed adoption to 55% in 2020 and around 78% today, according to data from Deepwater Asset Management.

“Apple’s ‘familiarity factor’ has been long overdue,” says Lisa Ellis, senior fintech analyst at MoffettNathanson. Her channel checks show that Apple Pay usage has accelerated over the past 18 months, including a “remarkable shift” over 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 recent years as it combines the convenience of a credit card with the structure of layaway. Instead of purchasing a credit card, shoppers typically split the payment into four equal installments over a two-month period with 0% interest.

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

Investors appear to be looking at Apple’s fintech ambitions as yet another reason to sour on payments stocks. Shares in PayPal, Block and Affirm are each down more than 75% from 2021 highs. Investors assign lower multiples to earnings and growth. PayPal trades at 11.6 times estimated trailing 12-month earnings, a third of the five-year average of 33 times, according to FactSet. Block trades for 28 times, down from an average of 98. Affirm is not profitable but trades at 2.4 times sales, down from an average of 17 times.

Some analysts see bargains in payments stocks, noting that Apple is not competing in any core areas. PayPal, for example, 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 positional advantages, including a wider acceptance rate among major 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 rebuilding the Cash app into a full-scale digital wallet. Under co-founder Jack Dorsey, Block is also one

Bitcoin

advocate, build out crypto and blockchain services, something Apple does not offer.

Affirm looks more vulnerable, not just because of pressure from Apple. BNPL is now a commodity offered by big 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 that it is growing its consumer and merchant base. But analysts see increasing pressure and are buzzing on the stock, reducing estimates, price targets and ratings.

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

Apple is not yet a fintech giant. Far more 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 enormous financial firepower at its disposal, including $56 billion in cash and cash equivalents on its balance sheet. It also has a huge 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 build similar payment services, but none are as fully integrated as Apple’s.

The pressure will force payments companies to do more “blocking and tackling to fend off the threat from Apple,” said the fintech analyst with investments in the space. Barron’s. It can be expensive. In fiscal year 2022, Apple spent $26 billion on research and development, while PayPal spent $1.7 billion on R&D. Apple can drastically more than PayPal, while still leaving plenty of money for things like virtual reality headsets, video content, and new features for the Apple Watch, iPhone, iPad, and Mac.

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

Write to Carleton English at [email protected]