Apple Inc. (NASDAQ:AAPL) strives to attract more enterprise users into its Apple ecosystem. Financial management services play an integral role in companies’ broader business systems, prompting Apple to introduce “Tap to Pay on iPhone.” Since the launch in beginning of 2022, various payment platforms have activated the iPhone’s “Tap to Pay” through their iOS apps, increasing the appeal of iPhones even more, and strengthening the company’s ambitions of the technological giant . The growing use of iPhone “Tap to Pay” by businesses is not only a boon for Apple’s iPhone/hardware segment, but also for its services division.
iPhone’s Tap to Pay increases the iPhone’s appeal for business use
iPhone Tap to Pay allows merchants to accept contactless payments on their iPhone, essentially turning the mobile device into a Point of Sale (POS) terminal. While it does not need to encourage all businesses replacing traditional POS hardware with iPhones, encouraging greater use of the mobile device for business purposes, especially in certain types of customer-facing businesses.
For example, sales staff in retail stores can accept payments from customers through partner-enabled iOS apps, such as those operated by Shopify (SHOP) or Block Square (SQ), directly with their iPhones. This removes one of the cost barriers to starting your own business. Traditionally, people who want to open physical business sites need to buy POS hardware devices such as registers and payment terminals, which can be expensive, especially for price-sensitive SMEs. With the launch of “Tap to Pay on iPhone”, aspiring SMEs can start doing business from anywhere, using their iPhones as payment terminals. As a result, this POS feature increases the iPhone’s appeal over competitors’ mobile devices, and helps attract enterprise consumers into the Apple ecosystem. This, in turn, strengthens Apple’s ability to cross-sell more of its hardware devices for business use, such as iPads and iMacs.
One might wonder why Payment Service Providers (PSPs), such as Stripe and Square, who sell their own suite of POS hardware devices, would be willing to partner with Apple to enable “Tap to Pay” through their apps POS software on iPhones. After all, an increasing use of iPhones as payment terminals results in fewer sales of their own POS devices. The answer lies in the power of the Apple brand. The iPhone has a massive installed base (proclamation 1 billion active users in January 2021), and continues to grow, as CFO Luca Maestri shared about Q4 2022 earnings calls: :
Thanks to our strong iPhone lineup, we set a quarterly record for upgrades and expanded double-digit switchers. This level of sales performance, along with unparalleled customer loyalty, has driven the active installed base of iPhones to a new all-time high across all geographic segments. And the latest US consumer survey by 451 Research indicates iPhone customer satisfaction at 98%.
Growing iPhone installed base forces PSPs to enable iPhone “Tap to Pay” in their apps to stay top of mind among potential iPhone owners businesses, or that are already engaged in business activities that require POS solutions. Merchants who want to start using their iPhones as payment terminals are required to download a supported payment app from the App Store, such as Shopify POS or Square POS. If, for example, a merchant’s current PSP does not facilitate iPhone “Tap to Pay,” it could undermine the merchant’s impression and experience of that PSP, and may even encourage them to migrate to a PSP with “Tap to Pay” – iOS app enabled. Therefore, the prominence of the iPhone encouraged PSPs to enable “Tap to Pay” as part of their merchant acquisition and retention efforts, to Apple’s benefit.
“Tap to Pay on iPhone” started as a partnership with Stripe and Shopify, and has since partnered with Block’s Square and Adyen, and soon to be. sustained from financial services giants like Chase and Worldpay. Partnerships with massive commerce platforms like Shopify and Square help accelerate enterprise adoption, thanks to their large merchant bases and ongoing business acquisition efforts. In addition, these business and payment platforms offer services that extend beyond payment solutions, such as CRM, team management and other essential business solutions. As more and more merchants use iPhones to conduct commerce through mobile applications, they encourage these commerce/payment platforms to allocate more of their resources to building apps that are compatible with iOS, instead of Android.
In addition, beyond PSP partner platforms, it can also induce other app developers to focus more on building business-oriented applications compatible with iOS, to capitalize on enterprise use proliferation of iPhones. This, in turn, induces a network effect, where the increasing availability and continued advancements in business-oriented iOS apps encourage more businesses to use iPhones, which then further encourages commerce and payment platforms. / app developers to build (or enhance) iOS- compatible business software. This self-reinforcing network effect translates into more and more iPhone sales (and subsequently other Apple hardware), and keeps users increasingly engaged in the Apple ecosystem.
A boon for service revenue, too
An increasing use of third-party business-oriented applications on the iPhone would also increase the App Store’s revenue from app sales/in-app sales, and strengthen the pricing power of the App Apple store. In addition, the proliferation of enterprise use of the App Store to search for useful enterprise applications will not only induce app developers to build more iOS-compatible business apps, but also increase the appeal of advertising applications in the App Store. App developers would like to get their business-oriented Apps in front of the growing base of business users, appearing prominently in the relevant search results, thus improving the advertising revenue potential of the App Store.
The increase in corporate use of the iPhone in general would also give Apple insight into how the device and the inherent software is used in professional contexts. These data could subsequently fuel the company’s efforts to innovate new products and services, especially aimed at business use. Apple’s suite of services has been primarily geared toward general consumer needs until now. Revenue from the company’s services segment has seen a slowdown in growth lately, only growing 14% year over year in fiscal 2022, compared to 27% in fiscal 2021.
Keep in mind that Apple is doing hard compounding from the pandemic boom. However, investors are eager to see how Apple strives to drive growth in services revenue going forward. Creating business-oriented services is one path the company could take. Amidst proliferating business use of the iPhone, Apple could leverage the following data to build services specifically targeted at business users, thereby creating new revenue streams, and potentially restarting growth of the revenues of the services.
The progressive offer to merchants “Tap to Pay on iPhone” through a growing number of partnerships with PSP is certainly a significant step forward towards the ambitions of the enterprise of Apple. The POS feature increases the appeal of iPhones over competitors’ mobile devices, especially for conducting certain types of customer transactions. The proliferation of enterprise use would also push commerce and payment platforms/app developers to allocate more of their resources towards creating apps that are compatible with iOS, rather than Android. This would induce a self-reinforcing network effect that would encourage greater use of the iPhone for commercial purposes.
Consequently, the growing prevalence of iPhone “Tap to Pay” could also increase App Store advertising revenue as app developers seek to put their business-oriented apps in front of business users opportunistically. The proliferating business use of the iPhone would also provide insights into the business use of the device, which Apple could exploit to build a new line of services specifically aimed at business users, thus creating new revenue streams.
Apple sells several hardware products and services, which investors should consider in aggregate when making investment decisions. Since this article focuses specifically on “Tap to Pay” of the iPhone for commercial use, a neutral “hold” rating will be assigned to Apple shares.