Apple company (Nasdaq: AAPL) strives to attract more enterprise users to its Apple ecosystem. Financial management services play an essential role in the broader business systems of organizations, prompting Apple to introduce Click to Pay on iPhone. Since its launch in In early 2022, several payment platforms enabled the iPhone’s “Tap to Pay” program through their iOS apps, increasingly increasing the appeal of iPhones, and fueling the tech giant’s ambitions. The increasing use of “Tap to Pay” by companies is not only a boon for Apple’s iPhone/device segment, but also for its services division.
The iPhone Tap to Pay feature increases the attractiveness of iPhone for corporate use
iPhone’s Tap to Pay feature enables merchants to accept contactless payments on their iPhone, essentially turning the mobile device into a point of sale (POS). While it will not necessarily encourage all companies to Replace traditional point-of-sale devices with iPhones, this encourages increased use of the mobile device for business purposes, particularly in certain types of customer-facing businesses.
For example, sales staff in retail stores can accept payments from customers through partner-supported iOS apps, such as those run by Shopify (SHOP) or Block’s Square (SQ), directly using their iPhone. This removes one of the cost barriers to starting your own business. Traditionally, people who want to open physical business locations need to purchase POS hardware(s) such as registers and payment terminals, which can be expensive, especially for price-sensitive small and medium businesses. With the launch of Click to Pay on iPhone, aspiring SMEs can start running a business from anywhere, using their iPhones as payment terminals. As a result, this POS feature increases the attractiveness of iPhones over mobile devices to competitors, and helps attract enterprise consumers into the Apple ecosystem. This, in turn, enhances Apple’s ability to sell more of its devices for commercial use, such as iPads and iMacs.
One might ask why Payment Service Providers (PSPs), such as Stripe and Square, who sell their own set of POS hardware, would be willing to partner with Apple to enable “Tap to Pay” through POS software applications on iPhones. After all, the increasing use of iPhones as payment terminals will lead to lower sales of their POS devices. The answer lies in the strength of the Apple brand. iPhone has a huge installed base (announced 1 billion active users in January 2021), and continues to grow, as CFO Luca Maestri shared on our Q4 2022 earnings call:
With our strong iPhone lineup, we set a quarterly record for upgrades and increased by double digits for converts. This level of sales performance, combined with unparalleled customer loyalty, has propelled the active iPhone installed base to an all-new level across all geographic segments. And a recent survey of American consumers from 451 Research reports iPhone customer satisfaction at 98%.
The growing iPhone install base forces PSPs to enable the iPhone’s “Tap to Pay” feature within their apps in order to stay top of mind for iPhone users who are likely to become business owners, or are already involved in businesses 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. For example, if a merchant’s existing PSP does not facilitate “Tap to Pay” on the iPhone, this could undermine the merchant’s impression of the PSP and their experience with the PSP, and it could also encourage them to migrate to the PSP with a “Tap to Pay”-enabled iOS app. Therefore, the prominence of the iPhone is encouraging payment service providers to enable “Tap to Pay” as part of their merchant acquisitions and retention efforts, in Apple’s favor.
Tap to Pay on iPhone started as a partnership with Stripe and Shopify, and has since grown into a partnership with Block’s Square and Adyen, and will soon be backed by financial services giants like Chase and Worldpay. Partnerships with massive commerce platforms like Shopify and Square are helping organizations accelerate adoption, thanks to their large merchant bases and ongoing merchant acquisition attempts. Moreover, these commerce and payment platforms offer services beyond payment solutions, such as CRM, team management, and other core business solutions. As more and more merchants use iPhones to conduct commerce through mobile apps, it encourages these commerce/payment platforms to allocate more of their resources towards building iOS compatible apps, rather than Android.
Furthermore, in addition to the PSP’s partner platforms, other application developers can also be induced to focus more on building iOS-compatible business-oriented applications, to take advantage of the growing enterprise use of iPhones. This in turn creates a network effect, as the increased availability and continued advancement of business-oriented iOS apps encourages more organizations to use iPhones, which also encourages app/commerce and payment platform developers to create (or improve) iOS-compatible business software. This self-reinforcing network effect results in more and more iPhone sales (and thus other Apple devices), and keeps users increasingly involved in the Apple ecosystem.
A boon for service revenue, too
The increased use of business-oriented third-party apps on iPhones will increase App Store revenue from app sales/in-app sales, and enhance Apple’s App Store pricing power. Moreover, the increased use of the App Store by enterprises to search for useful business applications will not only motivate app developers to create more iOS-compatible commerce applications, but also increase the attractiveness of advertising applications on the App Store. App developers want to put their business-oriented apps in front of the growing base of enterprise users, by appearing more prominently in relevant search results, thus improving the app store’s ad revenue potential.
Increased enterprise use of the iPhone in general would also give Apple insight into how the device and its inherent software are used in professional contexts. This data can later feed into the company’s endeavors to innovate new products and services, especially those intended for enterprise use. Apple’s suite of services has been mainly geared towards general consumer needs so far. Revenue from the company’s services segment has been slowing in growth recently, increasing just 14% year-on-year in FY2022, compared to 27% in FY2021.
Keep in mind that Apple is facing tough problems from the pandemic surge. However, investors are keen to see how Apple strives to boost services revenue growth in the future. Creating enterprise-oriented services is one path a company could take. Amid widespread enterprise use of iPhones, Apple could leverage subsequent data to build services specifically targeting enterprise users, thereby creating new revenue streams and potentially reigniting services revenue growth.
Gradually introducing merchants to “Click to Pay on iPhone” through an increasing number of partnerships with PSPs is certainly a meaningful step forward in Apple’s ambitions. The point-of-sale feature increases the attractiveness of iPhones over mobile devices to competitors, particularly for conducting certain types of customer-facing commerce. Widespread enterprise usage will also incentivize commerce and payment platforms/app developers to allocate more of their resources to building iOS compatible apps, rather than Android. This will create a self-reinforcing network effect that encourages more use of the iPhone for business purposes.
Thus, the growing prevalence of “Tap to Pay” on the iPhone could also boost App Store ad revenue, as app developers seek to position their business-oriented apps in front of enterprise users in an opportunistic manner. Repeated use of iPhones from enterprises will provide insights into the commercial use of the device, which Apple can leverage to build a new line of services aimed specifically at enterprise users, thus creating new revenue streams.
Apple sells multiple hardware products and services, which investors should consider when making investment decisions. Given that this article focuses specifically on Click to Pay for commercial use, a neutral “Hold” rating would be assigned to Apple stock.