Apple’s (Nasdaq: AAPL) Next Big Bite

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

Apple's (Nasdaq: AAPL) Next Big Bite

by Steve McDonald, Investment U Contributing Editor

Wednesday, December 28th, 2011

Someone has found a way to make 2.75 percent on almost all of the credit card charges in the world, and our friends at Apple (Nasdaq: AAPL) will be taking the biggest bite out of this digital money printing press.

In the United States alone there are 23 billion credit card transactions per year that total $1.9 trillion.

That means that the seven credit cards per person in this country and the 119 charges per person per year will be pumping gobs of cash into the pockets of those who know how to get it. No one has even begun to add up the possible numbers from the rest of the world.

The top five issuers, Chase, Bank of America, CITI, Capital One and Discover, have over $546 billion on their books as outstanding on their cards. That's just the top five!

Do the math: 2.75 percent of $546 billion– it's crazy.

This market is really heating up!

Currently a small company called Square has a gadget that clips into a smartphone and allows small merchants, those who in the past were either too small or too poor to process charges, to accept credit cards.

It's been very successful.

In almost no time it crossed the $1-billion mark in charges. That's pretty impressive, but they have to give away the device to small operators. And that's not so impressive.

There have also been a few problems with verifying credit history for its users, but Square is reportedly on top of the problem.

Other biggies have made some headway, as well. Google (Nasdaq: GOOG), for example, recently introduced mobile pay with their Nexus S Android phone and Google Wallet platform.

The stakes got higher recently when AT&T (NYSE: T), Verizon (NYSE: VZ) and T-Mobile (OTC: DETGY.PK) announced a plan to team up with Discover Card and Barclays on a project called ISIS.

ISIS, and all the other mobile payer systems, use near field communication (NFC), which allows smartphones to talk to other computers and card readers.

The Economist described this market as one of the two biggest and most profitable new technology areas for 2012. Everyone is scrambling to get their piece of this digital goldmine.

Most have a great deal of work ahead of them, setting up bank and credit card relationships to make this work. The ones already in the market have received a lukewarm reception.

Enter Apple

ComputerWorld recently reported that Apple's 161 million iTunes users are already using their accounts to buy music, and with their new NFC-enabled phones this built-in segment of the market will be able to buy just about anything with their accounts.

Think about it – the darling of tech lovers worldwide has a lock on 161 million credit card buyers and the system to allow them to pay via mobile phone is already up and running. The most stunning and immediately profitable part: This system is set up to bypass credit card companies and banks, just as PayPal has done on the web.

The only contact between Apple users and banks will be to replenish the funds in iTunes accounts. Besides already having a mobile pay system in place, bypassing banks and credit card companies allows Apple to put virtually all of the fees right in their pocket.

Think about it: 161 million iTunes users will simply swipe their NFC-enabled iPhone near a pay terminal and be on their way.

That's what I call a market advantage, but here's where this really gets crazy.

It-s easier to use your iPhone to pay for a cab in Nairobi than in New York. The Economist reported that the developing world has a huge head start on the developed world in mobile pay.

The reason? In the developed world, mobile payers are bickering with banks and credit card companies about who will own the customers, and it's holding up the whole parade.

However big the already-working pay system at Apple, that excludes the banks and credit card issuers, and the 161 million iTunes accounts already set up and functioning, which should be coming into a much sharper focus.

Personally, until this news hit the streets about mobile pay, I couldn't justify the additional cost of a smartphone, never mind an iPhone. But I have to confess, this mobile pay thing has my interest piqued. Why carry credit cards when I have my phone with me anyway?

If I am considering buying one of these gadgets, the guy who never buys technology, the tidal wave of buying has to be right behind me.

Apple, as I have said before, is positioned to be the biggest thing ever in the business world. I know it looks like it already made its run, but I believe we're witnessing the end of the infancy of the digital revolution, not the end of the run.

My previous call for a $600 Apple stands. The iPhone mobile pay market is just icing on the cake.

Good Investing,

Steve McDonald

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