Explaining Apple Pay’s Expansion Into China

Apple is expected to launch Apple Pay in China in early 2016, in partnership with China UnionPay – the association responsible for clearing China’s bank card payments – and 15 of China’s leading banks. The launch is noteworthy, as China is now the largest market for the iPhone and it also counts as one of the world’s hottest mobile payments markets. Below we discuss the outlook for Apple Pay in the Chinese market. 

We have a $144 price estimate for Apple, which translates to a market cap of roughly $800 billion. Our price estimate is about 30% ahead of the current market price.

See Our Complete Analysis For Apple Here

UnionPay’s Terminals, iPhone Momentum Provide A Solid Foundation

While Apple Pay’s launch will be subject to the completion of tests and certifications required by the Chinese government, it is possible that the service could scale up relatively quickly. Apple Pay will leverage UnionPay’s Quickpass, which is an existing contactless payment method deployed across mainland China, with an installed base of over 5 million terminals. Although it’s not clear at this point whether the service will be supported at all of these locations, it is probably safe to say that the initial roll-out will be wider than the initial launch in the U.S and the U.K (roughly 250,000 locations). Additionally, the iPhone – the device of choice for most Apple Pay users – has seen a boom in China, with shipments growing 87% year-over-year in FY’Q4.  The combination of a fast growing iDevice user base and contactless terminals should provide a solid foundation for the service.

Fierce Competition, Lower Swipe Fees

According to Chinese central bank data, mobile payment transactions grew by 134% to 22.6 trillion yuan (about $3.5 trillion) in 2014. However, unlike many Western markets, where payment and technology companies hold sway over the mobile payments market, the Chinese mobile market is dominated by major third-party Internet and e-commerce firms. The Alibaba Group’s Alipay – which can be used for e-commerce and physical store purchases – reportedly had 400 million+ registered users as of June, controlling about 83% of China’s third-party mobile payments market in 2014, according to research firm iResearch. Tencent’s Tenpay service held roughly 10% of the market. ^[1] Since these services are already fairly well entrenched and platform-agnostic, they could have an edge over Apple.

Payment fees are also likely to be an issue in China. In the U.S., Apple reportedly collects a 0.15% cut of the overall transaction value for all credit-card transactions done via Apple Pay. This is typically taken from the 2% fee paid by U.S. merchants to card companies. However, it’s likely that the share Apple collects will be a lot less generous in China, since the total fee paid by some merchants is just 0.38%, per Caixin magazine. ^[1] That said, this should not be a major concern for Apple, since the company’s initial focus with Apple Pay is to help keep customers loyal to their iDevices, while helping to attract new customers into the Apple ecosystem.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Apple, Samsung Agree With UnionPay for China Payments From 2016, Bloomberg, December 2015 [↩] [↩]