Apple Is Putting Fintech Competitors on Notice

In this clip from “The Future of Fintech” on Motley Fool Live, recorded on Feb. 10, Motley Fool contributors Matt Frankel, Jason Hall, and Will Healy discuss and analyze Apple‘s ( AAPL 1.30% ) recent announcement that could potentially put a dent in fintech stocks but could also be a big win for small businesses.

Matt Frankel: Apple is putting fintech on notice. Apple recently announced that its iPhone users will have the capability to accept payments directly from their iPhones with no external hardware required. If Jason has an iPhone and I have an iPhone and I want to pay him for something with a credit card, all we have to do is tap our iPhones and the payment can be processed like that. Square ( SQ 26.14% ) stock went down after this and for good reason. Apple’s first partner that it’s going to be using is Stripe, which is Square’s arguably biggest competitor, and Shopify ( SHOP 1.95% ) is integrating it into its system. No mention of Square to be found, and a lot of people think this is going to disrupt Square’s business. Guys, what do you think?

Jason Hall: Well I want to say too, it’s more than just iPhone to iPhone. If you have a credit card that has that little thing right there on it, the tap-to-pay feature, that will also work, which is basically every new credit card or debit card that’s issued in the U.S. This could be like a low-key big deal. I think, Matt, thinking about it broadly though, the market’s pretty saturated with devices already, so I think a little bit it’s like the SoFi ( SOFI 3.29% ) argument versus that Wells Fargo ( WFC 2.66% ) customer that’s been there for 20 years. For a merchant that already has a relationship with Square or one of these other providers, what’s the incentive for them to change to the iPhone? There needs to be something that’s beneficial. Obviously one thing, it’s one less device you have to carry around if you’re at a farmers’ market, you don’t have this other stuff to set up every time you set up your stand. I don’t know if it’s going to be as big of a deal as people think. It could be huge or it could take 10 years to be something really big.

Will Healy: I see these things that are just in one ecosystem. Once I hear that, I lose interest because you have your hardcore iOS users and you have your hardcore Android [Alphabet ( GOOG 1.39% )] users. Alienating one or the other typically doesn’t pay. It’ll help, I think, on the margins. I’m not sure it’s a big deal in the end. But again, we will have to wait and see.

Frankel: The only place I could see that this could disrupt companies like Square is on the very small merchant side of the business. Square has been increasingly focusing on midsize businesses. They say large businesses but they’re really midsize businesses. I’m not going to go into a restaurant and the servers are going to pull out their iPhone to take my credit card payment.

Hall: This is like sole proprietorship-level businesses.

Frankel: Right, like the farmers’ markets that you mentioned. That’s where it could be disruptive. People who are used to getting paid through Square, what are they going to do? Take the Square reader out of their phone and throw it in the garbage and immediately switch payment processors enough to relink their bank account to someone else. I don’t see why the switching value would be worth it.

Hall: Yeah, that’s the challenge. It’s not just the device, it’s everything that happens on the backend that gets them paid and that integrates with their accounting software like all of those aspects of it that it could affect. I don’t know that I think necessarily Block is going to be as big of a loser from this as a company like Stripe could be a big winner. For Apple, I think it just increases the stickiness in the loyalty there. It could bring over some entrepreneurs who have had Androids in the past because maybe it just simplifies their life a little bit for their small business.

Frankel: I could see that at the smaller end of the market. I think this is the most disruptive because it gives Stripe an advantage in capturing the small amount. Well, I don’t even know if it’s a small amount, but all of the small merchants that aren’t in Square’s ecosystem yet. Being in Square’s ecosystem, as you mentioned, there’s other things about it. It gets you access to their business lending, which is Square Capital or I think it’s Square Lending right now. It’s based on a merchant’s sales through their Square payment processing platform. That’s how they qualify their customers for loans. There are other advantages to being in Square’s ecosystem other than just payment processing, and I think that’s one thing the market’s really missing here, in addition to the fact that it’s only going to disrupt the small end of merchants.

Healy: Square is also an industrial bank now. Just like SoFi on a personal side, Square has the deepest ecosystem on the business side. I just think it’s beyond the point-of-sale. I think the benefit is limited unless they can expand that ecosystem.

Frankel: I think it’s more of a cool feature at this point.

Hall: I haven’t seen any details about it. But, if this is something that Apple also starts rolling out to the iPad, which I would imagine is probably what would happen, you could start seeing it move up market, where you have businesses like a restaurant, for example, that’s moving away from paper menus and trying to do more automation. You could see this proliferate and move up market. I wouldn’t be so quick to say it doesn’t become a bigger thing, but we’ll see.

Frankel: One thing that Apple said in its press release is that other payment companies like Square and app developers will be able to access this feature. Right now, it’s through the Stripe app on an iPhone. Through Square’s app, eventually Square will be able to use this capability in its own payment network. It’s not just Stripe. Other payment companies are going to be able to use this. If anything, it will save Square on hardware costs, which is the only part of its business, I believe, that still loses money. Hardware is a loss leader. In sales, it’s hardware at a loss to get people in the ecosystem. I could see it disrupting the market temporarily. But once they roll out the ability to use this to any app developer, I don’t really think it’s going to be a big negative. I think it’s going to be a net positive for all of them long-term.

Hall: The biggest winner here is definitely going to be small businesses here. Because if you want to start up something small, it’s less money you have to spend. It immediately makes your life a little easier.