Apple warns its Fintech competitors

In this clip from “The Future of Fintech” on Motley Fool Live, recorded on February 10Motley Fool contributors Matt Frankel, Jason Hall and Will Healy discuss and analyze Appleit’s (NASDAQ:AAPL) recent announcement that could potentially hurt fintech stocks, but could also be a big win for small businesses.

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Matt Frankel: Apple warns fintech. Apple recently announced that its iPhone users will have the ability 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 something with a credit card, all we have to do is tap our iPhones and the payment can be processed like that. Square (NYSE:SQ) the stock went down after that and for good reason. The first Apple partner it’s going to use is Stripe, which is arguably Square’s biggest competitor, and Shopify (NYSE: SHOP) integrates it into its system. No mention of Square to be found, and many people think this will disrupt Square’s business. Guys, what do you think?

Jason Hall: Well, I also mean, it’s more than just an iPhone to iPhone. If you have a credit card that has this little thing on it, the tap-to-pay feature, that will also work, which is basically every new credit card or debit card issued in the United States. This could be like a low key big problem. I think, Matt, thinking about it broadly, the market is already quite saturated with devices, so I think a bit it’s like the SoFi (NASDAQ: SOFI) argument against it Wells Fargo (NYSE: WFC) customer who has been there for 20 years. For a merchant who already has a relationship with Square or one of these other vendors, what drives them to move to iPhone? There must be something that is beneficial. Obviously one thing is one less device you have to carry around if you’re at a farmers market, you don’t have those other things to set up every time you set up your booth. I don’t know if it will be as important 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 only in one ecosystem. Once I hear that I lose interest because you have your hardcore iOS users and you have your hardcore Android users [Alphabet (NASDAQ: GOOG)] users. Alienating one or the other usually doesn’t pay off. This will help, I think, on the margins. I’m not sure it’s serious in the end. But again, we’ll have to wait and see.

Frankel: The only place I could see this could disrupt companies like Square is the very small merchant side of the business. Square is increasingly focusing on midsize businesses. They talk about large companies, but they are actually medium-sized companies. I’m not going to walk into a restaurant and the waiters are going to pull out their iPhones to take my credit card payment.

Hall: It’s like sole proprietorships at the corporate level.

Frankel: That’s right, like the farmers markets you mentioned. This is where it could be troublesome. 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 trash and immediately switch payment processors enough to link their bank account to someone else. I don’t see why the switch 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 makes them pay and integrates with their accounting software, like every aspect it might affect. I don’t know if I think Block will necessarily be as big a loser as a company like Stripe could be a big winner. For Apple, I think that just increases the fidelity rigidity there. This might bring in some entrepreneurs who have had androids in the past, as it may make life a bit easier for their small business.

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

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

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

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

Frankel: One thing 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, Square will eventually be able to use this capability in its own payment network. It’s not just Stripe. Other payment companies may use it. On the contrary, it will save Square on hardware costs, which is the only part of its business, I believe, that is still losing money. Hardware is a loss leader. In sales, it’s lossy material to bring people into the ecosystem. I could see it temporarily disrupting the market. But once they roll out the ability to use it for any app developer, I don’t really think that’s going to be a big negative. I think it’s going to be a net positive for all in the long run.

Hall: The biggest winner here will definitely be the small businesses here. Because if you want to start something small, that’s less money you have to spend. It immediately makes your life easier.

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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Jason Hall owns Alphabet (C shares), Block, Inc., Shopify and SoFi Technologies, Inc. Matthew Frankel, CFP® owns Block, Inc., SoFi Technologies, Inc. and Wells Fargo and has the following options: $200 short calls in January 2024 on Block, Inc. will heal owns Block, Inc. The Motley Fool owns and recommends Alphabet (A shares), Apple, Block, Inc. and Shopify. The Motley Fool recommends Alphabet (C-shares) and recommends the following options: $1,140 long calls in January 2023 on Shopify, $120 long calls in March 2023 on Apple, $1,160 short calls in January 2023 on Shopify and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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