If you use an Android smart phone in Beijing, you can just tap it to pay for a ride on the city’s transit system.
An iPhone? Forget it. Apple’s Phone uses ApplePay. And the company doesn’t grant access to third-party apps like those from Yikatong that handle payments on Beijing’s subways and buses–or to those that handle the bulk of mobile payments in China. Estimates say that Apple has less than a 1% share of China’s mobile payments market.
Which is a big deal for Apple since China accounts for 25% of all of Apple’s (AAPL) profits and is the company’s second largest market.
Not to mention that Apple is working hard to increase the stickier revenue that it gets from services–such as mobile payments, iTunes, and the App Store–as a percentage of overall revenue.
In the last quarter Apple reported double-digit growth in service revenue in China. That’s not especially impressive and reflects exactly how tough the competition is in the Chinese market.
The biggest challenge comes from the WeChat Pay and Alipay payment systems offered by Tencent Holdings (TCEHY) and Alibaba (BABA), respectively. Those payment systems are integrated into the social messaging and e-commerce apps at the two Chinese giants. They also work by scanning a QR code with a smart phone camera. Which means that Chinese consumers are used to using that method of making a payment rather than to waving their iPhone at a terminal at checkout.
The Chinese mobile market saw an estimated $8.8 trillion in transactions in 2016. That size plus the market’s fast growth means that Apple can’t afford to be locked out of China’s payments market. How the company plans to grow that 1% market share remains to be seen.
Apple, Tencent, and Alibaba are all members of my long-term 50 Stocks portfolio.