Apple Pay to Arrive in China in 2016 Via UnionPay

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Apple Inc.AAPL has finally made headway in bringing its mobile payments solution Apple Pay to China. The company revealed that it has formed an alliance with state-owned credit and debit card operator, UnionPay for the same.

China UnionPay is a popular alternative to Visa V and MasterCard MA in the Chinese market. It enjoys a prime position in the payment processing business in the country given its extensive network in both urban and rural areas. Founded in 2002, the company rapidly expanded in the international market, spreading across 150 countries. Additionally, over 5,000 ATMs and 500,000 POS terminals accept UnionPay cards.

Apple said that the service will be rolled out in early 2016, once it gets the pending regulatory approvals. However, we believe that the best time for the company to launch its service in the Chinese market would be before the Spring Festival holiday on Feb 8.

Apart from UnionPay, Apple has also received support from 15 major banks in the region, which should help its wide adoption.

Apple has been eyeing China's mobile payment market for a long time now. In fact, the company has taken quite a few strategic steps to crack this market. In 2014, Apple had collaborated with UnionPay to enable users to make their App Store payments. At that time, Apple Pay was still in the pipeline and an early partnership with UnionPay was undoubtedly a tactical step to pave the way for Apple Pay in the region.

Despite this, the Apple Pay-UnionPay collaboration was not an easy task for Apple. The two companies have previously been in talks regarding an alliance but nothing materialized. The main reason was speculated to be the high interchange fee charged by Apple for every transaction (approximately 0.15% in the U.S). UnionPay, being the sole regulator of near field communication (NFC) in the country, has enough authority to regulate the charges.

This time around, the two organizations have finally reached an agreement but both are mum on the cost-revenues sharing structure so far.

While on the one hand, Apple was looking to overcome the regulatory hurdles, it was simultaneously preparing for its probable entry into the market. Earlier this year, Apple had registered an entity in the Shanghai free-trade zone this September. This entity, named Apple Technology Service (Shanghai) Ltd., will primarily focus on "technical consulting, services and system integration in the field of payments." In addition, Apple ramped up the hiring process with some key talent acquisitions from peers in the region. Such initiatives have positioned the company to make a speedy launch.

Apple has definitely put in quite a bit of effort to venture into the Chinese payments market. It actually makes sense given the scope for growth in the region. Per the 'China Third-Party Payment Industry Report, 2015', the market for China's third-party mobile payment market, led by Internet payment, mobile payment, prepaid card and POS increased 391.3% last year and represented about 25.72% of total transactions.

Also, so far, Apple products have been well received by China-based users, making China the iPhone-maker's second largest market. In fiscal 2015, Apple derived as much as 25% of its total revenues from the Greater China region (up from 17% in fiscal 2014).

Moreover, this initiative will also strengthen the Apple ecosystem in the region and also boost demand for the company's other products.

Nonetheless, the Chinese market does have its own set of challenges. Apple Pay will face stiff competition from other private players like Alibaba's Alipay and Tencent's Tenpay (works through WeChat), which already have captured a decent share of the market. Furthermore, UnionPay is also partnering with Apple's primary rival Samsung to roll out Samsung Pay, which would definitely make things more interesting. Also, rumors that UnionPay is partnering with Alphabet's GOOGL Android Pay had surfaced last year. However, there have been no official update regarding that.

Currently, Apple has a Zacks Rank #3 (Hold).

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MASTERCARD INC (MA): Free Stock Analysis Report

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APPLE INC (AAPL): Free Stock Analysis Report

ALPHABET INC-A (GOOGL): Free Stock Analysis Report

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

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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