Apple—despite its initial plan to win the digital banking wars by displacing major players Mastercard (MA), Visa (V) and PayPal (PYPL)—has been forced to work through each of these giants and others as a way of facilitating Apple card payments. The tech titan had no choice, given Visa's impressive $11.2 trillion in annual payments on its global network of 54 million merchant locations and 3.3 billion cards. Mastercard's reach is only slightly smaller. The three digital banking behemoths, called MVP for Mastercard, Visa and PayPal, have not only impeded Apple's access to the digital payments space, but they have also outperformed the FAANGs solidly over the past three years. We'll look at what happened to prevent Apple from dominating this space, what it means and what comes next.

Below is a summary of stock performance for the biggest names in digital payments and the FAANG stocks.

FAANGs Get Crushed by Visa, Mastercard, PayPal (3 Years)

  • +154%: MVPs (Mastercard, Visa, PayPal)
  • +127%: FAANGs (Facebook, Apple, Amazon, Netflix, Google parent Alphabet)
  • +38%: S&P 500 Index

Source: Barron's; through May 29, 2019

Apple Cedes to MVP

Apple's mobile wallet, Apple Pay, launched in October of 2014 amidst talks of a global payments revolution, according to a detailed report by Barron's. Apple, one of the biggest companies in the world by market value, hoped to dominate the space. However, Apple's decision to partner with Visa, Mastercard and American Express (AXP) effectively strengthened the power of these behind-the-scenes digital payments giants. "When Apple Pay came along and they decided to use existing rails, that was a pretty good early proof point" for the prior model, according to James Tierney, CIO of concentrated U.S. growth at AllianceBernstein, according to the report.

Apple Pay has been most effective among U.S. consumers, who make up the bulk of its 87 million users, per a report by Slate. This leaves the tech giant well behind PayPal (210 million users) and Chinese competitors WeChat Pay and Alipay (1 billion combined users).

What It Means for Investors

One of the reasons the MVP companies have been so tough to challenge is their scale, strengthened through their vast networks of merchants, consumers and banks as well as regulation and security, which daunt even the largest tech companies. Morgan Stanley analyst James Faucette explained that, "because [MVP] are already at scale and they are on the same technology curve as Big Tech, there is no way to ever underprice them." Visa and Mastercard take just 0.15% per card transaction on average, while merchants claim 98% and issuing banks about 1.5%. The model has worked fantastically well, as Visa and Mastercard generated $10.7 billion and $5.9 billion in net income last year, per Barron's, and their stock prices in recent years have increasingly reflected that. With stellar brand recognition and trust, the steady march toward electronic payments globally, and a growing business to business market (estimated at $120 trillion, per another Barron's report), these established companies are very tough to beat.

What's Next

Apple continues in its efforts to expand its base, primarily by enhancing compatibility across institutions and credit cards (now more than 2,700 institutions support Apple Pay, per Slate). The company has also expanded the service to new countries and into peer-to-peer payments, the latter via Apple Pay Cash, built directly into the Messages app.