Does Apple Pay pose a threat to Canadian banks?

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Apple Pay is expected to arrive in Canada before the end of the year, allowing Canadians to make small purchases up to $100 with their iPhones – but also delivering Apple Inc., the world's largest company by capitalization and most powerful brand, as a potential financial rival to the big banks.

Should the banks be worried?

Robert Sedran, an analyst at CIBC World Markets, has published the first of a series of notes on the future of finance, taking a cautiously optimistic tone even as he calls mobile payments "the most topical potential disruptor."

Clearly, Apple Pay is a key development in mobile payments. Launched by Apple in the United States a year ago and then rolled out to the U.K. earlier this year, it allows consumers to use their iPhones as wallets for purchases.

Android users have been able to do this in Canada for some time, with Canadian banks backing various proprietory services, but the launch of Apple Pay will likely give mobile payments a big push.

The problem for the banks is that Apple takes a cut of their fees and inserts itself as a powerful brand in the eyes of consumers, pushing banks into a lesser role.

Mr. Sedran, though, argues that the banks are hardly at risk of becoming buggy whips.

For starters, Apple Pay's adoption by consumers could be slow, given that Canadian consumers are already well-served by contactless credit cards that essentially allow them to do most of what Apple Pay promises.

"In our view, for mobile payments to become a more attractive option, it needs to be about more than just the experience at the checkout (rewards cards, coupons, etc.)," Mr. Sedran said. "Otherwise, the credit card would seem to have it covered."

A recent survey by consultancy Accenture seems to back that up: 53 per cent of Canadians said that obtaining discount pricing and coupon offerings would encourage them to start using mobile payments.

The same survey of U.S. and Canadian adults found that 23 per cent of millennials are using their smartphones to make purchases, versus 18 per cent for other age groups.

Other surveys suggest that adoption is more sluggish. InfoScout, a retail data analytics firm, reported that the percentage of U.S. iPhone 6 users who have tried Apple Pay actually fell between March and June, to 13.1 per cent.

Even if adoption does take off in Canada, Mr. Sedran gives some perspective on the financial threat to the banks: Credit-card-fee revenue accounted for an average of just 2.9 per cent of the overall revenues among the Big Six over the past four quarters – suggesting that surrendering a small slice to Apple wouldn't cause much harm.

"If we were to assume that Apple (and similar ventures) capture 10 basis points per transaction (of a roughly 150 basis points per transaction) and a 30 per cent share of all credit card transactions (and both assumptions seem conservative to us), our numbers suggest that the impact on earnings would be immaterial for the sector in the near to medium term," he said in his report.

Longer-term, there could even be an offsetting upside: If mobile payments take off, more transactions will move away from cash and onto cards, driving up interchange revenues for everyone.

"Despite the consolidated nature of much of the Canadian financial services industry, we do not believe it is invulnerable to disruption," Mr. Sedran said.

"However, Canadians have not been ill-served by the industry when it comes to innovation, which implies that there is a strong likelihood that these companies will be part of the creative disruption rather than being replaced by it."