Pay by smile

E*TRADE Securities2

09/15/17

Apple (NYSE: AAPL) proved rumors true with a new iPhone that unlocks using next-generation face recognition technology. Among other benefits, Face ID will allow users to authenticate their identity to make purchases at Apple Pay sites (Shameless plug alert: Apple noted during its launch presentation that customers will be able to use Face ID to log on to the E*TRADE app). While slower to adopt in the U.S., perhaps such security will be the nudge consumers need to embrace mobile payments.

One place where no nudge is needed? China. And recently some consumers there have had practice with a modified pay-by-selfie in what may be a next step in their mobile pay experience. E-commerce giant Alibaba’s (NYSE: BABA) “Smile to Pay” program at select KFC restaurants allows customers registered to Alibaba’s mobile payment platform, Alipay, to pay at a screen where a 3-D camera scans their face.1

For investors, increased adoption of this burgeoning technology, in the fast-food line and elsewhere, could mean investment opportunities in a space that has been slower to get off the ground in the U.S.  

All in

Plastic cards are not now, nor have they ever been, embedded in China’s payment culture, with access to credit historically limited to the average consumer. And they might never be, as mobile technology appears to have given the masses there a skip-step right past credit cards. The  National Bureau of Statistics of China estimates mobile will represent 74% of total online sales by 2020, well ahead of the U.S. at 46%; for context, online sales in China totaled $750 billion in 2016, more than the U.S. and U.K. combined.2

It looks like the investment community has taken notice too. BABA and the stock of its chief rival, Tencent Holdings (NYSE: TCEHY), have been surging this year:

Alibaba (BABA) and Tencent (TCEHY) 1/4/17-9/14/17

Source: OptionsHouse by E*TRADE

Alibaba leapt to the forefront of the online payment space with Alipay and then rode that expertise over to the smartphone to capture a dominant share of China’s mobile payments transaction value. Competition has dented that share recently, leading Alibaba to look for new ways, including "Smile to Pay," to build on its monthly active user base of roughly 529 million.

Tencent and its WeChat app, with more than 963 million monthly active users, has been the one making inroads on Alipay. In addition to its social messaging capabilities, WeChat’s mobile pay functionality makes it something of a one-stop shop.

Still skittish

It’s a different story in the U.S. Apple Pay launched in October 2014 amid fanfare and lofty goals of making credit cards a thing of the past. But almost three years in, it appears many U.S. consumers continue to shrug their shoulders at that claim, right along with other mobile payment choices, while pulling out their credit cards. A big question for many consumers is whether mobile payment technology is actually safe, despite some expert claims that it installs a virtual Fort Knox in their pockets.3  

As such security features become more ubiquitous in smartphones, investors may want to see if users take to having their faces scanned, and if comfort with this authentication spills over into other areas. Potential beneficiaries could include companies that are invested in making mobile pay more prevalent, including those engaged in:

  • Near-field communication technology, like Square (NYSE: SQ), which allows payment terminals and smartphones to communicate with one another.
  • Sensor platforms, like Qualcomm (NYSE: QCOM), which use infrared dots to gather information about the depth of an object like, say, a face.
  • Virtual wallets, like Visa (NYSE: V), which continually evolve to make it easier for consumers to upload credit card information.

It appears competition for shares of the consumer’s payment habits will only continue to heat up, only now by way of their face. But there could be challenges to user satisfaction. Many cite glasses as an issue for accurate facial recognition. Also, growing that beard out could mean having to go through the facial enrollment process again. It’s early days for this authentication, but investors may want to see which companies can capitalize on the appetite for a smile.  

 

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1. Gilchrist, Karen. “Alibaba launches ‘smile to pay’ facial recognition system at KFC in China,” CNBC, 4 Sep. 2017. https://www.cnbc.com/2017/09/04/alibaba-launches-smile-to-pay-facial-recognition-system-at-kfc-china.html

2. Alankar, Ash. “Options Market Likes China’s Mobile-First Revolution,” Bloomberg, 24 Aug. 2017. https://www.bloomberg.com/view/articles/2017-08-25/options-market-likes-china-s-mobile-first-revolution

3. Mickle, Tripp. “Is Apple Pay Riskier or Safer Than a Credit Card,” The Wall Street Journal, 5 Apr. 2017. https://www.wsj.com/articles/is-apple-pay-riskier-or-safer-than-a-credit-card-1491384604?tesla=y