Apple Pay: Slow start, huge potential with loyalty

Apple (AAPL) begins its Apple Pay mobile wallet service just hours before the company announces its quarterly earnings. There are some significant restrictions on the service, and it certainly won't hit the levels of revenue that the iPhone currently generates.

However, Apple Pay is a critically smart move. Not only does it diversify Apple's offerings in an important way, but Apple Pay creates the foundation for a greater interactivity between the company and the rest of the world and an opportunity to make a lot of money.

Some large names in retail and banking have already signed on. Large banks and financial services companies initially supporting Apple Pay are American Express, Bank of America, CapitalOne, Chase, Citi, Wells Fargo, Visa, and MasterCard. More than 500 banks in total have signed on.

Apple claims 220,000 stores support the service. They currently list 31 retail chains, including McDonald's, Whole Foods, Panera Bread, Macy's, Chevron, Walgreens, Petco, and Office Depot. Missing are many other large chains: Target, KFC, Walmart, Exxon, CVS, and Sears, to name a few.

One significant issue is the use of point-of-sale systems that support the near-field communications (NFC) technology that enables the system to work. There are millions of merchants that cannot physically support Apple Pay. In addition, currently a store's own charge cards will not work with the technology. Merchants will be the ultimate gating factor.

So, the growth potential is there, with significant barriers to overcome. Some supporters dismiss skepticism and point to chains like Starbucks as proving the potential of mobile payment.

Fifteen percent of U.S. Starbucks transactions happen with the company's own mobile payment system. But a big reason for the acceptance is that Starbucks has tied its payment and loyalty systems together. Get coffee with the phone app and build credit towards rewards. Similarly, half of Macy's sales come from its in-store card, which is tied to its loyalty program.

That could be where Apple, or another vendor, could ultimately really make mobile payments pay off. Tie a single payment mechanism with virtually all the loyalty programs consumers participate in and there would be enormous incentive for consumers to participate. Gone would be a large set of preferred shopper or frequent buyer cards, with an Apple, PayPal (EBAY), Google (GOOG), or other contender offering the ultimate in shopping convenience. Overcome the potential security issues, and you might see a mass of people moving to mobile payment -- and opening the revenue floodgates for the company that puts the ultimate system together.